Force majeure have it or lose it

May 16, 2011

Tsunamis, earthquakes, terrorist atrocities, droughts, and labour disputes. It’s hard for a week to past without some significant actual or potential disruption to business life. Indeed whether it is flooded factories or a failure to distribute goods around the country for lack of fuel, the end result is that many commercial contracts are not performed

Non-performance can be serious for agency and distributorship agreements alike.

A principal owes various statutory duties to his agent under the Commercial Agents Regulations. Failure to fulfil them can at best trigger a claim for damages. At worst the agent may seek to argue that non-fulfilment amounts to a serious breach resulting in the agreement terminating and a claim for compensation or indemnity being made.

Further given that the principal has an obligation to inform the agent within a reasonable period when he anticipates that the volume of transactions will be significantly lower than that which the agent was otherwise expecting, a properly drafted force majeure clause may serve as a wake up call in its own right.
The situation is not easier for suppliers or distributors. An obligation to supply a fixed quantity at a fixed price can be a recipe for disaster in the global economy. Equally the inability of a distributor to rely on a force majeure clause may see the distributor go bust.

As such, the consequences of non-performance will depend of what the contract does or does not say. Many agency and distributorship agreements incorporate a specific clause designed to apply where contractual performance has become impossible because of circumstances which were not envisaged by the parties and are outside their control. Typically, a provision of this nature is known as a force majeure clause.

Such a clause can be quite detailed. Usually it will set out a series of force majeure events. It will then state the consequences of any such event occurring.
Whether or not a particular crisis or disaster scenario is covered under the clause will depend on what is stated in the list of force majeure events. Often there will be specific mention of, for example, flooding or reference to an Act of God.

However, if there is no such reference it will be a question of interpretation as to whether the list of events stated in the clause is non-exhaustive and can cover their particular event.

As an alternative, a force majeure clause can provide a "catch all". For example, this could be in terms of any clause or circumstances beyond the supplier's reasonable control. But how to define "beyond reasonable control"?

Even if labour dispute is an event covered by the force majeure clause, it is still necessary to carefully examine the way the clause works.
Often force majeure clauses will provide for the suspension of obligations during the period of the force majeure event. If these continue beyond a specific time, it is usual for the clause then to provide for the contract to be cancelled.

Most important is the question of the obligation of a party subject to the force majeure event to compensate the other party. Given the nature of the clause, it should state that the party suffering the event, for example a distributor, is not liable to compensate the other party, such as a supplier.  When a particular event occurs, it is understandable that the parties will seek to determine whether it is covered by the force majeure clause.

However, this is only part of the story as it is necessary for the clause to have been properly incorporated into the contract in the first place. If it has not been, the clause will be of no value.

If the contract does not contain a force majeure clause then the position is far less certain. It may be that the contract will be regarded as frustrated.
This occurs when a supervening event not envisaged by the parties and not due to their fault renders the contract impossible to perform or is radically different from that which they imagined.

The bad news is that situations where a contract can be said to be frustrated are extremely narrow and unpredictable in their application.
Over the years the courts have tended to restrict the application of the doctrine of frustration. This is to try to prevent parties from escaping from bad bargains.

Global warming is upon us. Freak weather conditions seem to be occurring on a regular basis. Whatever actions are taken by the UK Government and the governments of other countries, things will not change overnight and in the meantime your business needs to be protected in the contracts that it forms.

As a result, there is every incentive for parties making a contract to incorporate a force majeure clause. An express clause builds in a degree of certainty. It guards against the possible application of frustration which can produce an arbitrary result. It is also open to the parties to specify what is to happen in particular situations. In doing so they will be able to progress their business with a degree of certainty that would otherwise be missing.

Put simply, the choice is whether or not you want your business to be protected.

Stephen Sidkin is a Partner in the Commerce and Technology Department of Fox Williams LLP and a member of the agentlaw team. 

Related pages:

Agency, Distribution and International Trade more

Commercial more

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