Wake-up call: Check your contracts to expect the unexpected

The importance of contract clauses such as force majeure has been emphasised by the pandemic. Peter Kouwenberg explains what operators need to do to ensure they are protected against unexpected events.

The problem

Global supply chains have been hugely affected, not just by the outbreak of Covid-19 and the resulting lockdowns, but by the confusion concerning where responsibility lies for delayed, missed and incomplete deliveries.

These problems illustrate the often underestimated importance of contract clauses such as force majeure (FM), designed to address issues arising from unexpected future events beyond the reasonable control of the contracted parties.

The law

Due to the time to reach court, we are yet to see significant judgments in large FM claims arising from the pandemic. However, the courts have already handed down judgments on injunctions related to FM clauses and actions for breach of contract, stating that each FM clause should be considered in its own words and with context of the specific circumstances.

This is a clear warning for businesses to ensure their FM clauses are drafted very carefully, especially if they hope to rely on them to defend a breach of contract, whether it is caused by natural disasters, wars or compliance with government restrictions during a pandemic.

Expert advice

An FM clause should enable a business to invoke a rights of suspension and/or termination of its duties and obligations under the contract.

The inclusion of the words ‘epidemic’ and/or ‘pandemic’ in the clause may be sufficient to trigger FM. Where these terms have not been included, the emergency measures to address or contain any outbreak, like a travel ban or quarantine zones, may be sufficient to trigger FM.

If a business seeks to invoke an FM clause, it must show that any failure to perform its contractual obligations cannot be attributed to other factors, such as any additional cost of performance.

Any FM clause cannot be taken in isolation, and must interact appropriately with the other terms of the contract, such as any obligation to mitigate loss and the procedure to notify the other party.

To-do checklist

The first step for every business is to review existing standard terms and conditions of supply and/or purchase, carefully scrutinising all proposed new contract terms, especially to see if FM is expressly included within the contract.

Consider what is included as an FM event and what procedural steps are involved in relying upon FM, such as obligations to notify the other party. You should also consider what effort to perform/minimise loss will be required on the part of your business or your supplier.

Finally, consider the overall impact on the contract as a consequence of FM being triggered, such as termination rights. Then check your insurance position regarding a supplier or your business invoking an FM clause.

Beware

Remember, if a contract does not include an FM clause, it may be possible, in limited circumstances, to seek redress on the basis of frustration, but this is a complex legal matter with very strict requirements to be met.

In order to minimise potential loss in FM scenarios, it is vital to give a prompt, contractually compliant notice to the other party of possible or actual disruptions to performance, to allow them to prepare and to act appropriately to mitigate loss or damage.

It will also be prudent for businesses to consider if there is any alternative way of performing the contractual obligations, rather than leaving the client with the problem, which could help protect the long-term relationship.

Peter Kouwenberg is associate solicitor at Taylor Walton

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