Force Majeure clauses in Commercial Contracts

The recent stranding of the Ever Given vessel in the Suez Canal has shone a spotlight on the fragility of supply chains and how certain events can cause significant disruption to the transportation of goods and, ultimately, have a major impact on trade across the globe. 

The recent event of the stranding of the vessel, although thousands of miles away from the United Kingdom, should act as a lesson for all businesses – regardless of their size – when entering into a commercial contract.  Whilst events such of the lodging of a ‘mega vessel’ like the Ever Given may be rare, the last year or so has taught us all to expect the unexpected thanks to the Covid-19 pandemic. Grant Usher, Solicitor in our Company Commercial team, here reviews the importance for businesses to take appropriate legal advice to ensure that they are legally protected insofar as possible and that certain contractual provisions are included in their agreements with customers, suppliers and distributors.  

What is a ‘Force Majeure’ clause in a commercial contract?

Commercial contracts can typically include clauses documenting the parties’ agreement on key points including, but not limited to, the following:

• when delivery is deemed to take place,
• the quality and quantity of goods,
• which party is responsible for the transportation of the goods
• who is responsible for paying the cost of any insurance of the goods.

Another key provision, which may not necessarily be at the top of the parties’ list to include in a commercial contract, is what is known as a ‘Force Majeure’ clause.  This is a clause which caters for unforeseeable events outside of the control of the parties and sets out in writing what the parties’ contractual obligations are and liability in law is as a result of the unforeseeable event occurring.

Such clauses come into effect when, for instance, the delivery of goods has been delayed or cancelled. Whilst it is very difficult, if not impossible, to cover every eventuality in such a clause it is important to include a non-exhaustive list of examples of unforeseeable events in the commercial contract, so that each of the parties has clarity on the issue.  Examples typically included in contracts include:

• terrorism,
• war,
• building collapse,
• sonic boom and,
• more and more commonly, disease and pan- or epidemic.

Whilst the precise wording of the commercial contract will be key, it is not uncommon for contracts to include an obligation on either one or all of the parties to restrict their losses as a consequence of the Force Majeure event, if reasonably possible.

What could constitute as an ‘Act of God’ in Force Majeure clauses?

As at the time of writing, the suspected cause of the Ever Given becoming stuck in the Suez Canal, according to the vessel’s leasing company Ever Green Corp., was that it was ‘suspected of being hit by a sudden strong wind, causing the hull to deviate from (the) waterway and accidentally hit the bottom (of the Canal)’.[1]

Whether this reason, if found to be true, can amount to a ‘Force Majeure’ event will depend on the terms of the contract(s) involving the parties at hand, but often contracts will try to cater for events caused by nature by including the term ‘Acts of God’ as a ‘Force Majeure’ event. Like any ‘Force Majeure’ event, an ‘Act of God’ is usually trying to define an accident or unexpected incident of some kind which was not preventable or could have been mitigated against.  Unfortunately, case law of specifically what events are and are not covered by an ‘Act of God’ have rarely been tested in the courts and therefore the legal ramifications of the stranding of the Ever Given remain to be seen in the future.

Finally, if your business finds itself in circumstances where a ‘Force Majeure’ clause is being relied upon, a good first step is to hold a commercial discussion with the other party to the commercial contract to see if an alternative arrangement or a compromise can be found which works for everyone.  You may feel these discussions are necessary due to your business or another party to a contract your business is a party to, or if it has not yet reached that stage but you believe there may be a problem with your business’ supply chain or you have been notified that your business’ orders are under threat of delay or cancellation due to disruption to a supplier’s supply chain for whatever reason. It is important to remember that if this is achieved, the revised terms should be legally documented.

Ensuring you have sound commercial contracts is vital to protect your business interests, particularly in our current uncertain economic climate.  If your company is about to enter into a new commercial contract, we can review the documentation and help mitigate your legal risk.  To seek our guidance with this review, or to discuss your existing commercial contracts, contact Grant or the Company Commercial team today on 023 8071 7413 or email grantusher@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.