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Force majeure clauses in contracts have been common for some time, but do purchasers and suppliers really know when they should be used?

Force majeure can be translated as a “superior force” or “act of God”. It usually provides that if a party does not perform an obligation under the contract (such as provision of services) for reasons outside that party’s control (such as a natural disaster), the other party will not make that party liable for non-performance.

How should you plan for and manage the unknown? You cannot allow for every possible eventuality, but you can hedge your bets if you use the force majeure provisions in your contracts effectively.

There is no hard and fast rule about what constitutes force majeure in English law. If a party is relying on a force majeure event to gain relief under a contract it will typically be for something fundamental. To prevent disputes, it is essential that its meaning is fully defined in the contract.

If work on a building site has to stop owing to heavy snowfall, could the contractor claim force majeure as grounds for more time? Well, if it snowed in August then probably yes; if it was in February, probably not. However, the contract would need to have “exceptionally adverse weather conditions” as one of the force majeure events that provided relief.

The OGC model terms define force majeure events as “any cause affecting the performance by a party of its obligations arising from acts, events, omissions, happenings or non-happenings beyond its reasonable control, including acts of God, riots, war or armed conflict, acts of terrorism, acts of government, local government or regulatory bodies, fire, flood, storm or earthquake, or disaster, but excluding any industrial dispute relating to the contractor, the contractor personnel or any other failure in the contractor or the sub-contractor’s supply chain.”

But defining what constitutes a legitimate force majeure event is only half the story. Your contract must also state what happens next. 

The first thing you want is for the affected party (usually the supplier) to notify the customer as soon as possible. The contract should include obligations for the next steps; fast action is required, as is agreement as to whether it is a force majeure scenario. You will also want the supplier to mitigate the effects as much as possible.

Usually a force majeure provision will allow the parties to terminate or part-terminate the agreement if the event continues for a specified period, but it could also allow for the customer to “step in” and temporarily take over service provision.

A commonly overlooked area is what happens in terms of payments. It is usual that in the event of termination due to force majeure, both parties walk away with no obligation to financially compensate the other. The problem is that the wording and commitments in the contract may be straightforward but frequently the payment mechanisms are not, and this needs to be taken into account. If you are a PPP/PFI contractor and have already made significant capital investment into a project that you would recover over a period of years, or if you have just committed to a large order that you cannot cancel, quite rightly you would want making whole for this outlay. Contracts need to be explicit on what happens in terms of money and payments during a force majeure event.

Finally a cautionary note: if a force majeure event occurs due to a wilful act, neglect or failure to take reasonable precautions, it is unlikely you will be able to gain full relief. An example would be if an employer did not take precautions to prevent an outbreak of swine flu in the work place and subsequently did not have enough staff to deliver the contract.

Like any other important part of a contract, you need to work out what force majeure means to your organisation each time you do a deal. Beware of just using what was in the last contract you signed as it may not be applicable this time round.

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