Force majeure under common law

What is force majeure?

The term "force majeure" – the literal meaning of which is "superior force" – has its origins in French civil law. However, under common law (whether under English law or the law of another common law jurisdiction such as Australia) there is no doctrine of force majeure. Instead, the term force majeure is a convenient "label" used to refer to clauses which relieve a party from performance of its contractual obligations where that performance is impacted by events outside its control, such as natural disasters or war.

Why do you need a force majeure clause?

A unique feature of common law contract law is that, subject to limited exceptions, the law leaves it up to the contracting parties to set out in their contract all the terms that will govern their contractual relationship. As such, it gives contracting parties the flexibility and freedom to decide the terms of their contract, and certainty that these terms will not be altered by legal principles existing outside of the contract itself, in contrast to contracts governed by the laws of civil law jurisdictions. 

However, this upside associated with common law contract law also means that if the parties wish to "future proof" their contract to deal with changes in circumstances that may occur during the term of the contract, they must expressly provide for this in the contract itself. In the absence of express provisions in the contract, there are very limited circumstances in which the law will come to the aid of a party whose ability to perform its contractual obligations is impacted by external supervening events. One exception to this rule is the doctrine of frustration, where parties are relieved of their obligations under the contract if the contract is said to have been "frustrated". However, the doctrine of frustration has very limited application, as discussed in more detail below. 

For this reason, it is common practice to include in contracts a force majeure clause, to relieve a party from performance of its contractual obligations where that performance is impacted by events outside its control. 

What form does a force majeure clause follow?

While a force majeure clause should be drafted to reflect the particular circumstances, over time force majeure clauses have evolved to follow a similar form, and there is extensive case law on the interpretation of such clauses. 

In general, an effective force majeure clause will be made up of two main parts: the definition of what constitutes a "force majeure event" and the operative provisions which deal with what happens if there is a force majeure event.

Definition of "force majeure event"

Definition structure

The starting point for any force majeure clause is to define the force majeure event that will trigger the application of the clause. Some clauses opt for a very wide definition, referring to any "event or circumstances beyond the reasonable control" of the party seeking to rely on the clause. But this approach can lead to uncertainty. 

Another approach is to have an "exhaustive definition" which lists all the categories of events that are intended to be covered, for example, war, natural disasters such as earthquakes or floods, terrorist attacks, etc. The risk associated with such a prescriptive definition, however, is that the parties will not be protected by the force majeure clause if some completely unanticipated event occurs that the parties did not consider at the time they drafted the clause.

For this reason, the best approach in most cases is to have an inclusive definition, which lists the events that the parties envisage will be covered by the force majeure clause, but then includes a "catch all" provision to ensure that the definition does not preclude the application of the clause to other similar events. If such an approach is taken, the parties may also wish to expressly exclude certain events in the definition. In some cases it may be appropriate to be even more precise and specify that certain events will or will not be considered force majeure events in relation to one of the parties to the contract, but not the other.

A key point to remember is that while it would be unusual for the definition to require that the relevant event is unforeseeable (given that force majeure events are often foreseeable but cannot be prevented), the event must be one that is beyond the control of the party.

Ultimately, whether a specific event falls within the scope of the definition of force majeure event will depend on the drafting in the individual contract. 

General comments about typical FM events

The following are some general points to bear in mind about specific force majeure events, arising from the case law:

• War: The existence of a "war" is decided as a matter of common sense, not international law. It is irrelevant that there may have been no formal declaration of war, for example, as in the case of the Falklands and the Gulf conflicts.
• Industrial action: Where the alleged force majeure event is industrial action by the workforce of the claiming party itself, it is generally necessary for the claiming party to have taken reasonable steps to resolve the dispute before it is allowed to rely on the force majeure clause.
• Commercial impracticability: A frequent question is whether a party can claim force majeure if a contract becomes uneconomic to perform. The answer to this is no.¹ There is a distinction between inability to perform and inconvenience. As a general rule, economic circumstances, even a severe downturn, do not amount to an event of force majeure.² If the parties wish to protect themselves from changes in the economic equilibrium of the contract, the contract should include a separate clause to deal expressly with changes in market conditions, the availability of credit, price fluctuation and so on. In some instances, to avoid this issue being raised, one of the parties may well insist that such events are expressly excluded from the definition of force majeure event.
• Government action: A common event that may be covered by the definition of force majeure event is government action, for example, the failure to issue a licence or permit, or the expropriation or nationalisation of assets. This is often seen as potentially wide-ranging, but there are limits: the English courts have confirmed that if the claiming party has asked the relevant government body to take the relevant action (in this case, the revocation of a permit) then that action cannot be relied on since it is clearly not an action beyond the claiming party's reasonable control.³ If you ask for the action to be taken, you cannot then rely on it to excuse non-performance.

Operative provisions

Impact of the force majeure event

If there is in fact in existence an event which falls within the relevant definition of force majeure event, the party seeking relief from performance will generally be required to show that:

• it was prevented, hindered or delayed from performing its contractual obligations as result of the event;
• the event/inability to perform was beyond its control; and
• there were no reasonable steps the party could have taken to avoid the event or the consequences (see discussion of mitigation below).

The term "prevent" has been interpreted to have quite a narrow meaning: the party claiming force majeure must show that performance of its obligations was legally or physically impossible, not just more expensive than what was originally anticipated.⁴

Reporting obligations

A force majeure clause will usually provide that the party seeking to rely on the force majeure clause must notify the other party of the fact that the force majeure event is impeding its performance within a specified time frame. The notice will usually be required to include detailed information about the force majeure event and its impact on the party's ability to perform its obligations. Often the notification requirement will be a condition precedent to the ability of the party to rely on the relief provided for under the clause. For this reason, it is important that all procedural requirements are complied with, as failure to do so could bar a party from relying on the clause.  

In some countries, such as China, government authorities will sometimes issue companies with "force majeure certificates" in cases where there is an event of broad impact (for example, the COVID-19 outbreak of 2020). In the common law context, such a certificate may be useful evidence of the fact that a force majeure event has taken place, but it is unlikely that the existence of the certificate in and of itself will be sufficient to invoke the application of the force majeure clause (unless, for example, the clause expressly refers to the issue of such a certificate as being a trigger).

Ongoing information requirements

In addition to the initial notice and information requirements, a force majeure clause will often require the party claiming force majeure to provide regular updates to the other party. Once again, failure to comply with this requirement could prejudice the claiming party's ability to rely on the clause.

Mitigation requirements and causation

Frequently the force majeure clause will expressly require the party to use reasonable efforts to mitigate the effects of the force majeure clause. 

However, even if the clause does not expressly impose an obligation on a party to take mitigation measures, in practice the party may still need to show that it could not mitigate the effects, to demonstrate that the force majeure event actually caused the party to be unable to perform its obligations under the contract. Therefore, if alternative modes of performance are available but have not been pursued by a party to mitigate or prevent the impact of the force majeure event, it becomes less likely that a court will consider a party's non-performance attributable solely to the force majeure event.

A separate but related question is whether the force majeure event must be the sole cause of the non-performance by the party relying on the force majeure event. This is an issue that was considered by the Court of Appeal in the 2019 Limbungan case.⁵ In that case Limbungan, having chartered a ship, sought force majeure relief on the basis that a dam had burst and stopped production at a mine from which Limbungan had been procuring iron ore, which it then shipped to Malaysia. However, there was evidence to show that Limbungan would not have wanted to ship the iron ore anyway, as demand for iron ore in Malaysia had declined. The Court found that Limbungan could not rely on the force majeure clause, because the clause required a party seeking relief to be ready, willing and able to perform the contract "but for" the force majeure event. However, whether the "but for" test will apply will depend on the wording used in the relevant force majeure clause.

A similar difficulty was encountered in a 2018 case in which the defendant claimed force majeure under a contract for the hire of an oil drilling rig.⁶ The defendant claimed that the relevant force majeure event, a drilling moratorium imposed by the Government of Ghana, prevented it from undertaking drilling operations. However, the Court found that the main cause of the defendant's inability to proceed with its drilling operations (which meant it didn't need to hire the rig) was the fact that the Government had not approved its drilling plan (a failure which was not a force majeure event), which covered a wider area than that affected by the moratorium.

Consequences

The force majeure clause will also need to deal with what the parties intend to happen if it is accepted that an force majeure event has prevented a party from being able to perform its obligations. Typically, the clause will provide that the parties' obligations under the contract will be suspended until such time as the force majeure event (and its direct effects) have ceased to prevent performance of the contract. It is prudent to include in the clause a requirement for regular updates by the party relying on the clause. 

Most clauses will provide that if the impact of the force majeure event is not lifted within a certain time, for example 6 or 12 months, then the parties will have the right to terminate the contract.

The parties should also consider the knock-on effect on other provisions under the contract. For example, it may be appropriate to provide that the term of the contract will be extended by the duration of the force majeure event.

Unfair Contract Terms Act 1977

Under English law, the impact of the Unfair Contract Terms Act 1977 (UCTA) on force majeure clauses also needs to be considered. Under UCTA, a party cannot rely on any term to exclude or restrict liability for its own breach of contract, unless such a term satisfies the reasonableness test under UCTA (section 3(2), UCTA). Although force majeure clauses are generally regarded as reasonable, they may raise problems where they are drafted unusually widely to cover matters such as increased costs or events which are arguably within the control of the parties.

Frustration

There are some very limited circumstances in which the common law doctrine of frustration may come to the aid of a party unable to fulfil its contractual obligations. A contract may be discharged or "frustrated" if something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. However, case law shows that a very high threshold must be met before a contract will be considered to be frustrated: it is not sufficient that it is simply difficult or uneconomic to perform the contract, or that a degree of hardship or inconvenience is involved.

A leading case⁷ dealing with the doctrine of frustration, which illustrates how the doctrine will only apply where something happens to make an obligation "radically different" to that originally undertaken, involved a contract for the construction of 78 houses by the plaintiff company. The work was intended to be completed in 8 months, but the contract was entered into in 1946, and there was an unexpected shortage of labour, meaning that the work took 22 months to complete.  The claimant argued that the original contract had been frustrated, and that it should therefore be paid on a quantum meruit basis (that is, a reasonable sum for the services, in the absence of a contract), which would be higher than the contract price. However, the Court of Appeal held that while the work proved to be more onerous. it never became work of a different kind from that contemplated in the contract.

The classic cases where the doctrine of frustration has been successfully invoked are where the physical subject matter of the contract has been destroyed or, in the case of personal contracts, where the person who was supposed to perform the contract has died or fallen ill.

There have also been cases where events such as war or circumstances that make performance of the contract illegal have been held to frustrate a contract. For example, in a 1943 case⁸ there was a contract for the supply of machinery between a British supplier and a Polish purchaser. After the contract had been entered into, and the purchaser had paid a deposit, Germany invaded Poland and declared it illegal for Polish companies to conduct trade with the "enemy", meaning that the Polish purchaser was barred from proceeding with the purchase under the contract. It was held that, in the circumstances, the contract had been frustrated.

By contrast,  in a 2019 case, the Court held that Brexit did not frustrate a 25-year lease of London premises held by the European Medicines Agency (EMA).  The court rejected the EMA's contention that (i) the lease was frustrated by supervening illegality, and that (ii) the common purpose of the parties would be frustrated by Brexit. On the illegality point, the court held that there was no reason why the EMA could not continue to lease the premises. On the common purpose point, the court held that:

• while Brexit was not "relevantly foreseeable" when the agreement for lease was completed in August 2011, it was foreseeable that the EMA may involuntarily have to leave the premises due to circumstances beyond its control during the term of the lease;
• the parties had envisaged that the EMA may leave the premises by including alienation provisions in the lease; and
• the inclusion of a break clause would have significantly affected the inducement package the EMA would have received and, by taking the inducement and not including a break clause, the EMA assumed the risk of change over the 25-year term..

A very high threshold must be reached to show that the contract has been truly "frustrated". Moreover, a court will also be less likely to apply the doctrine where the parties have already dealt with supervening events in the contract by way of a force majeure clause or similar mechanism. Case law shows that courts and tribunals are reluctant to apply this doctrine. However, as at March 2020, we expect this area of the law to develop in the coming months, in the context of contracts impacted by the Coronavirus Disease (COVID-19) pandemic. In particular, the doctrine of frustration may have a role to play in circumstances where government response to the pandemic has made certain activities illegal. For instance, in Italy, Spain and France emergency regulations have been passed which, for example, prevent mass gatherings, resulting in an impact on contracts relating to conferences, concerts and other events.

In summary, while each case must be assessed on its own facts, it can generally be said that a frustrating event is one which:

• occurs after the contract has been entered into;
• renders performance impossible, illegal or radically different from what was originally contemplated by the parties;
• is not due to the act or election of the party seeking to rely on it;
• is not the fault of the contracting parties; and
• is not envisaged by the contract.

Illegality

There are circumstances where a contract may be terminated on the grounds of illegality, either because the contract itself is contrary to law or the parties' conduct is illegal in some way. There is, clearly, some overlap between illegality and frustration. While a detailed discussion of the doctrine of illegality is outside the scope of this quickguide, it is sufficient to say that it also has very limited application, and most cases in this sphere involve some sort of illegal conduct that is considered contrary to public policy, such as contracts involving the proceeds of crime.

1. Thames Valley Power Ltd v Total Gas & Power Ltd [2005] EWHC 2208 (Comm)
2. Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm)
3. Okta Crude Oil Refinery A.D. v Mamidoil-Jetoil Greek Petroleum Company S.A. [2003] EWCA Civ 1031
4. Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd [1917] AC 495
5. Classic Maritime Inc v Limbungan Makmur Sdn Bhd and another [2019] EWCA Civ 1102
6. Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm)
7. Davis Contractors v Fareham Urban DC [1956] AC 696
8. Fibrosa v Fairbairn [1943] AC 32
9. Canary Wharf (BP4) T1 Limited & ors v European Medicines Agency [2019] EWHC 335 (Ch)