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Planning ahead: Force Majeure clauses

18 October 2019

What is a force majeure clause?

A force majeure clause is a clause in a contract which seeks to preclude a party’s liability for a breach caused by certain events outside their control.

Can you rely on a force majeure clause to avoid liability?

The recent case of Classic Maritime Inc v Limbungan Makmur SDN BHD and Lion Diversified Holdings BHD [2019] EWCA Civ 1102 considered whether a party could rely on a force majeure clause to avoid liability when the excepted event was not the sole reason for the non-performance.

This case concerned a contract for the shipment of iron ore pellets from Brazil to Malaysia. The charter failed to ship/deliver the shipment. Around the time of the proposed shipment a burst dam stopped the production and shipment of all iron ore in the region. Litigation ensued. The contract included a clause purporting to prevent liability for loss or damage caused by non-performance where the non-performance was caused by “accidents at the mine” which were “beyond the…Shippers’ control” and “such events directly affect the performance of either party”. The charterer sought to rely on this force majeure clause. It was held that the charterer could not rely on the force majeure clause on the basis that the charterer had failed to make alternative arrangements to provide cargoes for the shipments of iron ore and accordingly the burst dam was not the sole reason for the non-performance.

What to consider when drafting a force majeure clause?

There is no clear definition of force majeure and case law shows that courts will interpret such clauses strictly. Therefore to avoid unintentional exclusion or unintentional liability, parties should consider the following steps when drafting a force majeure clause.

Steps to consider when drafting a force majeure clause:

  1. Provide a comprehensive list of potential, prohibitive events which are outside the parties’ reasonable control and which will impact on performance;
  2. Specify whether this list is exhaustive or provide a catch-all provision;
  3. Define the effect the events must have on performance, if the clause is to apply (i.e. prevent, delay or hinder performance). The courts have however been hesitant to allow the avoidance of liability unless the event prevents performance, as opposed to for example making performance more costly;
  4. Specify the impact on the parties’ liability for damages and loss when such an event occurs (i.e. no liability or reduced liability);
  5. Specify what happens if the event prevents performance for some time (i.e. automatic termination after a certain period of time or an option to terminate);
  6. Detail whether the parties should seek other means of performance to mitigate the damage;
  7. Be unambiguous and clearly set out the parties’ intentions; and
  8. Be sufficiently narrow to prevent it being considered void for reason of unreasonableness.

When drafting force majeure clauses it is important that a full risk assessment of potentially prohibitive events and their impact is conducted and the clauses are carefully worded so that they may be relied upon in the event of force majeure. An appreciation of the commercial environment and potential hazards is therefore essential. When seeking to rely on such a clause the infringing party must be able to show causation – ‘but for’ the event performance would have ensued.

It is therefore important to seek appropriate legal advice when contemplating drafting force majeure clauses. An appreciation of the impact such clauses can add is essential and could be the difference between adding an extra degree of protection in commercial contracts and finding yourself exposed.

By Rachel Hetherington

For further advice on any matters regarding Business Disputes in general or drafting force majeure clauses, please call us on 01483 543210 or alternatively email enquiries@barlowrobbins.com