An earlier post from Andrew Singer QC dealt with force majeure posts in construction projects. We asked Shaylla Shabbir, a pupil at Kings, to set out the basic principles of force majeure.
THE UNDERLYING PRINCIPLE
The underlying principle of force majeure is that the occurrence of certain events is outside a party’s control and therefore that party is either excused from performing all or part of its obligations, entitled to suspend performance of all or part of its obligations, or entitled to terminate the contract.
The difference between force majeure and frustration
In that sense, force majeure can be differentiated from the legal doctrine of Frustration which applies when an event occurs that makes it impossible to fulfil the contract. If such an event occurs the parties are automatically released from their obligations and the contract discharged. However, force majeure events rarely result in the discharge or cancellation of the contract; instead the contract usually sets out the result of a force majeure event.
A force majeure clause is also not regarded as an exemption or exception clause, even though the practical effect of a force majeure clause may be to relieve a party of liability for failure to perform, as exception/exemption clauses are typically concerned with relief from damages due to a particular event (a secondary obligation) rather than relief from a party’s primary obligation to perform the contract.
In contract law, Force Majeure refers to exceptional events which prevent or hinder the performance of an obligation. Generally, these are events beyond the parties’ control, which could not have been foreseen at the time the contract was entered into or prevented by the affected party. These include, but are not limited to; natural disasters, severe weather, government actions, war and acts of terrorism. The language of these clauses vary greatly, with some requiring the performance of the contract to have been prevented by the event, while others use the lower threshold of the performance being hindered or delayed.
An event of Force Majeure may result in the affected party being excused from liability for delay or non-performance of its obligations (such as liquidated damages) while the event is ongoing, with an equivalent extension of time for performance. The contract remains in force. Usually either party may rescind the contract without penalty if the force majeure event continues. Failure to comply with contractual notice provisions can have severe consequences. Normally, each party bears its own costs arising from the force majeure event and claims under its own insurance for compensation. Contractual protection continues only so long as the force majeure event itself does. Therefore, contractors must resume performance as soon as it becomes possible to do so or risk breaching the contract.
In the event that a contract does not include an express force majeure clause, a party may be able to discharge the contract using the doctrine of frustration. A contract may be frustrated by Covid-19 where it becomes impossible to perform, or where, as a consequence of the pandemic, a party’s contractual obligations become fundamentally different to what was envisaged at the outset. See the article by Mark Harper QC here.
In order to mitigate losses, many commercial companies have started to declare force majeure in response to the difficulties they face in fulfilling their contractual obligations. For instance, LNG importer CNOOC, have begun to declare force majeure in response to the difficulties they face, and the Chinese government is issuing force majeure certificates to companies unable to meet their contractual obligations in an attempt to protect them from breach of contract claims.