Suppliers affected by the closure of European airports in April and May, as a result of the ash spewed by the Icelandic Eyjafjallajökull volcano, may have relied on the force majeure clause in their contracts to exclude liability for goods supplied late or not at all. But what are these clauses and what rights does the buyer have? Kelvin Balmont explains
What are force majeure clauses and why are they included in contracts? Who do they benefit? Force majeure clauses are included in contracts to deal with a situation where a party cannot perform its part of a contract due to unexpected circumstances beyond its control. The clause will usually include a list of circumstances where the clause will apply, including such matters as floods, earthquakes or terrorist attacks. They will generally relieve the affected party from performing its obligations while the particular event is continuing. It may also give the other party the ability to terminate the contract if the event continues for a certain period. The clauses tend to benefit suppliers as they are the parties that are most likely to be unable to perform because of a force majeure event.
Are these clauses used often?Most contracts contain force majeure provisions although they are not generally considered in detail by companies when they are negotiating a contract. As they are drafted to cover unusual or unexpected events they are not frequently relied upon.
Are there standard force majeure clauses used? Most force majeure causes tend to follow a similar format. However, the list of specific force majeure events may vary from contract to contract (there is no overriding legal definition of force majeure) as will the consequences of a force majeure event occurring.
Does the disruption caused by the Icelandic volcanic ash, which intermittently grounded flights in April and May and caused transport problems constitute force majeure?Most force majeure clauses will include an “act of God” as a force majeure event, and a volcanic eruption would be included within this. However, it is not only the type of event that is important but the impact that it has on the affected party. If the clause has been drafted effectively then the supplier must be able to demonstrate that the event makes it impossible for them to perform the contract, not simply more difficult or expensive. Therefore a supplier in Southampton that supplies goods by air to a company in Glasgow may not be able to rely on a force majeure clause if those goods can be supplied by road or train, even if that involves greater cost.
What advice can you give to buyers when suppliers are trying to enforce force majeure as a result of the volcanic ash disruption? Do buyers have any rights? Buyers should review the specific clause being relied on by suppliers. First, to ensure that the clause covers this type of disruption and also to see what relief it provides for the supplier and what the supplier’s obligations are under the clause. There may be obligations on the supplier to provide specific notice to the buyer of the event and its impact. The clause may contain obligations on the supplier to take steps to minimise the effects of the force majeure event on the contract.
The volcanic ash problems lasted for weeks and there is uncertainty as to whether the problem will be ongoing. There is therefore an argument that suppliers should be taking steps to mitigate its effect – for instance, by monitoring weather conditions and transporting goods through alternative methods.
Many force majeure clauses include provisions enabling one or both parties to terminate the contract if the force majeure event continues for a certain period and it may therefore be possible for a buyer to terminate the agreement and seek alternative arrangements.
When a force majeure clause comes into effect, how can buyers and suppliers best work together? Should they set a communication procedure, for example? It is important that suppliers and buyers work together in the event of a force majeure event in order to minimise the disruption and cost to both parties and minimise disruption to a buyer’s own customers. It is therefore sensible to ensure that the parties make contact as soon as possible when an event occurs and that the parties get together to discuss how the event is going to be dealt with and, if necessary, what each parties’ obligations are going to be and how any losses will be allocated between the parties.
If suppliers don’t have force majeure clauses in their contracts, are they liable for any disruption caused by the volcano? Generally if a supplier does not perform under a contract, it will be liable for breach of that contract. In the absence of a force majeure clause, the only possible relief for a supplier would be to claim that the contract has been frustrated and has therefore terminated. A contract is frustrated if it has become impossible to perform.
Have you been contacted by organisations seeking advice on force majeure clauses as a result of the transport disruption caused by the volcano eruption? Have many firms been affected? We have been contacted by a number of organisations seeking clarification on the effects of the volcanic ash disruption. As well as the effect on supply contracts, companies are also querying their obligations in relation to employees who were or may be in future stranded abroad.
Might suppliers that haven’t included force majeure clauses in their contract so far want to amend the contract now to include it? How should buyers respond if they do?If a supplier wants to amend an existing contract then both parties would have to consent to this. Rather than simply agreeing to add a standard force majeure clause, it would be sensible for the parties to discuss what the potential effects of the disruption could be and agree to put procedures in place in order to deal with them. The contract could be amended to cover what would happen in the event of further disruption and to set out how any losses or liabilities will be allocated between the parties.
Should buyers avoid force majeure clauses being included in contracts?Buyers may find it difficult to justify deleting a force majeure clause as it is included to deal with specific situations. There is also the risk that without such a clause an unexpected event could frustrate the contract, leading to its termination without any claim for damages. There may also be circumstances where a force majeure clause could benefit a buyer – for instance, if its payment system fails. It is therefore more important to make sure that the force majeure clause is properly drafted and makes clear what each parties’ obligations are on the occurrence of a force majeure event.
If they must be included how can buyers make its terms more favourable to them?The most important thing for buyers is to make sure that a force majeure clause is very clearly drafted and that the list of force majeure events is clearly defined so that there is no ambiguity over whether an event qualifies and what the impact of the event must be for relief to be available. The buyer should consider carefully whether there are any events that specifically should not be a force majeure event, such as industrial disputes or failure of a party higher up the supply chain, which are arguably matters that the supplier should take responsibility for.
The clause can state that it will not apply if the supplier should have foreseen the event and taken steps to avoid the impact. The clause should also clearly state what a supplier’s obligations are when the event occurs, particularly in relation to giving notice to the buyer and its obligations to reduce the impact of the force majeure event and to take steps to minimise the disruption and cost to the buyer. The clause should give the buyer the ability to terminate the agreement either immediately or if the event continues beyond a certain period of time. The supplier can also be obliged to take steps to avoid or prevent the force majeure event before it occurs.
Kelvin Balmont is senior associate at law firm Clarke Willmott (kelvin.balmont@clarkewillmott.com)
