Business in the Age of Uncertainty: A guide to Force Majeure Clauses
The COVID-19 pandemic has wreaked havoc on the world economy and few businesses have been spared. Many commercial parties are keen to know whether they can rely on force majeure clauses found in their contracts to delay or cancel performance of their contractual obligations. In this article, we address some frequently asked questions in relation to force majeure clauses.
What is force majeure?
Clauses referring to force majeure commonly feature in commercial agreements. Under Singapore law, like in other Commonwealth jurisdictions, there is no actual legal definition of what constitutes force majeure. While generally understood to refer to events or circumstances arising outside the control of the parties, the precise meaning of force majeure in each case is determined by the precise wording of the force majeure clause and any related contractual provisions.
What type of events are regarded as force majeure?
The scope of events that are regarded as force majeure depends on how the particular force majeure clause is drafted. Typically, clauses will stipulate a series of events such as war, government intervention, breakdown of machinery, natural disasters and acts of God. In some cases, the clause may also provide include a pandemic or epidemic as a force majeure event (see, for example, the International Chamber of Commerce Force Majeure Clause 2003).
Sometimes, the force majeure clause may also contain a ‘catch-all’ phrase to include uncontrollable events beyond that have been expressly specified. This may take the form of phrase defining force majeure as “any event beyond the reasonable control of parties”, or, as in the case of the latest Grain And Feed Trade Association force majeure clause, “any other event comprehended in the term “force majeure””.
However, events or circumstances brought about by a party’s own act(s) or omission(s) will generally not be regarded as force majeure as these are seen to be within the control of parties. For example, the voluntary closure of factories by a manufacturer against the backdrop of a natural disaster is not likely to be regarded as an event of force majeure.
What do I need to do to successfully invoke a force majeure clause?
To successfully invoke a force majeure clause, you will need to ask the following questions:
- Does the event in question fall within the clause?
- Has the event in question caused the non-performance of my contractual obligations?
- Has the event in question affected the performance of my contractual obligations to the extent set out in the clause?
- Were reasonable steps were taken to avoid the operation of the clause or mitigate its results?
Does the event in question fall within the clause?
Where the event in question falls within the list of events stipulated, there will be no dispute that the event constitutes force majeure. However, if the event does not fall within the list, you will need to show that the event nonetheless lies within the scope of events envisioned by the ‘catch-all’ phrase. For instance, where the list does not include government intervention as a force majeure event, a seller of goods who is faced with a sudden export ban could nonetheless argue that the government’s actions equate to an event “beyond the reasonable control of parties”. Additionally, Singapore courts have held that if the event in question arises from natural causes, there may be scope to say that the event constitutes an “act of God”.
Has the event in question caused the non-performance of my contractual obligations?
Assuming the event in question constitutes force majeure, you must also show that the event in fact caused your failure to perform your contractual obligations. For instance, where a strike has caused general delays at a discharge port, a charterer seeking to invoke a force majeure clause will need to show that the delays in discharge arose from the effects of the strike rather than any failure on its part to make the necessary arrangements. Similarly, if a buyer of goods wishes to refuse delivery from a seller in the context of a global pandemic, it will have to show that its refusal stems from prohibitions put in place by a local government in response to the pandemic, rather than the mere fact of a falling market. In short, the party seeking to invoke force majeure cannot simplistically use the prevailing event as an excuse to not perform its contractual obligations.
Has the event in question affected the performance of my contractual obligations to the extent set out in the clause?
The event in question must also have affected the performance of your contractual obligations to the extent set out in the force majeure clause. The position in Singapore is that the language of the clause will determine the threshold that needs to be met. Where the clause refers to performance of your obligations being “prevented” by the event in question, you will need to show that the event has rendered performance impossible, and not just more difficult or more costly. On the other hand, if the clause refers to performance being “disrupted”, “hindered” or “affected”, it may suffice to show that performance is commercially impractical. For example, it was held in one Singapore case that a concrete supplier’s difficulty in obtaining a consistent supply of sand at an affordable rate constituted a “disruption” under the clause.
Were reasonable steps were taken to avoid the operation of the force majeure clause or mitigate its results?
Where an event of force majeure arises, you should take reasonable steps to avoid or minimise the operation of a force majeure clause. While Singapore courts have held that this is not a blanket requirement in all cases, it would be prudent to do so to protect your position. In the case where there are multiple ways to perform the same set of contractual obligations and an event of force majeure arises in respect of only one of them, you will need to show that you attempted performance by an alternative method, even if this proves more costly. Following on from above example, it was necessary for the concrete supplier facing a disruption in the supply of sand to show that it had taken reasonable steps to obtain alternative sources of sand to satisfy its contractual obligations, which included procuring the sand at a more expensive price than the market rate.
Are there any additional steps that I need to take prior to invoking the force majeure clause?
You will normally be required to provide formal notice of force majeure to trigger the operation of the clause. Additionally, if the contract provides for it, you may also have to comply with specific procedures or timelines before giving notice.
Will the COVID-19 pandemic allow me to successfully invoke the force majeure clause in my contract?
Whether the COVID-19 pandemic opens the door to invoking a force majeure clause will depend largely on the precise event that you seek to characterise as force majeure, and, as set out above, on the wording of the clause. As a general guideline, it is likely that a party facing government-imposed restrictions and/or closure of production facilities as a result of COVID-19 will be able to avail itself of a force majeure clause.
If I am unable to successfully invoke the force majeure clause, are there any other ways to obtain relief from my contractual obligations?
If the contract does not contain a force majeure clause or the clause cannot be successfully invoked, you may still able to obtain relief by invoking the doctrine of frustration, which is where a contract is discharged on the basis that an unforeseen event that renders parties’ obligations radically different from what had been agreed has occurred. In the alternative, where the other party has committed a fundamental breach of the contract, you may be able to accept its breach and terminate the contract.
Conclusion
The effects of the COVID-19 pandemic will continue be felt in the months to come. Given the current global economic uncertainty, it is likely that issues pertaining to force majeure clauses will continue to surface. In such cases, it is critical that parties seeking to invoke or resist force majeure clauses obtain legal advice on the matter to understand the best way forward.