Force majeure is French for “superior force”. It refers to an unforeseeable event that prevents someone from fulfilling their obligations under a contract. A force majeure clause in a contract provides clarity on what is to happen if a such an event occurs.
The doctrine of frustration
The doctrine of frustration can apply to discharge a party’s obligations under a contract. The doctrine states that if performance of a contract becomes impossible, termination of the contract is automatic and all future obligations of the contracted parties are discharged. No party is considered at fault.
Frustration can occur only if circumstances make performance of the obligation impossible, illegal or radically different from those originally contemplated when the contract was made. Such instances include the destruction of the physical subject matter of the contract, or the death or a party.
Frustration of contract is a common law doctrine. This means it can apply to a contract without it needing to be stated in the contract and agreed to by parties. A force majeure clause is used to overcome the limited application of the doctrine by providing an agreement on what is to happen if a specified event impairs performance of the contract.
The force majeure event must be the only or most substantial reason for an inability to perform under the contract. Parties cannot invoke the clause if they are relying on their own acts or omissions. Also, the force majeure event must be a legal or physical restraint, not solely an economic one.
Drafting a force majeure clause
Generally, there are three essential elements to a force majeure clause. The event:
- can be natural or manmade;
- cannot have been reasonably foreseen by the contracted parties;
- must be completely beyond the parties’ control and they could not have prevented its consequences.
The clause should define what is to be considered a “force majeure” event, either by reference to an exhaustive list of events such as riots, wars and certain weather events including hurricanes and earthquakes, or by reference to a general description of the event, such as “an event beyond the reasonable control of the parties”, and include a non-exhaustive list of such events.
It should also:
- include the right to suspend or terminate the contract if the force majeure persists;
- specify whether relief is available only for the duration of the event;
- provide for any payments to be suspended until obligations can be performed;
- require that a party affected by a force majeure event provide reasonable notification of the event to the other party;
- require that a party affected by a force majeure event take all reasonable steps to mitigate the effects of the event on the contract;
- state whether another party can be engaged to complete the contract;
- address all obligations after the force majeure event ends;
- specify that the contract obligations must become impossible to perform rather than more costly or difficult.
Consequences of activating a clause
The consequences of activating a force majeure clause will depend on its drafting and the degree of impairment the event causes to performance of the contract.
The consequences could include:
- termination of the contract, either automatic or discretionary;
- suspension of obligations for the parties for the duration of the force majeure event;
- payment of compensation to an affected party;
- negotiation of amendments if there are parts of the contract that can still be completed.
A force majeure claim should be made with care because a wrongful claim could amount to a breach of contract or repudiation of the contract. The party making the claim will generally need to show:
- it was prevented from, or impeded in performing its contractual obligations;
- this constraint was beyond its control;
- there was no reasonable action that could have been taken to avoid the event or its consequences.
A party handed notice of a force majeure event should examine the claim to determine:
- if it is consistent with the scope of the protection afforded by the clause;
- if any provision for providing notice has been complied with;
- whether evidence has been provided.
For assistance with contracts or for legal advice or representation in any matter, please contact Armstrong Legal.