Understanding Force Majeure Clauses – Are Your Agreements Up To Date?
The current events in the Middle East have brought the importance of force majeure clauses into sharp focus. With the Strait of Hormuz seeing significant disruption, major international companies across the Middle East and around the world have activated force majeure (including Shell PLC declaring force majeure in relation to all of its LNG gas exports around the world). As a result, these companies have effectively ‘hit pause’ on their obligations under those current agreements.
This recent and significant example of where force majeure clauses have helped businesses navigate extenuating circumstances brings to light the importance of making sure that all corporate agreements are up to date and have the right contingencies in place. With this in mind, we have summarised the role that force majeure clauses can play in your corporate arrangements in this article, and explained how to make sure that yours are effective.
What Is A Force Majeure Clause?
Force majeure clauses exist in commercial agreements to set out what happens when extraordinary events occur beyond a party’s control that disrupt contractual performance, such as wars and pandemics. They operate as a contractual safety net, excusing, suspending or delaying obligations when specific events occur that are beyond the affected party’s reasonable control.
Properly drafted, force majeure clauses provide certainty by defining what happens when performance becomes impracticable or impossible due to agreed events outside your control.
Common Examples of Force Majeure Events:
A wide range of events may be described as force majeure, including:
- Natural events: flood, earthquake, storm, fire and other acts of God.
- War and civil unrest: war, terrorism, riot, insurrection and sabotage.
- Governmental action: changes in law, export controls, embargoes and compulsory orders.
- Labour and industrial issues.
- Epidemics and pandemics.
- Utilities and infrastructure failure.
- Supply chain disruptions.
Force majeure clauses typically require that the event be outside of the reasonable control of the affected party and that it prevents, hinders or delays performance. How the force majeure clause has been drafted will affect how and when a force majeure clause may be relied upon and whether you can just ‘pause’ your obligations or avoid them completely. Without such contract clauses, you may be bound by your obligations under the contract, which can have a devastating impact on your business and in some circumstances, this can be terminal for your business.
Giving Notice Of Force Majeure Clauses
If your business is putting force majeure clauses in place, you are required to give prompt written notice and update any other parties as circumstances change and evolve. Failure to comply limits available relief.
Force majeure clauses should also oblige the affected party to take reasonable steps to mitigate the effects and to resume performance as soon as reasonably practicable. Some clauses will also require the pursuit of alternatives, including the use of substitute suppliers or routes, where commercially reasonable.
Changing Drafting Trends
Since the recent pandemic, which exposed many issues with force majeure clauses in contracts, there has been a shift to drafting with more specificity. Many new contracts now:
- Expressly include “epidemic,” “pandemic,” “public health emergency”, and “governmental measures in response”.
- Specify the threshold(s) at which force majeure will apply, sometimes differentiating between different areas of disruption such as supply, logistics and site-specific performance.
- Include detailed notice requirements with consistent updates and documentation requirements.
- Mandate the pursuit of mitigation (if possible), such as further sourcing or rerouting.
- Provide clearer longstop termination rights, extensions of time and pricing adjustments.
Force majeure is usually described as a ‘standard clause’. This can lead to these clauses being generally overlooked as standard or unimportant. However, recent events show just how important they are in contracts.
Are Force Majeure Clauses Always Effective?
How effective your force majeure clauses are will depend on their precise drafting and how compliant the parties have been with their terms. Considering current events and disruptions, our expert corporate and commercial solicitors in Plymouth would always recommend that you review any legacy wording included within your business-critical agreements.
At GA Solicitors, we are highly experienced in the creation of all types of corporate agreements and can help you to ensure that your best interests are protected regardless of external circumstances.
If you have any questions or concerns in relation to your current force majeure clauses or any wider concerns regarding your commercial contracts, then please feel free to contact our corporate and commercial solicitors today on 01752 203500 or email me directly at jack.ross@GAsolicitors.com.
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