By Thomas O'Leary and Laura J. McPhee
In an era marked by unpredictable global events such as the COVID-19 pandemic, and with the looming threats of further economic disruptions as the result of supply chains under increasing risk due to political forces, climate, and other variables, the role of force majeure clauses in commercial contracts has never been more critical. These provisions are not just legal formalities; they are vital tools for risk management, used increasingly by legal experts and business leaders to shield against the chaos of unforeseen disasters.
Negotiating and drafting force majeure clauses involves complex issues and choices. Below is a general overview of the function, interpretation, and elements of force majeure clauses. We hope that it is a s useful starting point for considering how the force majeure concept might be best utilized in written agreements, and how it may be applied to contractual performance obligations.
The Purpose of Force Majeure
A common provision in commercial contracts, force majeure clauses excuse one or both parties from performance during that course of “force majeure”. The Supreme Court of Canada, in the seminal case Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., articulated the essence of force majeure: it absolves a party from liability when an unexpected, often extraordinary event beyond human control renders performance impossible.
Originally rooted in French law and later integrated into Anglo-American contracts, force majeure mitigates the rigidity of the common law doctrine of frustration, which is the only common law doctrine that excuses contractual performance in the absence of breach. Whereas the doctrine of frustration requires the total destruction of the contract's underlying purpose in order to excuse non-performance, the contractual concept of force majeure can operate more flexibly, excusing performance in the face of temporary or partial impediments.
Decoding Force Majeure: Interpretation and Challenges
Despite ubiquity in commercial contracts, the interpretation of force majeure clauses in Canadian jurisprudence is relatively limited. Though uncertainty exists on more nuanced interpretive issues, it is clear, as a starting point, that force majeure clauses can be expected to be subject to strict and narrow interpretation. This reflects the traditional wariness of courts toward contractual terms that attempt to excuse contractual performance or limit liability for non-performance. Indeed, it is rarely the intention of contracting parties to excuse contractual non-performance in circumstances that make such performance merely difficult, rather than impossible. Careful drafting of force majeure clauses is therefore critical.
Key Aspects
Aspects of force majeure clauses that should be carefully considered at the drafting stage, and when post-contract circumstances may bring force majeure into play, include:
Triggering Events
Drafters may choose between setting out a list of specific triggering events (ex. flood, strike, fire, etc.) or using general language setting out the criteria for an event to constitute force majeure and thereby suspend performance obligations. Both approaches bring benefits and risks to the parties. Providing a “laundry list” of triggering events is intended to promote certainty and to ensure that force majeure will operate only in specified circumstances. If an event occurs that was not contemplated by the drafters, there’s a risk that force majeure relief may not be available to a party because the specific event is not listed (for example, failing to include “global pandemic” as an event, may have precluded reliance on force majeure during COVID-19). Conversely, where more general force majeure criteria is used, application of the concept can be more flexible but risk of greater uncertainty in application. These approaches can be combined with a specific list of triggering events, followed by general language for “any other events” meeting specified criteria.
Mitigation Obligations/Duration
Determining how long non-performance will be excused in the face of force majeure is also critical. Usually non-performance is excused for as long as the force majeure circumstances cannot be overcome by the claiming party acting diligently (“with all reasonable dispatch” or similar language is often used here). Important questions to be addressed in this respect are whether the impacts of the force majeure must be overcome, or merely the event itself (i.e. does a supplier of goods have obligations to provide an alternative supply if its original supply is confiscated by pirates on its transoceanic journey?), and any limits on what the claiming party must do to overcome the force majeure. The concept of commercial reasonableness has been employed to limit a claimant’s obligations to overcome force majeure, but this has been controversial and introduces further uncertainty (i.e what is commercially reasonable in the circumstances?). A further matter to consider in this area is when and if a force majeure event can be considered permanent, the contract frustrated, and all contractual obligations ended.
Notice
Typically, providing notice to counterparties is a prerequisite to relying on force majeure to excuse non-performance. Force majeure protection is normally retroactive to the triggering event though notice may not be given until a later date. The logic of providing a notice period after a triggering event is to allow the claiming party an opportunity to cure or mitigate the triggering event and its consequences. It is often required that notices detail the basis for reliance on force majeure (give “full particulars”) in order to be valid. A failure to give the required notice within the required time after the triggering event may preclude reliance on force majeure.
Effect on Contractual Obligations
It is important to address this issue, particularly in complex agreements where the parties may not wish force majeure events and impacts on contractual performance obligations be treated uniformly. It may be desirable in the face of a force majeure event to end, suspend, or alter particular obligations, or to specify that certain obligations continue unabated. Force majeure clauses may also be drafted so that different types of force majeure events deliver different impacts on the performance obligations of the claiming party or the counterparty.
One particular issue that has often arisen in this context concerns the allocation of a limited supply of goods or products among numerous contracted buyers when force majeure prevents fulfillment of all contracted obligations. Supplier obligations to allocate limited supply among various counterparties are often defined in detail to avoid potential disputes of this nature. Conflicts among supplier obligations under different contracts (ex. where once contract states that the supplier will deliver product to buyers pro-rata, while another is silent) can be a particular concern in these circumstances.
The Future of Force Majeure
Force majeure risks in business have been attracting increasing attention over the past decade, reflecting increased perceptions of risk in light of the COVID-19 pandemic, evolving political forces, and climate related factors. It is therefore important for lawyers and business leaders to understand the basic aspects of force majeure clauses, and how drafting choices can impact rights and liabilities when unforeseen events impact contractual performance.
For further insight on these issues, please contact us at Blue Rock Law LLP.