Interpretation of Force Majeure Clauses

After a contract has been concluded, circumstances may arise which render the contract unworkable or even impossible to perform. A force majeure clause will stipulate what happens to the parties’ contractual obligations in the event of specified events or events beyond the control of either or both parties. It can operate to terminate the contract in its entirety and excuse performance of a party’s obligation in whole or in part. Essentially, it operates as an express risk allocation mechanism between parties in situations that are beyond the parties’ control e.g. outbreak of war, strikes and so-called Acts of God.

As noted by the English High Court in Tandrin Aviation Holdings Ltd v Aero Toy Store Llc & Anor [2010] EWHC 40 (Comm), “[w]hether a force majeure clause in a contract is triggered depends on the proper construction of the wording of that clause; “force majeure” is not a term of art“. Nevertheless, a body of case law has developed as to what typical force majeure clauses will not cover in the absence of explicit wording to the contrary.

The Canadian Supreme Court in Atlantic Paper Stock Ltd. v St. Anne-Nackawic Pulp and Paper Company Limited, 1975 CanLII 170 (SCC) has held that in relation to force majeure clauses, “[t]he common thread is that of the unexpected, something beyond reasonable human foresight and skill“.

The doctrines of force majeure and frustration are similar to the extent that successful recourse to either doctrine determines the contract and no further performance is required from the parties to the contract. The historical and classic example is that of the destruction of a concert hall just prior to when a performance was to have been held.

Unlike a force majeure clause though, frustration does not require an explicit provision in the contract. In fact, where parties have applied their mind to the frustrating event, this will generally preclude reliance on the doctrine. This is because frustration is concerned with the incidence of risk for unforeseen, supervening events that have occurred without default of either party such that the nature of the contract has become so radically differently that the performance of the contractual obligation would be fundamentally different from the obligations initially contemplated and undertaken. As a result, the court considers that it would be unjust to hold the parties to their initial contractual obligations. Because of the rather draconian effect of the doctrine, the mere fact that the contractual obligations have become more onerous to perform is insufficient grounds to amount to frustration.

English Courts’ Approach

Both the cases of Tandrin Aviation and Carboex SA v Louis Dreyfus Commodities Suisse SA [2012] EWCA Civ 838 are useful in considering the court’s approach to interpreting force majeure clause. In line with the construction of contractual provisions, the courts will look at the ordinary and natural meaning of the word in the context of the entire contract and with a business and commonsensical approach. 

In Tandrin Aviation, the defendant sought to justify its refusal to accept delivery of the aircraft on the basis that the “unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets” triggered the force majeure clause in the relevant agreement (see paragraph [38]). However, as the High Court noted, “[i]t is well established under English law that a change in economic / market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not regarded as being a force majeure event. Thus a failure of performance due to the provision of insufficient financial resources has been held not to amount to force majeure“.

In such circumstances, whether or not a force majeure clause operates will depend on the proper construction of the wording of that clause. The High Court considered that the force majeure clause did not cover economic downturn and in this respect applied the usual approach of contractual interpretation to the force majeure clause.

  1. The phrase that was sought to be relied upon “any other cause beyond the Seller’s [the plaintiff’s] reasonable control” ought to be read in the context of the entire clause. While the High Court considered that there was no requirement to construe the phrase in accordance with the ejusdem generis principle [that is, the principle that a more general phrase following a series of descriptors should be construed restrictively to the same kind or class of the descriptors], nevertheless the High Court considered it “telling” that the examples of force majeure in the clause were not “even remotely connected with economic downturn, market circumstances or the financing of the deal” (see paragraph [44]).

  2. Pertinently, the phrase merely referred to causes beyond the plaintiff’s and not the defendant’s (or either party’s) control. The High Court considered that the “natural and ordinary meaning” of such a provision was that it addresses the position of the plaintiff rather than the defendant such that it should be construed as a clause that only the plaintiff seller could rely upon. To do otherwise would be to “give no meaning to the words ‘the seller’s‘” and would “fundamentally change the meaning of the phrase” as it “would be an absurdity” (see paragraph [46]).

  3. The High Court considered that it would not be particularly surprising if this part of the force majeure clause was so limited because it was the plaintiff seller who had the principal performance obligations under the Agreement. The defendant purchaser’s main performance obligations were to pay the price and accept delivery of the aircraft which were obligations that were far less likely to be affected by force majeure circumstances (see paragraph [45]).

In Carboex SA v Louis Dreyfus, the question involved whether a party could rely on a force majeure (laycan) clause to excuse delay in discharging the cargo of coal as a result of the aftermath of a strike and an unofficial stoppage thereafter causing congestion in the port and knock on delays in hauling the cargo away. The respondent charterer claimed that they were entitled to rely on the laycan clause notwithstanding that the vessels in issue were not delayed by the strike per se, but its after effects and that some of these vessels had arrived in the port after the strike had ended. The High Court accepted the charterer’s construction of the laycan clause.

The specific clause in question read,

9. . . . In Case of strikes, lockouts, civil commotions or any other causes included but not limited to breakdown of shore equipment or accidents beyond the control of the Charterers which prevent or delay the discharging, such time is not to count unless the vessel is already on demurrage.

The Court of Appeal in dismissing the appeal first considered the language of the charter without reference to previous decisions of the court (see paragraph [12]). While they accepted that the effect of another clause in allowing the charters to give notice of readiness “whether in berth or not” was to transfer the risk of delay due to congestion to the charterers, this general regime by itself did not raise any presumption that the charterer did not transfer the risk back to the owners in specific situations envisaged by the laycan clause.

The Court of Appeal noted that such risks were a matter of commercial consideration to be allocated between parties under different circumstances. In support of their view, the Court of Appeal considered cases with similar though not identical clauses and considered that those rendered assistance in support of the proposition that from “a business and common sense point of view“, there was “nothing incongruous about an agreement which relieved the charterer from the risk of delay in getting into berth in order to start loading” (see paragraph [17]).

It also rejected the respondent’s alternative argument which sought to reject the charterer’s construction on the laycan clause on the basis that it would produce uncertainty in determining whether the clause would apply in any given situation. While certainty is important in commercial matters, that would not defeat the language of the laycan clause.

Conclusion

Force majeure clauses are meant to deal with situations that are beyond the control of one or both of the parties as well as situations that are unforeseen and which renders the performance of the agreement either impossible or radically different from that which had been contemplated. Parties should take care to consider how the force majeure clause is to be drafted and in particular, what events or circumstances will trigger force majeure as well as the effects and consequences of force majeure. 

Parties should also bear in mind that courts and arbitral tribunals will not protect companies from bad economic and commercial bargains. In times of severe economic uncertainty, parties who wish to protect themselves from onerous uneconomic bargains as a result of a material change in circumstances must take special care to make that explicit in the contract. Alternatively, they should take non-legal measures to hedge against such risks.

About Shaun Lee

International arbitration lawyer specialising in Technology, Media and Telecommunications disputes.
This entry was posted in Arbitration, Asean and tagged , , , , , , . Bookmark the permalink.

2 Responses to Interpretation of Force Majeure Clauses

  1. Pingback: Technology and Outsourcing Hot Spots Series (3): Termination and Post-termination rights | Singapore International Arbitration Blog

  2. Pingback: The Interpretation of Force Majeure Clauses and Frustration in Singapore | Singapore International Arbitration Blog

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