It would not be unreasonable to suggest that planning for (often) wildly unexpected events may not be at the forefront of either party’s agenda during initial contract negotiations.
Price, payment terms, liability and termination are examples of the terms in a manufacturing contract that usually demand the most by attention by way of discussion; however history serves to warn us that we cannot afford to bypass “boilerplate” clauses such as force majeure without caution.
What is a force majeure clause?
A force majeure clause is designed to excuse one party (or both) from performing affected obligations in a contract following the occurrence of certain events or circumstances beyond its control.
However, whilst it may come as a surprise to some business people, the term “force majeure” has no meaning under English law. Rather, “protection” is only afforded if the applicable circumstances are specified in a written contract; it will not be implied. [see Note 1 below]
Manufacturing: supply chain risks
The disruption to Toyota’s supply chain following the earthquakes in Southern Japan in April 2016 is a notable example of the need to pay adequate attention to a force majeure provision in manufacturing contracts. The resulting shortage of parts following the damage caused led to Toyota temporarily suspending much of its production across Japan. It was estimated to have reduced Toyota’s operating profits by around $277 million for the second quarter of 2016.
It is far from the purpose of this article to speculate what was included within Toyota’s contracts with its customers, however it serves to highlight that the unexpected remains a possibility and should, as far as reasonably possible, be given broad consideration.
A failure to include a satisfactory force majeure clause could render a manufacturer obligated but unable to supply goods within a specified timeframe under an agreement, leaving it open to potentially costly claims for breach of contract from unhappy customers.
What to include in a force majeure clause
Given the concept of force majeure is contractual, the circumstances in which and how it will apply come down to contractual interpretation. Key points to consider include:
- The scope of the potential relief; does it include circumstances not just relating to “failure” or “delay” but broader aspects such as “hinder” or “prevent”;
- The financial impact. For example, a ‘traditional’ force majeure clause will not excuse performance by a party where it is possible to perform but ‘hopelessly uneconomic for it to do so’. As such, the parties need to consider whether the drafting should include financial qualifications (e.g. performance becomes uneconomical or the often used not reasonably capable of performing);
- Have all of the likely events been included; for example, in logistics/distribution contracts, failure of a road (or other) network.
Effect of a force majeure clause
The effect of a force majeure clause will depend on how it is drafted. Generally, its effect includes some (or all) of the following:
- Suspension: For the most part, force majeure clauses are suspensory, that is, the affected obligations remain but they are suspended for so long as the force majeure event continues. Once the force majeure event has ceased, the contract is then continues on its same terms. Dependent upon the drafting, the benefit of the force majeure clause will be subject to service of notice of force majeure on the other party or will be automatically available to the non-performing party.
- Non-liability: Once the force majeure clause is triggered, the non-performing party's liability for non-performance or delay in performance is removed; however, this is usually for as long as the force majeure event continues.
- Obligation to mitigate: The entitlement to benefit from a force majeure clause is usually subject to the affected party having taken all possible steps to avoid the event or the impact of its consequences. In many cases, this will be difficult for the affected party to prove. A duty to mitigate may be implied in any event.
- Right to terminate: Although many force majeure clauses go no further than to suspend the parties' obligations so long as the force majeure event continues, this may be unsatisfactory if it becomes commercially unfeasible for the parties to resume performance of the agreement once the force majeure event ceases. To this end, most force majeure clauses do permit either or both parties to serve notice terminating the agreement after a specified period so that they can make alternative arrangements.
One point to note is that where a contract is on one party’s standard terms, a force majeure clause will be governed by the Unfair Contract Terms Act 1977 (UCTA). Under UCTA, a party cannot rely on any term to exclude or restrict liability for its own breach of contract, unless such a term satisfies the reasonableness test under UCTA (section 3(2), UCTA). A force majeure clause therefore needs to be reasonable to remain valid (and were a party to seek to classify events, which are in fact within its control as force majeure events, this could potentially be unreasonable).
How can we help?
Wright Hassall’s experienced team of manufacturing lawyers can provide a review of any of your commercial contracts to assess the steps that you could be taking now to mitigate future risks. If you would like to discuss this further, please get in touch with a member of our team.
Note 1: The Doctrine of Frustration is the only exception. In very limited circumstances and only where performance of a contract is rendered “impossible” it may be possible to avoid further contractual liability.