Force majeure: Update in light of recent developments

News / / Dubai

When an event occurs, either natural or man-made, which significantly impacts the performance of a contract but is beyond the control of the parties, how is the risk allocated between the parties? What remedies are available? Who pays for the delay? Often the answers to such questions are found in the force majeure clause.

The recent Ebola outbreak and the ongoing unrest in Iraq and Libya, have all raised concerns for those who have operations in Africa and the Middle East, particularly in the oil and gas industry. As contractors consider the potential impact of these crises and assess whether they can vary the performance of their contractual obligations, force majeure has naturally been at the forefront.

What is force majeure?

In contrast to civil law jurisdictions there is no doctrine of force majeure in English common law. Therefore commercial parties who wish to rely upon force majeure can do so by including a provision in their contract in accordance with the general principles of English contract law (which generally give parties the freedom to contract on the terms they see fit). Where parties include a force majeure clause in their contract, the consequences of an exceptional event will ultimately be determined by the precise construction and interpretation of that clause.

As a result the scope and extent of the force majeure clause in any given contract is of paramount importance when dealing with the unexpected or uncontrollable. A typical force majeure clause permits a party to extend, suspend and/or terminate the performance of the contract when an extraordinary event occurs beyond the parties’ control. The English court will give effect to a properly drafted and applicable force majeure clause as an allocation of risk provision.

Force majeure clauses

Most force majeure clauses stipulate that the disruptive event must have an actual impact (e.g. cause genuine delay or hindrance) on the parties’ ability to fulfil their contractual obligations before an event can be relied upon to excuse or change performance. Further, some force majeure clauses require that the event is unforeseeable to succeed as force majeure. Where such a requirement exists, it would be difficult for a party, for example, to contend that intensified disruption is unforeseeable if that party knowingly chose to commence operations at a time when the area was already affected by significant unrest.

Many clauses adopt a non-exhaustive list of events or circumstances that would qualify as force majeure and typically include, amongst others, “acts of God”, “earthquake, fire, flood or other natural physical disasters”, “acts of war” and “riot, insurrection, rebellion, sabotage or acts of terrorists”. Some parties attempt to include a catch-all provision in their force majeure clause, with wording such as “any other event”. However, such phrases should be adopted with caution. In the case of Tandrin Aviation Holdings Limited v Aero Toy Store LCC and others1
the phrase “any other cause beyond the Seller’s  reasonable control” was interpreted by the court narrowly and it was held that, in the context of that case, the phrase was limited to the class of events specifically referred to in the force majeure clause.

If a contract does not have a force majeure provision, the parties will need to look to the narrow doctrine of frustration which essentially “kills the contract” if performance becomes impossible, or look to other available remedies.

Could the Ebola outbreak qualify as a force majeure event? The Ebola virus is a severe, often fatal illness and is one of the world’s most virulent diseases2. The recent occurrence in West Africa is the largest Ebola outbreak ever reported with the World Health Organisation declaring it a “Public Health Emergency of International Concern” that constitutes an “extraordinary event3.

Whether the Ebola epidemic qualifies as a force majeure event will depend on the drafting and interpretation of the relevant clause. It is common for “epidemic” to be expressly included in the definition of force majeure as is the case in the standard form IADC International Offshore Daywork Drilling Contract (in contrast to the LOGIC General Conditions of Contract which has closed standard wording and does not refer to an epidemic).

However, the absence of express reference to an epidemic would not necessarily prevent Ebola from being considered as a force majeure event. All depends upon how broadly the concept is defined. Wording such as that used in the FIDIC Forms are very broad and simply require that the event is one beyond a party’s control, that could not reasonably have been provided against before the contract, which could not have been avoided or overcome and is not substantially attributable to the parties. Provided that the conditions set out in a force majeure clause are satisfied and it can be demonstrated that the outbreak will or has affected (as the case may be) the parties’ ability to fulfil their contractual obligations then the Ebola outbreak may well meet the contractual requirement and be considered a force majeure event.

Last month, for example, a leading steel and mining company declared that the Ebola epidemic triggered force majeure in relation to its operations in Liberia and that it was moving its personnel out of the country. It remains to be seen how other corporations will respond to the epidemic. If the disease continues to spread as predicted, it seems others are likely to follow.

Could the unrest in Iraq qualify as a force majeure event? There is little doubt that the current unrest and violence in Iraq has made the operations of oil and gas contractors in this region increasingly challenging. The ongoing instability in the region has already resulted in force majeure provisions being invoked by contractors.

Many contracts expressly include “acts of war” and “riot, insurrection, rebellion, sabotage or acts of terrorists” as force majeure events and it is probable that on a traditional interpretation of such definitions the current instability in certain parts of Iraq could be interpreted as such an event.

However, in many cases the relevant event must in fact have had an adverse impact upon performance and in assessing that impact it is likely a Judge or tribunal will take account of the situation which existed at the time the contract was agreed. Care must therefore be taken to ensure that the force majeure clause achieves what was intended between the parties and defines just what level of risk is unacceptable.

Practical considerations

In light of the recent events noted above it is advisable that contractors review and analyse their force majeure clauses in order to manage the impact of extraordinary events. Useful points to consider include:

  • setting out in detail in the contract the circumstances which constitute a force majeure event;
  • making clear the exact threshold required to invoke force majeure;
  • carefully outlining the relief and remedies that the parties may seek in the event of force majeure (e.g., suspension, termination, reduced rates);
  • setting out whether there are obligations to mitigate the impact of a force majeure event and specify a practical notice procedure;
  • considering the knock-on effect that declaring a force majeure event may have on other contracts; and
  • assessing the logistical, financial and reputational risks that may result from relying on force majeure.

When drafting a force majeure clause, often the best solutions allow the parties to overcome the force majeure event in a sensible manner such as granting further time for contractual performance, with the back stop of a time limit, or allowing performance at a different rate, as it may be in both parties’ interests that the contract survives and can be completed after the end of a force majeure event. Equally however, those contracting out valuable assets and personnel will not wish them to be tied up for long periods without generating revenue. Time spent deciding how long both sides are prepared to wait can be worthwhile.

Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm)

Rania Tadros

Rania Tadros Managing Partner

Amaka Edomobi

Amaka Edomobi Managing Associate

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