Emerging Laws of Force Majeure Clauses as a Defense or an Excuse for Contract Performance.
Force Majeure is a French term referring to some major force or acts of God. Such may include hurricanes, floods and so on. They Are events of nature which are unforeseeable, inevitable, and not as a result of a person’s act or omission. Also be defined as superior or irresistible force. In relation to contract law, it is that neither party can be held liable to breach of contract due to detrimental conditions caused by such unenforceable circumstances. From the foregoing, it is important to look at how the doctrine developed in order to understand better its legal framework and implications. This shall be looking at the historical development of the force majeure clauses, the legal framework and distinguish it from the legal concepts of impossibility, impracticability and frustration of purpose. In that respect, the impact of covid-19 on performance of contractual obligation in the modern commercial world.
Historical Background: An Overview of Force Majeure Clause
The concept developed with the emergence of trade during the medieval ages. The historical evolution of this force majeure doctrine can be traced from the western countries. It originated in Rome. There was no established comprehensive system of contract law then. Commercial and contract related issues were addressed under the general laws. The concept of the stipulation, was the formative idea which later evolved to more developed principles such as the force majeure and impossibility. Stipulatio, as it is in the Roman law, was a simple form of contract that was majorly oral. The Roman law provided that a debtor is exempted from paying a loan where it is proved that it was not his intention or fault that he failed to pay or there was loss of goods, but was due to unforeseen disaster. The doctrine refers to external factors that cannot usually be foreseen or can be foreseen but are irresistible.
The content of the doctrine was later adopted and developed in France. This was captured under the French civil code. The code provides that a party to a contract in French law is liable for damages caused by the non-performance of his contractual obligations where he fails to prove that the failure to perform was due to external forces beyond his control and that there was no bad faith on his part. This provision closely alludes that the doctrine of force majeure exempted a party from non-performance.
Germany also, later on, adopted the same in its German civil code by explaining the situation without explicitly mentioning the term ‘force majeure’. The Bürgerliches Gesetzbuch (BGB) before its amendment provided for circumstances under which a part may be excused from performance where the fault lies on a supervening factor. BGB refers to the German civil code that was developed in 1881 and came into force in 1900. In America, the law had continuously insisted on the strict application of the concept of absolute obligation. A party to a contract was expected to adhere to the contract and perform his obligation thereof. The doctrine of force majeure was unrecognized at the time as a result of absolute obligation. One would be found liable for non-performance even where it was impossible to perform as a result of an intervening event that was unforeseeable and out of his control.
However, the American law has continuously improved and developed over time. The aspect of unpredictable events in life started to be appreciated, although the point of departure remained to be to observe the concept of absolute obligation. The common law was extremely rigid on this aspect. Absolute performance of contractual obligations was the norm. This was even where the unforeseeable event was not as a result of the parties’ fault. However, Thomas Aquinas observed that where the circumstances which existed at the formation of a contract changed affecting the performance of a contract, non-performance of such can be excused. This reflected the modern principle of excuses for non-performance of contracts.
In 1863, the courts made a major turning adopting that there can be mitigating factors when it comes to discharge of absolute contracts. This was in the land mark case of Taylor v Caldwell. The facts of the case were as follows; Caldwell, the defendant, allowed Taylor in a contract, to use a music hall for four days in return Taylor was to pay a hundred Euros per day. In the contract, it was provided that the hall was to be fit for a concert. However, there was no provision regarding any disaster that may occur. Before the concert started, the hall was destroyed as a result of fire. Taylor sued Caldwell for breach of contract of not renting the hall and concert advertising expenses incurred.
The clause operates in a way to free parties to a contract from obligation or liability in case of occurrence of an event which is beyond the control of the parties. However, the clause does not suspend the contract completely but rather offers relief from performance for a certain period of time. A good example is when strikes occur, delivery of goods in time might be affected but not the timely payment for the already delivered portion.
Force Majeure Provisions and its Applicability in Contracts
In life we make plans and promises to other people to do certain things. However, it is not always certain that we shall fulfill such promises or plans. Other factor that are unplanned for come into play and end up making it impossible to carry out the targeted goals. Parties to a contract are obligated to perform their contractual obligations. In formulating the contractual agreement, the law allows parties to include a force majeure clause that may be invoked upon the occurrence of an intervening event that causes performance to be impossible.
The reason for including such a clause in the contract is to allocate risk of loss associated with failure or delay of performance as a result of an event that the parties did not foresee and not within their control. The clause has to include certain components to be enforceable; must define the breach to be excused, the force majeure event, require a link to the event and performance of the contract and lastly explain what will happen after performance is excuse.
Force majeure clauses may be included in different types of contracts. A good example is contract for service. This type of contracts is likely to be substantially affected by an occurrence of an unpredictable event. To illustrate, in the at the onset of the current coronavirus pandemic, many contracts of service became impossible to perform. In addition to the massive loss of peoples lives, many countries resorted to coming up with measures to curb or decrease the impact of such epidemic. Lockdowns made it difficult for delivery of services among other things. In such a case, parties may enter into contracts of service and include force majeure clause.
Every force majeure clause includes a description of the types of circumstances covered by the clause. These may be very general and limited, such as “acts of God or government authorities, natural disasters, or other emergencies” or a long list of potential catastrophes. Provisions typically cover natural disasters like hurricanes, floods, earthquakes, and weather disturbances (sometimes referred to as “acts of God”), as well as any other regional risks, such as an avalanche or a tsunami. Other covered events may include war, terrorism or threats of terrorism, government regulations, civil disorder, labor strikes or disruptions, fire, disease or medical epidemics or outbreaks, and curtailment of transportation facilities preventing or delaying attendance by at least twenty five percent of meeting participants.
If the force-majeure clause specifically covers financial crises and economic recession, then the parties have a better chance to excuse themselves of further obligations as they have explicitly agreed in the contract to this condition. A court would uphold the sanctity of the contract and the freedom of the parties to define the parameters of their obligations as they see fit. The court cannot go contrary to explicit clauses in order to make the contractual bargain fairer. A court would only go contrary to a clause should it contain an illegality, in which case the illegal clause can be severed from the contract.
Principles of Force Majeure
Generally, the principle deals with legal or physical impossibility of performance of contractual obligations. The doctrine is a clause included as part of the construed contract. The clause may not necessarily expressly mention the term ‘force majeure’ but should explain the situation. However, in the Indian case of M/s. Dhanrajamal Gobindram v. M/s. Shamji Kalidas and Co., it was held that the clause ‘subject to the usual Force Majeure Clause’ was not vague and that the contract was not void for vagueness or uncertainty in reference to the force majeure clause. The facts were as follows; the applicant, buyers, entered into an agreement with the defendants. The contract involved purchase of bags of African raw cotton. It took the form of letters from the seller and confirmed by the purchaser. In one of the letters it was stated that ‘we confirm having sold to your African raw cotton on the following terms and conditions subject to the usual Force Majeure Clause…’
In Civil and Common law jurisdictions, the practice is that for on to claim force majeure as a defense to non- performance, the event in question must pass three tests. The first test is the externality test. The parties to the contract must be shown to have had nothing contributing to the supervening event. The event basically is as a result of some external factors outside the control of the parties. In case of fire like in the Taylor case, the party should not be connected in any way with the cause of the fire. In re Phantasmal Gobindram v. Shamji Kalidas, the court observed that the intent of is to protect the non-performing party from the consequences of a supervening event outside his control.
The second test is the unpredictability test. The test refers to the concept of foreseeability. It is sensible that an event which is foreseeable, one would tend to prepare for such. Where the supervening event is shown to be foreseeable and a party claiming force majeure seeks to be excuses from performance of the contractual obligation, the party shall be held liable. This test is mutually inclusive of the other tests. In order to be excused one has to prove all of the three tests.
The final test is the test of irresistibility. This basically provides that the supervening event must one which cannot be prevented. The parties cannot bring themselves to avoid the event from affecting the contract substantially. An event of nature can be predicted for example an earthquake, however, its impact maybe that which cannot be resisted thus force majeure can come into play. The party in default is left completely powerless with no defense. In the determination of this tests, all factors surrounding the case must be put into consideration. These tests can be said to form the principles of the force majeure doctrine.
Force Majeure distinguished from other terms.
Impracticality is a Common law doctrine. Just like force majeure, impracticability operates as an excuse for non- performance especially where the obligation is extremely difficult and costly to fulfill. Commercial impracticability is a development from the Common law concept of impossibility.
In Transatlantic Fin. Corp. v. United States the court pronounced that performance of a contract maybe impracticable where it can only be achieved at an excessive and unreasonable cost. It was pronounced that ‘a thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can be done at an excessive and unresonable cost’. Kelly in his article, identifies factors which the court will take into account in determining impracticability. The first consideration is whether an unexpected event took place, secondly whether the risk of such event was allocated through the contractual agreement, and thirdly is whether the unexpected event made performance impractical. This test is put into application by the United States courts as well as several other jurisdictions but with a few alterations.
Impossibility concept is applicable where the subject matter of the contractual agreement has been destroyed through an occurrence of unforeseen event. Refer to the case of Taylor v Caldwell. Unlike force majeure clause, impossibility is not provided for in the contract. It is the outcome of the supervening event that takes place after the contract is construed. In both concepts the parties are expected to be blameless. They should not have anything to do with the cause of the
Frustration operates as an excuse, as well, not to perform or to set aside. The rule of force majeure is however, closely related to the concept of frustration of purpose or otherwise basis of the contract. In the case of Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH case often referred to as the Suez Canal case there was an attempt to rely on frustration for purpose. The case involved contract for transportation of nuts from Hamburg to Sudan. This was to happen through the Suez Canal. However, it was closed down thus not able to be used for such purpose. The issue was whether there was frustration for purpose as a result of the closure. The House of Lords held that the contract for sale was not frustrated as a result of such closure. There was another alternative means through which the goods would have been transported. The other route was however, much more expensive and the distance three times longer than the Suez Canal. Although performance had become quite difficult, it was otherwise possible. Thus, mere difficulty would not render the contract discharged for impossibility of performance.
Another case is the sea angel casewhich provided a more modern approach. The issue was whether there was frustration of the contract as a consequence of the detention of the vessel. The approach was to look at all the factors that affect performance of the contract.
The court observed that;
“…the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as there can be ascribed mutually and objectively, an then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express of implied provision but may also depend on less easily defined matters such as ‘the contemplation of the parties’, the application of the doctrine can often be a difficult one. “
Challenges to Successfully Invoke the Doctrine
In order to successfully invoke the doctrine of force majeure, the courts will take into account certain considerations. These considerations must be fully satisfied by the party invoking the force majeure clause. Such may include; the invoking party bears the burden of proof. This poses a challenge as the burden must be discharged for the party to be excused from performance by showing the effort he made to perform regardless of the occurrence of such event.
In the case of United States v. Brooks-Callaway Co. the issue was whether the proviso to Article 9 of the Standard Form of Government Construction Contract which provides that a contractor shall not be charged with liquidated damages because of delays due to unforeseeable causes beyond the control and without the fault of the contractor, including floods, requires the remission of liquidated damages for delay caused by high water found to have been customary and foreseeable by the contracting officer. The non-performing party made a claim to recover money deducted from the price in the contract as liquidated damages for delay in contemplation of a contract involving construction of levees on a river. There was a force majeure clause in the contract which required the supervening event causing non-performance be one that is beyond the control of parties and not as a result of the contractor’s fault or negligence. By upholding the lower courts decision, the US supreme court provided that the mere showing of the occurrence of the alleged supervening event causing delay in delivery does not automatically amount to a claim for force majeure relief. To invoke, the non-performing party has a duty that extends to show which act it took in order to perform the contractual obligation regardless of the intervening factor.
It was stated that;
“…Not every fire or quarantine or strike or freight embargo should be an excuse for delay under the proviso. The contract might be one to excavate for a building in an area where a coal mine had been on fire for years, well known to everybody, including the contractor, and where a large element of the contract price was attributable to this known difficulty. A quarantine or freight embargo may have been in effect for many years as a permanent policy of the controlling government. A strike may be an old and chronic one whose settlement within an early period is not expected. In any of these situations, there could be no possible reason why the contractor, who, of course, anticipated these obstacles in his estimate of time and cost, should have his time extended because of them.”
The Future of Contract Clauses to Protect parties from Force Majeure or Unpredictable Events.
Force majeure clause are meant to offer relief on occurrence of an unforeseen event which hinders a party from performing the contractual obligation. For a party to rely on this clause there must be a connection the event and the performance of the contract. Different unpredictable events affect different contacts differently. This creates the need for the courts to analyze keenly the clause provided and the supervening event in accordance to each case. The non-performing party will be excused from performing the contractual obligation and would not be held liable for breach of contract. In the circumstance where a supervening event affect the fundamental term of the contract making it incapable of performance, a party is allowed to invoke the force majeure clause. It will be unfair for one to be held liable for events that were not in his control and unforeseeable. It is just and fair for the courts to give effect of the clause in the event it is invoked and the party invoking proves all the essential elements required for the clause to be enforced.
The New York court in JN Contemporary Art case was tasked with the question of whether Covid-19 pandemic qualifies as an ‘act of God’s. In this case the defendant agreed to cosign two pieces of art from the plaintiff ahead of an art auction in May 2020, in which one piece would be auctioned. The New York governor Andrew Cuomo declared a state disaster emergency and went further to lockdown all the non- essential businesses. Art galleries formed part of the non-essential businesses. The defendant relied on force majeure clause as established in the contract and terminated the contract for May 2020 auction. Plaintiff sued for damages.
The court mainly focused on the issue of whether the force majeure clause in question was applicable since it did not specifically contemplate pandemic or epidemic. It was held that COVID-19 pandemic was a natural disaster falling within the scope of force majeure clause. The court relieved the defendant from performance of the contract.
Conclusion
The doctrine of force majeure is one of great import in the commercial world today. It follows the principle of freedom of contract thus affording an excuse regarding the rigidity in the civil and Common law jurisdictions. It is required that parties entering a contractual agreement provide a clear and well drafted force majeure clause. The doctrine may often be used by different scholars interchangeably with other terms such as impossibility, impracticability and frustration. However, this should not be the case as in as much as they are closely related, they have different meaning and courts may found the doctrines to impact differently according to each case. The coronavirus pandemic has affected the performance in of contractual obligations differently. Therefore, the courts must be careful in applying the force majeure clause as an excuse for non-performance since the circumstances of each case differ from the other.
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