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[1]. 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[2]. 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 enforceable circumstances[3]. From the foregoing, it is important to look at how the doctrine developed in order to understand better.
Historical Background
[4]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. [5]There was no comprehensive system of contract law. Commercial and contract related issues were addressed under the general law. [6]The concept of the stipulation, was the formative idea which later evolved to more developed principles such as the force majeure and impossibility. [7]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. [8]This was captured under the [9]French civil code. Germany also, later on, adopted the same in its German civil code by explaining the situation without explicitly mentioning the term ‘force majeure’. [10]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. [11]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.
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. [12]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.
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.
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 [13]Taylor v Caldwell. The facts of he 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.
In the holding, Blackburn J, stated that;
“[t]here seems no doubt that where there is a positive contract to do a thing, not in unlawful, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burdensome or even impossible… In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance…both parties are excused, the plaintiffs from taking the [music hall] and paying the money, the defendants from performing their promise to give the use of the [music hall].”
[14]In 1914, the World War 1 brought certain fundamental changes in the legal framework of several countries. This is in relation to the doctrine of force majeure. The concept was expanded to include discharge of certain contracts as a result of such new events. This would include wars, strikes, riot, epidemic and also certain legal changes hindering performance of contractual obligations.
The concepts
The general rule has always been a party to a contract has to perform his obligation According to the contract he signed. Failure to do so, he has to pay damages to the other aggrieved party for breach of contract. However, a party maybe excused from such duty where he is unable to perform. This excuses operate as an exception to the general rule and thus afford the default party a defense for non-performance of the contractual obligations. This excuses may include impossibility, commercial impracticability, and frustration of purpose as well as force majeure clauses. The concepts tend to protect parties to a contract from obligation where there is occurrence of something that is outside their control rendering the performance of such obligation unfeasibly difficult thus are not to be held liable.
[15]This terms refers to events that result to making performance of contractual obligations extremely onerous. Some legal scholars may find themselves using the terms interchangeably, which should not be the case.
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 [16]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.
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 [17]Taylor case, the party should not be connected in any way with the cause of the fire. In [18]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.
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 defence[19]. In the determination of this tests, all factors surrounding the case must be put into consideration. This tests can be said to form the principles of the force majeure doctrine.
Force Majeure and Impracticability
Impracticality is a Common law doctrine. Just like force majeure, impracticability operates as an excuse for non- performance especially where the obligation is extremely difficulty and costly to fulfill. Commercial impracticability is a development from the Common law concept of impossibility.
In [20]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. [21]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.
[22]The threshold required for any contractual obligation to be declared impracticable is quite high. This was illustrated in an American case of [23]Publicker Industries v. Union Carbide Corporation. It was stated “[the court] is not aware of any cases where something less than a 100% cost increase has been held to make a seller’s ‘impracticable’”. This is shows a strict interpretation of the concept of impracticability. According to [24]Mazzacano, bankruptcy, insolvency and such financial and economic constraints would not usually amount to contract impracticability.
In another case of [25]Eastern Air Lines Inc. v Gulf Oil Corporation, the United States District court observed that;
“The modern U.C.C. § 2-615 doctrine of commercial impracticability has its roots in the common law doctrine of frustration or impossibility and finds its most recognized illustrations in the so-called “Suez Cases”, arising out of the various closings of the Suez Canal and the consequent increases in shipping costs around the Cape of Good . Those cases offered little encouragement to those who would wield the sword of commercial impracticability. As a leading British case arising out of the 1957 Suez closure declared, the unforeseen cost increase that would excuse performance ‘must be more than merely onerous or expensive. It must be positively unjust to hold the parties bound.’”
Force Majeure and Impossibility
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 [26]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. For force majeure, it is part of the contractual provision that contemplates an event that may lead to non-performance. In both concepts the parties are expected to be blameless. They should not have anything to do with the cause of the supervening event.
Another illustration of impossibility is the case of [27]Robinson v Davidson. Robinson, the plaintiff entered into a contract with the wife of the defendant, as the defendant’s agent. The agreement was that the wife was supposed to play piano at a concert on a specific J. When the specified was at hand, the wife became sick rendering her unable to perform her obligation to the contract. There was no provision as to any such situation causing impossibility of performance. The plaintiff proceeded to sue for breach of contract.
The court held that upon looking at the terms of the contract there was an implied condition that the performance relied on the wife being well enough to do so. Therefore the illness amounted to an impossibility excusing the wife from performing the contractual obligation.
Force Majeure and Frustration of Purpose
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. This can be well illustrated in the [28]Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH case often referred to as the Suez Canal case. 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 was the [29]Sea Angel case which a provided a more modern approach. The issue was whether there was frustration of the contract as consequence of the detention of the vessel. The court of appeal in its holding 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. “
However, there are several differences that are to be noted between this two concepts. [30]Frustration can be invoked by a party to the contract where the contract has no provision of such, while force majeure must be provided for in the contract. It is also contended that a higher threshold is required in frustration as opposed to force majeure.
Challenges to Successfully Invoke the Doctrine
Force Majeure requirements are represented in the International Chamber of Commerce’s Force Majeure Clause 2003[31]. The clause incorporated an impracticability standard. The clause provides that an event must be beyond the party’s control, not foreseeable at the time the contract was signed and it could not have reasonably been avoided. There three major primary reasons why tribunals find that a force majeure defence fails. The reasons are that (1) the party invoking the event should have foreseen it, (2) should have determined an alternative way of performing the contract and (3) did not comply with the notice requirement in the force majeure clause. The tribunal may allow a force majeure defence but limit the defence to a certain period of time, the end result being that the force majeure clause does not necessarily excuse the performance indefinitely. For instance, in [32]Parsons and Whittemore Overseas Company v Societe Generale de L’Industries du Papier, the tribunal found that the respondent was excused from performance only for one month of time in which the defendant claimed a force majeure event prevented performance.
The several challenges/ impediments to successfully invoking the doctrine of force majeure are further heightened by the factors below. 1) Tribunals strictly interpret foreseeability in the sense that failure to protect oneself against a foreseeable event is an assumption of the risk of that event. Justice Traynor in the U.S. Supreme Court case, [33]United States v Winstar Corporation, explained, “If the risk was foreseeable, there should have been provision for it in the contract, and the absence of such a provision gives rise to the inference that the risk was assumed.”
In many of the decisions where tribunals reject a force majeure defense, the party asserting the defense could and should have identified the problem that led to non-performance and specifically allocated its risk before entering into the contract. In ICC No. 12112/2009, the tribunal concluded that force majeure did not excuse the State partner of a joint venture for cultivating agricultural products’ failure to perform because partner, as a regional public entity, must have known about the social climate and forces in its region that made ensuring performance difficult. The tribunal stated that before entering into an obligation everyone must be certain that he has the ability to perform and he doubts about his ability to perform, he must make all necessary verifications before promising performance.
Another challenge is that an otherwise successful force majeure defense can be lost by failing to give timely notice. Section 4 of the ICC clause provides for a duty to notify other party of the impediment without delay. CISG Article 79(4); UNIDROIT Article 7.1.7 and PECL Article 8:108(3) contains the same provision. Tribunals will not excuse failure to provide timely notice of contending a force majeure event. In ICC No. 2478/1974, the tribunals agreed that the events constituted a case of force majeure based on the principles of law and the general contract but failed to enforce it because the contract and general legal principles required the party invoking the force majeure to inform the other party without due delay. The Rumanian company did not provide Timely notice and therefore lost the opportunity to claim force majeure for a certain term period.
The third challenge is that exploring alternate performance and demonstrating its impossibility is critical. Tribunals often require a party claiming force majeure to prove it attempted alternate performance before accepting its force majeure defence. In [34]Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier, the tribunal contended that force majeure was not a defence because due to the conditions arising from the hostilities, the respondents were excused from performance under the contract and relevant laws but only for one month. After the one month, force majeure was not a valid defence because it did not appear that the respondent made any effort to obtain the required visas for its personnel or explored other stafng alternatives. These three factors have made invoking of force majeure as a defence almost impossible.
Purpose of Force Majeure
The clause operates in a way to free parties to a contract from obligation or liability incase 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 enables determination of the scope of relief to which a party is subject to or entitled Incase his performance is affected by such supervening events. In [35]Netone Inc. v Panache Destination Management, a party had booked an event and had already paid the deposit as agreed by the parties. The other party had made preparation for the event and but had not hosted any event. The parties to the contract had established a pandemic as a force majeure event capable of relieving both parties to the contract from future performance. The party that had already paid the deposit sued to recover his deposits.
The court dismissed this claim and stated that force majeure clause in the contract was clear. Therefore, the force majeure relieved both parties from future performance. Previously, courts would excuse performance under a contract on the ground of contract’s force majeure clause on condition that the clause expressly listed the event preventing the party’s performance as stated in the case of [36]Kel Kim Corp. v Central Mkt.
The New York court in [37]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.
[1] Law dictionary
[2] Black’s law dictionary
[3] Supra (n) 1
[4] Peter J. Mazzacano; Force Majeure, Impossibility, Frustration & the Like: Excuses for Non-performance; the Historical Origins Development of an Autonomous Commercial Norm in the CISG; Nordic Journal of Commercial Law
[5] Ibid
[6] ibid
[7] Yingyuan Tang and Chenhao Zhao; A Brief Analysis on the Force Majeure of Covid-19; Advances in Social Science, Education and Humanities Research, volume 251; Atlantis press.
[8] Article 1147 French Civil Code of 1804
[9] Ibid
[10] Section 276
[11] Supra(n) 4
[12] Thomas Aquinas; Summa Theologica
[13] EWHC QB J1, (1863) 3 B & S 826, 122 ER 309
[14] Supra(n) 11 at page 45
[15] Supra(n) 14 at page 39
[16] AIR 1961 SC 1285, (1961)
[17] Supra(n) 23
[18] All India Reporter 1961 Supreme Court (of India) 1285
[19] Supra(n) 25 at page 43
[20] 363 F.2d 312, 315 (D.C. Cir. 1966).
[21] JAY D. KELLEY; SO WHAT’S YOUR EXCUSE? AN ANALYSIS OF FORCE MAJEURE CLAIMS, Volume 2; Texas Journal of Oil, Gas, and Energy Law, 2006
[22] Supra(n) 14
[23] U.C.C. Rep. Serv. 989 at 992 (E.D. Pa. 1975)
[24] Supra(n) 19
[25] 415 F.Supp. 429 (1975)
[26] Supra(n) 13
[27] (1871) LR 6 Ex 269
[28] (1961) 2 All ER 179
[29] Edwinton Commercial Corpn. V. Tsavliris Russ (Worldwide Salvage & Towage) Ltd., 2007 EWCA Civ 547
[30] Jack Young et all; Force Majeure vs. Frustration of Contracts in the Time of COVID-19; Lawson Lundell https://www.lawsonlundell.com/
[31] International Chamber of Commerce, ICC Force Majeure Clause 2003; Hardship Clause 2003; ICC publication(2003)
[32] ICC case No. 1703/1971; at Peter Sanders (ed.) 1 Yearbook Commercial Arbitration 130-32(1976)
[33] 518 US 839, 905-907, (1996)
[34] Ibid parsons
[35] NetOne, Inc. v. Panache Destination Management, Inc., No. 20-cv-00150-DKW-WRP (D. Hawaii June 5, 2020)
[36]133 Misc. 2d 529 (1986)
[37] 2020 WL 7405262 (S.D.N.Y. Dec. 16. 2020),
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