Recent geopolitical developments, particularly the escalating conflict involving Iran, are causing uncertainty across global business and trade. The disruption of key energy and shipping corridors is affecting supply chains and increasing transportation and insurance costs. Businesses are therefore facing volatility of costs, delays in the movement of goods, and an increasingly unpredictable trading environment. In this article we look at potential contractual remedies if a party is unable to perform its contractual obligations.
Limiting or Avoiding Liability
A contract which is governed by the laws of England and Wales requires that the party seeking to exclude or limit its obligations under the contract must rely upon the contractual terms agreed upon between the parties. This can take the form of a specific exclusion clause or, more commonly, a force majeure clause.
Typically, force majeure clauses will allow for parties to terminate their contract in situations where one party has been prevented from performing their contractual obligations due to circumstances out of their control.
It is important that any force majeure clause is drafted with sufficient detail to enable it to be relied upon. Equally, it is important that is is not drafted so narrowly as to restrict its use to the point of being ineffective.
The common points to be aware of in order to rely upon a force majeure clause, in particular during times of war and conflict, are:
- List of specific events or circumstances which will (or will not) be considered to trigger the force majeure clause – does the contract expressly make provision for events such as fire, flooding, natural disasters, war and conflict.
- Impact on business – are there specifications as to how the ‘event’ must impact the business before any relief can be sought?
- Notice – what form of notice is required generally under the contract? Are there different requirements for force majeure events?
- Mitigation – could the business have put into place any mechanisms to avoid or reduce the impact of the event on the business so as to allow to continue performance under the contract?
- Foreseeability – is there express provision within the clause which excludes foreseeable events?
It is important to note that it is for the party seeking to rely upon the force majeure clause to establish the true meaning and effect of the clause in the event of dispute.
No Force Majeure Clause? Is the Contract ‘Frustrated’?
The doctrine of frustration allows for contracts to be brought to an end under specific circumstances without any liability for breach of contract. This doctrine will only apply in the absence of a contractual remedy, for example, in instances where there is no force majeure clause or where the force majeure is too widely drafted to be relied upon.
There is a high burden to proving a contract has been frustrated and it should only be relied upon as a ‘last resort’.
In order for a contract to be considered ‘frustrated’, the following broad terms need to be satisfied;
- The frustrating event occurred after the contract had been formed;
- The frustrating event was not the fault of either party to the contract;
- The frustrating event was beyond the contemplation of the parties at the time the contract was entered into; and
- The frustrating event made the performance of future obligations under the contract impossible, illegal or radically different.
For a more detailed discussion on the doctrine of frustration please see our article on the consequences of a frustrating event.
Foreseeability and Mitigation
A party wishing to rely upon force majeure or frustration will need to demonstrate they have taken sufficient steps to mitigate any potential business impact. The impact of the conflict is being felt throughout the world and it is affecting many industries and businesses. A carefully worded force majeure clause should therefore offer protection but as the conflict continues, it is likely that parties will be required to demonstrate that despite the measures in place following the conflict, the business impact was neither foreseen, nor could it have been reasonably mitigated against.
If this is something you need help with, please get in touch with our Commercial Dispute Resolution team.