Protecting against the unforeseeable and unavoidable
The English origins of the force majeure clause date back to the 19th century and a case involving the destruction of a music hall by accidental fire.
In a most recent case, RTI Ltd -v- MUR Shipping BV [2024] UKSC 18, the Supreme Court held that whilst a party seeking to rely on a force majeure (FM) clause in a contract must comply with any reasonable endeavours proviso contained in the FM clause, such reasonable endeavours did not require that party to accept a non-contractual performance.
In that case, the issue was whether the shipowner under a contract of affreightment was entitled to insist on payment of freight in the contractual currency, US dollars, or whether it was required to accept payment in another currency in circumstances in which the charterer’s ability to make payment in US dollars was impaired by US sanctions against its parent company.
The Supreme Court held that the shipowner was contractually entitled to insist on payment in US dollars and could refuse payment in any other currency. The contractual obligation to exercise reasonable endeavours to overcome an FM event did not require the affected party to forego a contractual right unless it had expressly agreed to do so.
In reaching this conclusion, and overturning the Court of Appeal’s differing decision, the Supreme Court highlighted the importance of:
- Freedom of contract and allowing the parties to agree on the terms of their own bargain.
- The principle that a contracting party will not be presumed to have given up a valuable contractual right where it has not expressly said so.
- Certainty in commercial contracts.
The Supreme Court’s decision is relevant beyond the shipping sphere to FM provisions in commercial contracts generally, including commodities contracts.
Why incorporate an FM clause in the contract
An FM clause is a way of ensuring as far as possible that the contract addresses the risk of unforeseen or unanticipated events. In general terms, an FM clause excuses the affected party from performing, or allows it to suspend performance of, its contractual obligations where events outside its control impact that performance. Where performance may be suspended while the FM event continues, the contract normally allows for termination after a certain time period, either automatically or at the option of one or both parties.
In recent years, FM clauses have been highlighted among other things by COVID-19, sanctions against Russia following the invasion of Ukraine, and the reduction of gas supplies from Russia to Europe in 2022. Supplies of commodities may be affected by a number of potential FM events, including extreme weather (on the increase as a result of climate change), catastrophes, geopolitical tensions and government import/export restrictions.
Under English common law, there is no doctrine of FM. The closest English common law concept to FM is frustration of contract. A contract may be discharged or “frustrated” if something happens after the contract has been concluded which makes it physically or commercially impossible to perform the contract, or makes performance radically different to that which was agreed when the contract was entered into.
There is a high threshold for successfully arguing that a contract has been frustrated. Mere inconvenience or increased cost of performance is not enough. In a commodities context, for example, unless a contract provides expressly for supply of a commodity from a particular source or origin, the supplier may be obliged to find an alternative source even if that makes the contract unprofitable.
Consequently, including an express FM clause may be an effective way for the parties to allocate risk with regard to unforeseen events.
Drafting an FM clause
Very often an FM clause may form part of one or other party’s standard terms and conditions (or third-party standard terms and conditions adopted within the commodity industry) which are incorporated into the sale contract wholesale.
Many trade association forms (GAFTA, FOSFA etc) and commonly used terms and conditions (such as BP GTCs 2015) also contain FM clauses dealing with a range of scenarios that may result in delay in delivery/shipment and setting out the procedure the parties must follow if they wish to rely on the clause. The effect may differ according to whether it is a CIF or FOB contract, and the wording of the clause must be analysed carefully to ensure that it is complied with.
Whilst arguably a good starting point, it may be that the standard form FM clause will need to be amended and/or replaced by a bespoke clause tailored to the contract in question.
Some relevant considerations when drafting or amending an FM clause might be:
- the type and nature of the commodity;
- whether it is a spot or long-term contract;
- whether there is a contractual chain and the FM provisions are back-to-back;
- the risks associated with the location where performance is to take place;
- the risk factors associated with the identity of one or both parties (is one party particularly vulnerable to fluctuating market conditions?); and
- the parties’ respective bargaining power.
An FM clause will usually list the applicable FM events which will excuse non-performance, often including the proviso (as in RTI -v- MUR) that the FM event “cannot be overcome by reasonable endeavours of the party affected.” As has now been confirmed by the Supreme Court, reasonable endeavours only go so far and do not require acceptance of non-contractual performance even if this would not cause any obvious detriment to the affected party.
The list of FM events should reflect the specific risks of the commodity or industry in question. There may also be a catch-all provision to ensure that the list of FM events is not exhaustive. Using the word “whatsoever” in the catch-all provision will extend its scope and effect. However, where the parties intend the FM events to include economic hardship, it is advisable to specify this expressly.
It is also important to distinguish between FM clauses that require performance to actually be prevented, rather than merely hindered, delayed, disrupted etc. “Prevented” will be harder to prove, requiring legal or physical impossibility. Ultimately, the wording agreed upon may depend on whether the parties benefit from having a widely or narrowly drafted FM clause. Where the parties’ interests differ, it may come down to which party has the greater negotiating and commercial power.
Prohibition clauses
Prohibition clauses can be found in standard form and trade association contracts for agricultural commodities e.g. FOSFA and GAFTA. They address the situation where governmental export restrictions, or other legislative or governmental actions, may affect pre-existing contractual obligations.
Depending on the wording of the clause, it may be far-reaching and cover actions of administrative bodies as well as governmental decisions. It may also cover “blockades and hostilities”, thereby extending to civil unrest situations.
In certain situations, a prohibition clause may overlap with an FM clause if both are included in the contract. However, generally, a prohibition clause will not have the strict notice requirements that an FM clause does.
In theory, this makes it easier for a seller to simply notify the buyer of a pending governmental restriction. However, the seller should be careful not to cancel the contract prematurely and find itself in repudiatory breach because, for example, the restriction does not eventualise.
Other relevant contractual provisions
In addition to, or in the absence of, an FM clause, the contract is likely to have provisions dealing with termination of the contract, usually in the event of breach. In some instances, however, a party may be entitled to terminate for convenience. Furthermore, the parties will have termination rights at common law for repudiatory breach, irrespective of and in addition to any express contractual termination provision.
There may also be clauses excusing or suspending performance in circumstances involving sanctions and boycotts. Sanctions and boycotts clauses have continued to evolve in commercial contracts in recent years, as a result of the expansion of international sanctions against various countries including countries active in the commodity sector including Iran, Russia and Venezuela.
Sale contracts may also contain a price review clause that allows the parties to try and agree a new contract price, usually because of market fluctuations or a change in circumstances, for example hardship for the buyer. Such clauses are common in long-term energy supply contracts. Unlike an FM clause, a price review provision does not require the change in circumstances to be unforeseen at the time of contracting.
A material adverse change (MAC) clause is more usually found in finance documents but may be incorporated into a commodities contract. A MAC clause is aimed at dealing with unforeseen events or occurrences that may permit a party to renegotiate the terms of the contract or even to walk away.
The Court will look for a trigger event that brings the MAC clause into play. The clause may expressly list the relevant trigger events, or the Court may have to determine the issue of what qualifies as such an event. It will then consider whether that event has had a materially adverse effect on the party seeking to rely on it. Whether the effect is material will depend on the specific facts of the individual case and the commercial context.
Comment
It is important to carefully consider the wording and scope of any FM clause both when negotiating it and also when seeking to rely on it.
A party seeking to rely on an FM clause should make sure it complies with any requirements stipulated e.g. notice requirements, so that the clause is effectively triggered.
It is also important to consider any other suspension or termination provisions in the contract before deciding which provision(s) apply to the prevailing circumstances.
Finally, an affected party will usually be required to mitigate the effects of the FM event through reasonable endeavours, even if such endeavours do not include accepting a non-contractual performance.