Can You Rely On A Force Majeure Clause In A Commercial Contract?

Table of contents

• Introduction
• What is force majeure?
• How do the Courts rule on force majeure clauses?
• Can a force majeure be claimed if the contract becomes uneconomical to perform?
• Concluding comments

Introduction

The confusion and chaos unleashed by President Donald Trump’s US tariffs have brought into focus the importance of ensuring commercial contracts are drafted to include a force majeure clause to protect parties if unforeseen or uncontrollable events happen that prevent the contract from being fully or partially performed. 

What is force majeure?

Force majeure events are usually defined as acts, events, or circumstances beyond the reasonable control of the party concerned. If you want to rely on a force majeure clause, you must first check the commercial contract in question to see if such a clause exists.

There does not have to be a specifically labelled force majeure clause if there are clauses that anticipate that there may be some sort of event beyond the control of the parties that prevents one or both of the parties from performing the contract. For example, if there is a severe shortage of fuel, one party may not be able to deliver goods for a period.

Force majeure clauses can list the supervening events, but in most cases, they are general in nature (for example, referring generally to acts of government, or to performance having to be lawful, or to anything preventing performance that is beyond the party’s control).

The Courts view force majeure clauses restrictively and can imply limitations. One famous example is the case of Metropolitan Water Board v Dick Kerr & Co [1918] AC 119, where the House of Lords concluded that a clause aimed at covering delays which included the words “however caused” did not cover substantial delays caused by the First World War.

How do the Courts rule on force majeure clauses?

In Nord Naphtha Ltd v New Stream Trading AG [2020] 11 WLUK 281, the Defendant agreed to deliver 30,000 tons of ultra-low sulphur diesel to the Claimant on 21 April 2019. The contract between the parties required the Claimant to make an advance payment of 90% of the value of the diesel. The contract provided that the time for delivery was to be extended if a force majeure event occurred, and if the delay were more than 30 consecutive days, either party could terminate the contract.

The refinery that was to supply the Defendant with the diesel was to provide a letter of comfort. Clause 14.5 of the contract provided that subject to any agreement between the parties in relation to deliveries after termination by a force majeure event, nothing “shall impair the obligations by the seller to repay to the buyer the amount of the advance payment”. The Claimant made an advance payment of US$16 million by the required date. The refinery comfort letter provided that if the total value of the product delivered was less than the advance payment, the refinery would repay the difference.

Liability under the comfort letter was to expire on 25 April 2019, and it could be revoked at the refinery’s discretion. The Claimant was told that delivery of the diesel was going to be delayed because of a force majeure event, and this delay would go beyond 30 consecutive days. The Claimant served notice to terminate the contract and sought to recover the $16 million advance payment.

The Defendant argued that there was no obligation under the contract to repay the advance.

Sitting in the High Court, Mr Charles Hollander QC concluded that considering the contractual terms and the expiration date of the comfort letter, if there was a force majeure event, it was unlikely that the comfort letter would cover repayment of the advance. Furthermore, the comfort letter could be rescinded at the sole discretion of the refinery if a force majeure event occurred. Therefore, the rights and liabilities under the contract would not be affected by the comfort letter.

Mr Hollander QC said it would be extremely unusual if, in the absence of an express provision, the Claimant could not recover the $16 million advance. It was only possible to make sense of clause 14.5 by reading it as an express obligation to repay the advance in the event of termination after a force majeure event. And even if that was not the case, the Claimant satisfied the requirements for implying a term to that effect.

The Court of Appeal upheld the Commercial Court’s decision, stating that constructing the contract any other way would offend business common sense. The Court did criticise the drafting of the force majeure clause, highlighting the importance of having agreements drafted by an experienced Commercial Law Solicitor.

In 2024, the Supreme Court case of RTI Ltd (Respondent) v MUR Shipping BV (Appellant) [2024] UKSC 18 concerning an affreightment contract affected by Russian sanctions involved a contractual clause which provided that the specified event would only be a force majeure event if “it cannot be overcome by reasonable endeavours from the Party affected.”

The central issue for the Supreme Court was whether the exercise of reasonable endeavours may require the party affected, if it is to be entitled to rely on the force majeure clause, to accept an offer of non-contractual performance from the other contracting party to overcome the effects of the specified event (in this case, RTI offered to make payments in Euros instead of USD as was stipulated in the contract) . The Court held ‘reasonable endeavours’ did not require a party to accept the contract to be performed differently from what was stipulated in the terms. Given that a crucial element of freedom of contract is the freedom not to contract, it follows that parties have the right to refuse an offer of non-contractual performance.

Can a force majeure be claimed if the contract becomes uneconomical to perform?

Before claiming force majeure, you must establish whether the event makes performing your contractual obligations impossible or merely inconvenient. The latter will not stand up in Court. To protect yourself against economic downturns, specific clauses that deal with market fluctuations, credit availability, and labour shortages should be included in the contract. 

Concluding comments

There is no doubt that businesses are currently having to deal with challenging circumstances. However, history tells us that no matter what, the future is generally positive. To protect your best interests, have your commercial agreements checked to see whether there are clauses that provide safeguards against unforeseen events, keeping in mind that, as illustrated above, what may seem unforeseen in a layperson’s eyes may not necessarily be the same as the Court’s definition of the event. 

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