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Force Majeure A measure to mitigate risk

Date | Version September 25, 2022| 1.0
Keywords ‘Force Majeure’, ‘Act of God’, ‘Affected Party’, ‘Force Majeure Clause’,‘Force Majeure Event’
Jurisdiction India

 

Introduction

There are unavoidable circumstances when despite best intentions, a contracting party is unable to perform in the manner contractually agreed. To mitigate liability flowing from such failure to perform, it is common for parties to agree on a ‘force majeure’ (FM) provision. A FM provision has the effect of excusing the party affected by the occurrence of specified events,from the performance of its obligations under the contract, to the extent it’s performance is affected by such specified event(s). Typically, the events falling under FM are those which are not within reasonable control of the contracting parties – whether an act of God or otherwise.

The concept is straight-forward, and one should not expect much difficulty in preparing a FM provision. Except that the consequences of not having a well-crafted FM provision can result in the affected party being burdened with liabilities arising from non-performance of contract. Thus, a risk which the party thought was mitigated under the FM clause may spring a surprise.

Force majeure- what, when and how

A good FM clause should answer the following questions without ambiguity:

  • 1. What events will classify as FM, and what will not. Such as, will non-performance bya vendor of the affected party qualify as FM? If yes, under what circumstance?If only act of God and the like are considered as FM, then parties open themselves to debate if a particular event being man-induced should be considered as an act of God. A ready example is COVID-19 – the origin of the virus is debatable, and it is not clear if the debate will be settled any time soon. Arguably, several natural disasters are a result of the cumulative actions of man over a period. Accordingly, it is better to spell out the events instead of having a general cover under ‘act of God’.

 

  • 2. Whensuch FM event would come to the rescue of the affected party. For example, tobenefit from the FM event, the affected party should be able to establish that it could not have prevented or overcome the event by exercise of due diligence or following good industry practices. For example, the impact of a wildfire could have been limited if the affected party had taken appropriate measures as required under law or as generally followed as good industry practice – in such a scenario a certain level of diligence would be required to ascertain the extent to which the event could have been curtailed by the affected party.

 

  • 3. Howwill the process of benefiting from FM provision work. For instance, the affected party would need to notify the other party of such FM event, should have taken steps to mitigate the impact of the FM event, and so on.

 

  • 4. Effect of occurrence of FM event on the affected party.

 

The What, When, How and Effect in respect of a FM event should be answered effectively by a FM provision.

Suggestions for a FM clause

Force Majeure – What events will qualify as force majeure event:

  • -The events and circumstances constituting FM should be defined in an exhaustive manner and not in an illustrative manner.
  • -The event and circumstances may be qualified depending on the underlying contract.
  • -Events which are intended to be excluded from the meaning of FM should be specifically stated.

Force Majeure- When the FM event will come to the rescue of the affected party:

  • -The event in question should be beyond the reasonable control of the affected party. The expression ‘reasonable’ would arguably mean by the use of ‘reasonable commercialefforts’ and use of ‘reasonable technological efforts’.
  • -The affected party could not have prevented or overcome the event by exercise of due diligence and following good industry practice.
  • -The event has a material adverse effect on the affected party.

Force Majeure- How will the process of benefiting from FM provision work:

  • -The affected party should be required to notify the other party(ies) in reasonable detail. The details should include, the nature and extent of the FM event along with supporting evidence, the estimated duration and the effect or probable effect which such FM event is having or will have on the affected party’s performance of its obligations under the contract.
  • -The affected party should specify the measures which it is taking or proposes to take for minimizing the impact of such event.
  • -The affected party should be required to specify any other information relevant to the affected party’s claim.
  • -The foregoing information should be provided by the affected party to other party(ies) on an ongoing basis.

 

Force Majeure- Effect of occurrence of FM event on the affected party

  • -The affected party should be excused from the performance of its contractual obligation, subject to compliance with the other provisions of the FM clause.
  • -The affected party shall not be entitled to any relief in the absence of due notification.
  • -The affected party should not be entitled to relief if it fails to take all reasonable steps to prevent, reduce to a minimum and mitigate the effect of the event of FM.
  • -Each party should be required to bear its own costs in respect of loss, damage, cost, expense, claims, demands and proceedings relating to or arising out of occurrence or existence of any FM event.

 

Sample FM provision

While the sample provision is broad in its application, however, it may not necessarily cover all requirements of a specific project.

Definition of “Force Majeure” shall mean only the following events and circumstances to the extent that they, or their consequences, satisfy the specified requirements:

  • (i) Act of God, epidemic, extremely adverse weather conditions, lightning, earthquake, landslide, cyclone, flood, volcanic eruption, chemical or radioactive contamination or ionising radiation, fire or explosion (to the extent of contamination or radiation or fire or explosion originating from a source external to the site);Drafting and Guidance Note: note here that the words ‘such as’ do not follow ‘Act of God’. In geographical locations known for extreme weather, suitable modification would be required to the wordings ‘extremely adverse weather conditions’.

 

  • (ii) An act of war (whether declared or undeclared), invasion, armed conflict or act of foreign enemy, blockade, embargo, riot, insurrection, terrorist or military action, civil commotion or politically motivated sabotage; ); Drafting and Guidance Note: it may be difficult to establish ‘politically motivated sabotage’, so parties may wish to use different wording.

 

  • (iii) Strikes or boycotts (other than those involving the affected contracting party, its contractors or their respective employees/representatives, or attributable to any act or omission of any of them) interrupting supplies and services to the site for a continuous period of [insert] hours and an aggregate period exceeding [insert] days in a calendar year; ); Drafting and Guidance Note: The word ‘site’ may be substituted with ‘affected party’ depending on the nature of the underlying contract. Similarly, the placeholders for duration would need to be completed suitably.

 

  • (iv) The discovery of geological conditions, toxic contamination or archaeological remains on the site that could not reasonably have been expected to be discovered through a site inspection; ); Drafting and Guidance Note: this provision may be relevant only to constructed related contracts.

 

  • (v) Any political or economic upheaval, disturbance, movement, struggle or similar occurrence which could not have been anticipated or foreseen by a prudent person and which causes the performance by the affected party to be financially unviable or otherwise not feasible, with such determination having been made by an independent person; ); Drafting and Guidance Note: if provision of independent person is retained, then suitable provision for appointment, scope of work of such person, and payment of such independent person should be specified.

 

  • (vi) Compulsory acquisition by the Government in national interest or expropriation of rights of the affected party under the contract or of the assets involved in the performance of the contract;

 

  • (vii) any judgement or order of any court of competent jurisdiction or statutory authority made against the affect party in any proceedings for reasons other than (i) failure of the affected party to comply with any applicable law, or (ii) on account of breach of any applicable law or of any contract or approvals or permits, or (iii) enforcement of the contract;
  • (viii)Any other event that the contracting parties agree is analogous to the above.

Drafting and Guidance Note: Certain types of contracts may require a force majeure affecting their named (either by description of services or otherwise) agents or service provider shall also qualify as Force Majeure, in which case suitable addition would be required to the above list.

Provided that none of the following matters or their consequences shall be capable of constituting or causing Force Majeure:

 

  • (ix) Failureor inability to make any payment by affected party;
  • (x)The effect of market conditions unless such market conditions were themselves caused by or were a result of a Force Majeure event.
  • (xii) Breach of underlying contract by the affected party.

 

Drafting and Guidance Note: In certain types of contracts, there may be a need to specifically exclude non-performance by sub-contractor to be a force majeure event in which case suitable addition would be required to the above list.

Force Majeure provision

1.    FORCE MAJEURE

1.1 This provision shall apply if the performance of its obligations by a Party claiming the benefit hereunder (“Affected Party”) is affected by reason of Force Majeure and each of the following conditions is met:

1.1.1 the act or event is beyond the reasonable control of the Affected Party,

1.1.2 the Affected Party could not have prevented or overcome the act or event by exercise of due diligence and following Good Industry Practice, and

1.1.3 the act or event has a material adverse effect on the Affected Party.

Drafting and Guidance Note: if there is any principal document which governs the contract, then an additional condition stating that the ‘act or event should be declared a force majeure event under such principal document’ may be incorporated.

1.2 Upon the occurrence of a Force Majeure event, the Affected Party shall by notice, report such occurrence to the other Party forthwith. Any notice pursuant hereto shall include full particulars:

1.2.1    the nature and extent of each Force Majeure event which is the subject of any claim for relief under this Clause with evidence in support thereof;

1.2.2 the estimated duration and the effect or probable effect which such Force Majeure event is having or will have on the Affected Party’s performance of its obligations under this Agreement;

1.2.3 the measures which the Affected Party is taking or proposes to take for alleviating the impact of such Force Majeure event; and

1.2.4 any other information relevant to the Affected Party’s claim.

The Affected Party shall continue to provide this information on a daily basis, unless otherwise agreed, for so long as the Force Majeure event has a material adverse effect on its performance.

1.3 The Affected Party shall not be entitled to any relief for or in respect of a Force Majeure event unless it shall have notified in writing the other Party of the occurrence of the Force Majeure event as soon as reasonably practicable but no later than [insert] days following the commencement of the effect of Force Majeure, or  ought reasonably to have known, of its occurrence, and shall have given particulars of the probable material effect that the Force Majeure event is likely to have on the performance of its obligations under the contract.

1.4 The Affected Party shall take all reasonable steps to prevent, reduce to a minimum and mitigate the effect of the event of Force Majeure.

1.5 Upon the occurrence of any Force Majeure event, the Parties shall bear their respective costs and no Party shall be required to pay to the other Party any costs thereof and neither Party shall be liable in any manner to the other Party in respect of any loss, damage, cost, expense, claims, demands and proceedings relating to or arising out of occurrence or existence of any Force Majeure event or exercise of any right pursuant hereto.

1.6 Upon the occurrence of Force Majeure event the time for performance shall be extended by a period equal in length to the duration of the Force Majeure event.Drafting and Guidance Note: this part should be evaluated depending on the nature of the contract. It is not uncommon to require a ‘mitigation plan’ to be agreed to between the parties, and to agree on such mitigation plan would be an event leading to termination. Sometimes, parties may also resort to engagement of an industry expert for assistance with a ‘mitigation plan’.

1.7 If any event of Force Majeure continues beyond a period of [insert] months within a continuous period of [insert] days, the other party(ies) shall have the right, but not the obligation, to terminate thecontract.

 

Conclusion

The golden rule normally is that there is no golden rule! However, the golden rule in drafting a force majeure clause is that it should be customised for the transaction at hand.

 

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.