Legal Opinion on the Doctrine of Force Majeure
Force-majeure is a term that has its origin in French language with its literal meaning being superior force. In the context of contract law, Force-majeure is defined as an event or effect that can neither be anticipated nor controlled; especially, an unprecedented event that prevents someone from doing or completing something that they had agreed to do. The term includes both, acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars). In other words, Force-majeure refers to events outside the control of the parties and which prevent one or both of the parties from performing their contractual obligations.
While the doctrine was originally a civil law concept contained in the French Civil Code, and it found its way into English common law as early as 1863. The doctrine has been employed over the years to either delay performance or alleviate liability for non-performance of obligations. It comes into play upon the occurrence of an extraordinary event beyond the control of the parties, which renders the performance of their obligations impossible.
In civil law countries, such as the China and France, force majeure may be pursued by a party to a contract as a matter of law that applies even without being expressly set out in the contract. For example, the UAE Civil Code (Federal Law Number 5 of 1985) sets the definition and boundaries of a force-majeure event, and the consequences it triggers. On the contrary, in common law countries such as India and Kenya, the concept does not have a general meaning and will only operate if inserted into the contract. The clause is then subject to the usual rules of interpretation of contract.
The World Bank has adopted a broader definition informed largely by the nature of projects it engages in and the unique difficulties that may apply to those contracts. It specifically defines force majeure as an event beyond the control of the authority and the operator which prevents a party from complying with its obligations and contracts. It further clarifies the ingredients of the force majeure events to be;
- Such circumstances which, despite exercise of reasonable diligence and observance of good utility practice cannot be, or be caused to be, prevented, avoided or removed by such a party, and
- Such circumstances which materially and adversely affect the ability of the party to perform its obligations under the agreement, such party having taken all reasonable precautions, due care and reasonable alternative measures to avoid the effect of such events on its ability.
The events are broadly categorised as;
- Natural Force Majeure events include: fire, chemical or radioactive contamination or radiation, earthquakes, cyclones, hurricanes, floods, droughts, unanticipated geological conditions, epidemics, famine, plague or other natural calamities and acts of God, explosions, accidents, structural collapse, acts of war (whether declared or undeclared), invasions, strikes, lockouts, work stoppage, and labor disputes.
- Political force Majeure events including; acts of terrorism, blockades, embargoes, riots, public disorder, violent demonstrations, insurrections, rebellion, failure of concessionaire to renew appropriate consents, failure of action of a competent authority without a justifiable cause, expropriation or compulsory acquisition and subsequent legal prohibitions.
Essentials of Force Majeure
- Express Inclusion in Contracts
The first thing to check in a contract is whether or not it contains a force majeure clause. By its nature, a force majeure clause cannot be implied into a contract. The applicability of a force majeure clause is limited by the scope of events envisaged within the clause and is often considered to be limited only to such events without more.
- Impossible to Perform Contractual Obligation
A person who wants to invoke the force majeure clause must prove that the relevant triggering event envisaged in the contract has prevented or delayed performance of its obligations under the contract. The party seeking to invoke the clause must demonstrate that performance is legally or physically impossible, not simply difficult or unprofitable. A change in economic or market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed is not regarded as a force majeure event.
The force majeure event will excuse performance of only those obligations which are affected by the said event. In contracts with divisible performance obligations, a force majeure event could cause only partial impossibility or impracticability and the party’s unaffected performance obligations will not be excused. It should be noted that, the force majeure event must be the only effective cause of default by a party under a contract relying on a force majeure provision.
- Unforeseeable Event
An event qualifies as a force majeure event only if it is unforeseeable or not reasonably foreseeable at the time of execution of the contract.
- Mitigation The party claiming relief due to force majeure is under a duty to show that it has taken reasonable steps to avoid or mitigate the effects of the force majeure event, and that there are no alternate means for performing under the contract.
Invocation of Force Majeure
For a party to successfully invoke the defense of force majeure the above discussed pertinent conditions must be fulfilled. Force majeure clauses generally include notice provisions which are part of the steps which must be taken to mitigate the losses that may be occasioned upon the other party. Some contracts will contain a “time bar” clause that requires notice to be provided within a specific period from when the affected party first became aware of the force majeure event, failure which results in a loss of entitlement to claim.
Jurisprudence on force majeure emphasizes the issuance of notice by the parties whether or not it was contemplated in the contract. The timing of the notice is equally fundamental as it can help parties mitigate or alleviate the effects of the anticipated non-performance. Courts and arbitral tribunals have in various instances awarded damages against parties who fail to issue timely notices even where it is found that the doctrine is applicable.
Forms of Force Majeure Clauses.
Force Majeure clauses may take two forms, generic or specific.
A generic clause would be that which is general, with a ‘catch-all’ wording. Generic force majeure clauses also referred to as boilerplate clauses tend to be permissive in nature and would include phrases such as acts of God.
On the other hand, a specific force majeure clause will outline the specific events that shall be deemed to be force majeure events in the contract. The general position is that where a specific force majeure clause is included in a contracts, the parties are not at liberty to expand the scope which then limits the definition of the events to only those contained in the contract.
Related Common Law Doctrines
In common law, a contract may be set aside on the ground of frustration where an unforeseen event renders the contract physically or commercially impossible to fulfil. unlike the force majeure doctrine, the doctrine of frustration need not be expressly set out in a contract and can potentially be invoked by any party. The doctrine allows a contract to be automatically discharged when a frustrating event occurs so that parties are no longer bound to perform their obligations.
The doctrine of frustration is generally thought to provide a solution to the problem of loss allocation which arises when performance is prevented by supervening events. Therefore, in the event of a contract being frustrated and the resultant inability to perform contractual obligations, the operation of the doctrine automatically allocates risk and loss flowing from the said termination.
It is worth noting that, if a force majeure clause exists, it would displace the doctrine of frustration for any event that falls within the scope of the force majeure clause. In circumstances where the contract is specific and does not include events which have the effect of frustrating a contract, parties can still invoke the doctrine of frustration to discharge their obligations under a contract.Â Thus, even if a contract includes a force majeure clause, a court may still find frustration to be applicable to the extent that it falls outside the force majeure clause.
Since frustration may potentially be invoked by any party, the threshold that a party has to meet is high. In fact, the practice of including force majeure clauses is directly related to the high threshold for invoking frustration, because contractual clauses let parties customize the threshold and other elements.
A supervening event (frustrating event) is an event that occurs:
a) after the formation of the contract;
b) for which the contract makes no provision; and
c) which is not the fault of either party, not self-induced, and not foreseeable.
A supervening event must also substantially change the nature of the contractual rights and obligations which the parties would reasonably have contemplated at the time of execution, so that at least one of the following is true:
a) performance of the contract has become impossible;
b) the contract is rendered totally different from what the parties intended;
c) a fundamental contractual term has become incapable of being performed;
d) new circumstances in which performance is called for would render it radically different from those which were contemplated at the time of formation of the contract; or
e) the supervening event has totally affected the nature, meaning, purpose, effect and consequence of the contract in so far as it concerns either or both parties.
The chart below outlines some of the differences between the two doctrines;
|1.May be invoked by any party to a contract without being expressly provide for in the contract||1. Must be included expressly in the contract in order for it to be invoked. It cannot be implied.|
|2. This doctrine automatically terminates the contract in question and the parties will no longer be bound by their obligations thereunder.||2. This doctrine offers the flexibility for parties to fashion their responses according to their circumstances.|
|3. The drastic consequences of contractual frustration means that the threshold here is quite high because it must be shown that the obligations impacted by the event go to the root of the contract.||3. The threshold is not high because parties only have to show that the clause is in the contract and the specific event outlined in the contract has taken place and caused their non-performance.|
Impossibility and impracticability are similar doctrines that excuse performance when an unanticipated event that could not have been foreseen or guarded against in the contract makes performance impossible or impracticable. Some courts and jurisdictions require actual objective impossibility, whereas others require impracticability, meaning that performance would be unreasonable not simply that performance would be more costly than anticipated or would result in a loss.
Impracticability will apply where performance is objectively unreasonable, in other words, when the industry as a whole would conclude the obligations as impossible. Completion of the obligation must require so much beyond the parties’ contemplation that it becomes an exercise in commercial futility.
Material Adverse Effect/Material Adverse Change
A contract may also include a Material Adverse Effect (MAE) or Material Adverse Change (MAC) clause that; depending on the particular facts and circumstances and the specific language included in the clause, may be invoked to excuse a contracting party’s non-performance.
MAE/MAC clauses are often included to permit one or more parties to escape their performance obligations should fundamental conditions change. The party invoking the MAE/MAC clause to avoid performance of its obligations – for example, to close an M&A transaction bears the burden of proving that an MAE/MAC occurred.
The factors which are most frequently considered in determining whether an MAE or MAC occurred include:
a) The foreseeability of the alleged cause of the MAC or MAE;
b) Who assumed the risk of such an event;
c) The durational significance of the event in the context of the transaction; and
d) Whether the cause of the material adverse change is based on industry-wide or company-specific developments.
These factors are considered together, and no single factor is dispositive. In general, however, courts are reluctant to find that a MAE/MAC has occurred when the claimed MAE/MAC is based on the realization of a risk that was foreseeable or known to the parties, when a business downturn is a result of industry-wide rather than company-specific developments, and/or when the negative impact of a development is not expected to last a particularly long time relative to the duration of the underlying transaction. Parties should bear in mind that the analysis of whether an MAE or MAC occurred is highly dependent on the facts and circumstances (and typically requires expert testimony). As such, the party seeking to invoke a MAC/MAE clause is unlikely to prevail without an evidentiary hearing, full summary judgment record or an expedited trial.
Implications of force majeure in the context of COVID-19 Pandemic.
COVID-19 pandemic could make it more difficult for parties to perform their contractual obligations. It remains to be seen whether the COVID-19 pandemic is covered by force majeure clauses. There are two possible instances, which may suggest that a ‘force majeure’ clause covers a pandemic:
- If the contractual definition of force-majeure event expressly includes a pandemic. Inclusion of pandemic (without necessarily mention of COVID-19) to the list of force-majeure events will provide clarity as to whether Covid-19 outbreak would trigger a force majeure clause in a contract; or
- If the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is established that the factual circumstances caused by the pandemic are beyond the reasonable control of the affected party and are as a direct effect of the pandemic.
Depending on the language of the clause, the COVID-19 pandemic itself may not necessarily be considered a force majeure event. The scope of force majeure might have been broadened in light of WHO’s declaration of COVID-19 as a pandemic and the reactions by governments to contain the spread of the virus. These have had a ripple effect on the ability of businesses to perform their contractual obligations. It may include certain other aspects of this pandemic, such as the increase in government-decreed lockdowns, social distance, and curfews aimed at slowing the pandemic’s spread.
Courts may view COVID-19 as a force majeure event or interpret the government’s action taken to combat the virus as the force majeure event as opposed to COVID-19 itself. This decision will be left to the discretion of the Court. It is also important to mention that some countries such as China, Turkey and Mexico have gone ahead to declare COVID-19 as a force majeure event. China has issued force majeure certificates to its citizens.
Where the force majeure clause specifies “disease”, “outbreak of illness”, “epidemic”, “and pandemic” or some other similar term, it is opined that the current outbreak would likely qualify by virtue of its scale and disruptive effects. In contracts where no specific clause relating to disease is used, it might still be a valid ground if an omnibus term such as “act of God” is included.
As such, the question whether a party can be excused from performing its obligations under a contract on account of COVID-19 being declared a pandemic would be a fact-specific determination that will depend on the nature of the party’s obligations read with the specific terms of the Contract.
In either case, the fundamental requirements for invoking a force majeure would still have to be satisfied by showing that:
- The incident (outbreak of COVID-19 as per the contract; pandemic or epidemic) has occurred out of the control of the parties.
- It has made it impossible to continue the performance of the contract as usual.
- The party invoking the clause has taken all reasonable steps to avoid or mitigate the effect of the consequences of the incident.
SPECIFIC IMPLICATIONS OF FORCE MAJEURE ON COMMERCIAL AGREEMENTS
- Majority of current commercial agreements in Kenya do not have extensive and well-tailored force majeure clauses. A majority of the commercial contracts in Kenya have boiler plate clauses that are not extensive, failing to include factors such as curtailment of transport and movement which are not otherwise a force majeure event but are a logical result of such an event.
- In the case of multi-jurisdictional syndicated loan facilities, it becomes complicated when Covid-19 has been declared a force majeure event in one country while in others it hasn’t.
- As a result of the pandemic, there is stalling of certain financed projects. This means that such Borrowers may default in their obligations. Lenders have to consider ways on which they can recover their facilities without incurring reputational damage.
- Banks should re-think the manner in which their letters of offer are drafted. Specifically the clause on the purpose of the facility. These clauses should provide for the option of the Bank to disburse in tranches which may be paused or stopped all together should the financed project cease to be viable due to the effects of a force majeure event.
- In cases where we have boiler plate contracts for example letters of offer, deeds of assignments and guarantees, it is important to consider having force majeure clauses aimed at helping the institutions mitigate the potential losses that may be occasioned by such events.
- In cases where force majeure, frustration or impossibility is contemplated then timely notices must be issued either by the parties at their own instigation or by the third party institutions such as banks who may stand to suffer direct prejudice owing to the failure to issue such notices.
- A review of all existing contracts is necessary to ascertain the nature of obligations and assess whether or not the pandemic may affect them in one way or the other.
The unique nature of the novel COVID-19 pandemic means that many businesses have not had the occasion to exhaustively deal with its implications. It calls for parties to change tact. Financial institutions need to have a fresh look at the obligations they owe and the expectations borrowers have towards them. Additionally, they have to scrutinize the contracts which the borrowers are entering into with third parties and the implications of these contracts on the borrowers’ obligations. Finally, they need to explore the possible ways to exit contracts (in appropriate cases) without severing business relationships.