Force majeure in today’s high cost world

Tuesday 9th August, 2022

The war in the Ukraine has led to spiralling costs for energy and certain products and materials. Overall inflation is at its highest in 40 years. In these challenging times, some supply of goods contracts have become unprofitable or even loss-making to operate. Suppliers will be looking for ways to exit unprofitable contracts. Can suppliers invoke force majeure clauses to get themselves out of such contracts?

What is force majeure?

A force majeure clause is a contractual provision which entitles a party affected by certain specified events (e.g. war, natural disaster, pandemics and actions by governments) usually to suspend performance and/or ultimately to terminate the contract if the party is either prevented from performing its contractual obligations or is hindered or delayed in doing so as a result of a force majeure event.

In current circumstances, while a party may seek to rely on force majeure events such as “war” (with reference to the war in the Ukraine) and “actions by governments” (with reference to imposition of sanctions on certain Russian parties where this may impact on the importation of necessary materials) if it can be shown that such events have made the performance of the contract uneconomic, the force majeure event must result in the prevention of performance or a hindrance/delay in it.

Prevention of performance

In order to amount to “prevention”, the circumstances must make it physically or legally impossible for the supplier to carry out its obligations under the contract. In the 1917 case of Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd [1917] AC 495, it was held that mere difficulty or unprofitability in carrying out these obligations will not suffice in allowing for an invocation of a force majeure clause.

In the case of Thames Valley Power Limited v Total Gas & Power Limited [2005] EWHC 2208, the supplier argued that a sharp rise in the price of gas made supply under the contractual pricing mechanism uneconomic. The Court held that an increase in the market price of gas might have made supply commercially impractical, but it had not rendered it impossible and therefore the force majeure clause could not be invoked.

Hindrance or delay in performance

Alternatively, a force majeure clause may refer to performance being “hindered” or “delayed”. In order to meet this test, performance only needs to be substantially more difficult, rather than impossible. This may be satisfied where complying with the contract would cause a party to dislocate its business or break other contracts. However, an increase in the cost of performance of the contract will not generally, without something more, satisfy the requirement of hindrance or delay.

Drafting

As a result of this, if a party wishes to be relieved from performance where compliance has become simply uneconomic, this will need to be stated expressly and clearly in the contract. In the absence of such wording, parties will be required under English law to perform their agreed contractual obligations by taking all and any alternative means, even if such means are unprofitable and uncommercial.

Conclusion

As a consequence of the above, force majeure clauses are unlikely to offer an exit route out of a contract where spiralling costs have made performance uneconomic. Suppliers may need to consider alternative termination routes and assess the risks and benefits of such routes


This article was written by Tamar Halevy and Zoha Khalaj-Mehri.

Articles by Tamar Halevy