Force majeure – what does it mean and what does it cover?

In 2012 an initial period of drought and water use restriction in certain parts of the country was followed by rainfall that made it one of the wettest years for half a century. Such conditions inevitably had an impact on food crops grown in the UK in terms of both yield and quality. Shortages or quality issues in relation to certain crops or varieties led inevitably to some price spikes which meant that securing replacement crops at comparable prices elsewhere was difficult if not impossible. These kind of conditions have in some cases left growers or others in the supply chain who have committed to supply a particular quantity or variety of crop at a fixed price at the beginning of the season facing serious commercial problems on two fronts. First there will be the consequences arising from a poor crop resulting in generally poor returns. Secondly there may be the prospect of defaulting on supply commitments leading to claims from the customer, whether a retailer, wholesaler or pack house, based on the additional cost which will be incurred in obtaining replacement supplies on the open market.

These kind of weather related issues have not surprisingly caused growers and others in the supply chain to take a careful look at their trading terms and in particular the “force majeure” clause to see if these will excuse the supplier from meeting its obligations and hence avoiding liability for customer claims for the cost of replacement stock.

So what are the key points to consider in relation to “force majeure” clauses?

• A so called “force majeure” clause is designed to excuse one party (or both) from contract performance following the occurrence of certain events or circumstances. However “force majeure” has no set meaning under English Law. It follows that protection is only provided by the clause if particular circumstances set out in the clause should arise.
• If there is no clause dealing with the issue which has arisen, no “force majeure” protections will be implied. In very limited circumstances and only where performance of a contract has become impossible (not just more difficult or more expensive) it may be possible to rely on the doctrine of frustration to avoid further contractual liability. However in the context of the food supply chain where much produce is traded on a global market, it will be rare that frustration can be relied upon.
• The key therefore is to include in supply terms an express force majeure clause. This will provide for example that if certain events or circumstances arise which “delay, hinder or prevent” performance by a party (or performance in the manner expected by the parties), and which are beyond that party’s reasonable control, that party is excused performance and will have no liability to the other party. Importantly this “delay, hinder or prevent” wording will not excuse a party from performance and liability where it is possible for that party to perform but just hopelessly uneconomic for it to do so. From a supplier’s perspective therefore it is often desirable to seek to extend the scope of the wording to cover the position where performance becomes uneconomic as a result of the force majeure circumstances although some purchaser resistance to this may be expected.
• The events and circumstances which excuse contract performance need to be tailored to the specific contract circumstances. Some events and circumstances will be uncontroversial being clearly beyond a supplier’s control such as Government action (examples might include export or import bans on relevant products or prohibitions on the transport or sale of cattle in BSE affected areas) or fire, flood or war. Others may be more controversial although they may well be justifiable in relation to particular contracts.

Examples

• Industrial dispute, strike or lockout. This is commonly accepted however some purchasers will argue that this is not always beyond a supplier’s reasonable control particularly where it is the supplier’s own workforce who go on strike. In such cases it may be argued that the industrial unrest results from the supplier’s failure to manage its workforce reasonably and fairly.
• Difficulty or increased expense in obtaining supplies from normal or anticipated sources of supply. The supplier will want to include this but the purchaser may see this as providing the supplier with too broad an “exit” route from the contract. However if all parties are aware that the supplier will be obtaining raw materials from a particular sources and at particular pricing or growing the produce on particular fields, its inability to do so for good reasons can be justified as being force majeure in nature.
• Adverse weather conditions or drought. This again can be controversial, not so much as a matter of principle but due to the difficulty in defining the point at which adverse weather crosses the line between being a normal risk of trading and being so exceptional and unforeseeable as to release parties from contractual performance.

In conclusion force majeure clauses are often seen as standard boiler plate wording – but adverse weather, food scares, bird flu and a range of similar matters have highlighted that these clauses and the care taken to address potential risks can make the difference between just a poor position on account of circumstances beyond a supplier’s reasonable control preventing contract performance and a far worse position where the supplier in addition has to meet the cost incurred by its customers in procuring replacement supplies.