Force Majeure: balancing contractual obligations and real-world challenges

Force majeure clauses often act as the lifeboats thrown to parties caught in unexpected storms. These clauses are designed to provide relief when unforeseen events—like natural disasters, government actions, or pandemics—disrupt the ability to perform contractual duties. But recent legal interpretations, including a pivotal UK Supreme Court decision, highlight the complexities and potential pitfalls of these clauses, particularly around the notion of "reasonable endeavours" and the acceptance of non-contractual performance.

The Heart of the Matter

A force majeure clause typically entitles one or more parties to cancel the contract or be excused from performing their duties when a specified event occurs. This sounds straightforward, but as recent cases show, the devil is in the details.

Under a contract of affreightment, the charterer agreed to pay the shipowner in U.S. dollars to transport bauxite. The contract's force majeure clause required the affected party to exercise “reasonable endeavours” to overcome any force majeure event. In 2018, U.S. sanctions against the charterer’s parent company made timely payments in U.S. dollars nearly impossible. The charterer offered to pay in Euros and cover conversion costs, but the shipowner refused, leading to suspended operations and a protracted legal battle.

The Supreme Court's Decision

The UK Supreme Court ultimately ruled that while parties must exercise "reasonable endeavours" to overcome a force majeure event, they are not required to accept non-contractual performance. The Court's decision hinged on several key points:

• General Importance: The case was not just about the specific force majeure clause but about the broader principle. The Court suggested that even in the absence of explicit reasonable endeavours language, such a proviso could be implied.
• Contractual Performance Presumption: The Court presumed that only contractual performance could satisfy the reasonable endeavours requirement unless explicitly stated otherwise.
• Certainty in Commercial Transactions: By refusing to mandate the acceptance of non-contractual performance, even if no detriment was suffered, the Court emphasized the need for clear, predictable rules in commercial dealings.

Implications for Fairness and Certainty

This decision underscores the importance of certainty in contractual relationships. While some might argue that requiring strict adherence to contractual terms can be unfair, especially when no actual harm results from non-contractual performance, the Court rightly prioritized predictability and clarity. Detriment is a subjective concept, and commercial parties need clear guidelines to navigate force majeure events without ambiguity.

Practical Considerations for Businesses

Recent global events, from the COVID-19 pandemic to geopolitical upheavals, have spotlighted the crucial role of force majeure clauses. Businesses should proactively review and possibly revise these clauses to ensure they are robust and clear. Here are some recommendations:

• Clarify Reasonable Endeavours: Clearly define what constitutes reasonable endeavours in the context of your contracts.
• Address Non-Contractual Performance: If parties are willing to accept non-contractual performance under certain conditions, this should be explicitly stated.
• Review Regularly: Regularly update force majeure clauses to reflect new risks and learnings from recent events.

Conclusion

The UK Supreme Court's ruling on force majeure and reasonable endeavours brings much-needed clarity but also highlights the necessity for precise contract drafting. By ensuring that force majeure clauses are clear and comprehensive, businesses can better navigate the uncertainties of the real world while maintaining fairness and predictability in their contractual relationships.

Dechert Contributors

• Yan Shen Tan, Trainee Solicitor
• Daniel Natoff, Partner
• John Bedford, Partner
• Abdul Azeem s/o Abdul Samad, Associate