Commercial Disputes

Problematic clauses in commercial contracts

A force majeure clause is designed to protect both parties in circumstances that render a contract impossible to perform properly.

10 Nov 2022

Team name
James Bowles

James Bowles

The clause will be intended to allow the parties to avoid liability for late or non-performance due to events outside their (usually, reasonable) control. The parties may consider specifying particular events which are to (or not to) constitute force majeure. As these clauses can bring a contract to an end they must be carefully drafted to ensure that they find the right balance to ensure both parties are adequately protected.

Wording in force majeure clauses:

 Force Majeure clauses are often found near the end of the agreement and there is often not enough consideration given to their drafting. You will often find a very limited clause simply setting out that neither party is obliged to perform its obligations if a force majeure event occurs. In other circumstances the definition of the term force majeure will be too generic meaning that parties intentions at the start of the contract are not clear.

This limited wording in both the definition and the clause itself can lead to a variety of different issues which result in litigation.

Potential issues:

One of the biggest issues that arises from poorly drafted force majeure clauses stems from a lack of limitation in the clause and in particular on how long a party is entitled to rely on the clause before the other party can terminate the contract. This can result in a party relying on the force majeure clause until the event ends which could go on for an unlimited amount of time leaving the other party locked in a contract that they are unable to terminate.

Another issue that can come up is where there has been a payment made in advance of performance of the contract and there is a subsequent force majeure event meaning that the contract can no longer be performed. If the wording is not clear on the terms of repayment of advanced payments then issues as to the whether or not the money should be repaid and if so how much is to be repaid. Such a dispute arose in the case of Nord Naphtha v New Stream Trading where the claimant Nord Naptha had made payment in advance and subsequently terminated the contract following a force majeure event. When Nord Naptha requested the advance payment be repaid New Stream denied that they were any under obligation to repay this. The court found that the wording in the contract was not clear as to the intentions of the parties and that the force majeure clause “did not fit well” with the other clauses. Clearly had the force majeure clause been better drafted then it is possible that the litigation could have been avoided all together.

M&P Commentary

James Bowles a solicitor in the Commercial department said:

“Well drafted commercial contracts should be able to properly deal with many different circumstances including those that are outside the control of the parties and while seemingly innocuous force majeure clauses can lead to complicated litigation if not drafted properly. It is important therefore that at the outset of any commercial contract to ensure that the drafting of the agreement is precise and has the agreed effect.”

If you need advice on force majeure clauses or have any questions on the above please contact our Commercial Team who will be able to assist.

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