Force majeure clauses are a familiar feature in contracts, designed to protect parties from unforeseen and uncontrollable events that prevent them from fulfilling their contractual obligations. Recent global events, such as the COVID-19 pandemic and forest fire, have brought these clauses into the spotlight, challenging their interpretation and application. Let's explore the role of force majeure clauses in contracts and how recent events have reshaped their understanding.
What is a Force Majeure Clause?
A force majeure clause is a contractual provision that frees parties from liability or obligation when extraordinary circumstances beyond their control occur. These events, often termed “acts of God,” can include natural disasters, war, terrorism, strikes, and pandemics. The key is that these events must be unforeseeable and unavoidable, making it impossible or impractical to perform contractual duties.
How Force Majeure Clauses Work?
The specific language of a force majeure clause determines its scope and application. Unlike the common law doctrine of frustration, which automatically discharges contractual obligations when performance becomes impossible, force majeure clauses are based on the contract terms. These clauses must be explicitly included in the contract, and their interpretation hinges on the precise wording used.
A well-drafted force majeure clause typically includes:
Definition of Force Majeure Events:
A list of events considered as force majeure, such as earthquakes, floods, pandemics, or government actions. This list should be comprehensive yet specific enough to avoid ambiguity.
Notification Requirements:
Procedures for how and when parties must notify each other of a force majeure event, often within a specified time frame.
Consequences of Force Majeure:
The impact on contractual obligations, such as suspension, extension of time, or termination of the contract.
Mitigation Obligations:
A requirement for parties to take reasonable steps to minimize the impact of the force majeure event.
Recent Events and the Interpretation of Force Majeure Clauses
The COVID-19 pandemic has tested the boundaries of force majeure clauses like never before. Here are some key lessons learned:
Pandemics and Health Crises:
Before COVID-19, many force majeure clauses did not explicitly list pandemics as a force majeure event. This led to disputes over whether the pandemic qualified as an unforeseen event. Today, it is advisable to explicitly include pandemics and health crises in force majeure definitions to avoid ambiguity.
Government Actions:
During the pandemic, government-imposed lockdowns and travel restrictions were common. Force majeure clauses that included “government actions” or “changes in law” were more effective in providing relief. This highlights the importance of considering governmental interventions when drafting these clauses.
Burden of Proof:
The party invoking a force majeure clause bears the burden of proving that the event falls within the clause's definition and that it directly prevented contractual performance. Courts have scrutinised whether parties have genuinely been prevented from performing or are merely facing increased costs or inconvenience.
Mitigation Efforts:
Many disputes arose from parties failing to take reasonable steps to mitigate the impact of the force majeure event. Courts have emphasized the need for parties to demonstrate active efforts to reduce harm and explore alternative means of performance.
Flexibility in Drafting:
Rigid force majeure clauses that only listed specific events faced challenges. Including broad language like “any other circumstances beyond the reasonable control of the parties” can provide flexibility, ensuring the clause remains effective in unforeseen situations.
Best Practices for Drafting Force Majeure Clauses
To ensure robust protection, consider the following best practices:
Be Specific and Comprehensive:
Include a detailed list of potential force majeure events, covering natural disasters, health emergencies, government actions, and other relevant scenarios.
Include a Catch-All Provision:
Add language to cover events not specifically listed but that are beyond the parties' control.
Set Clear Notification and Mitigation Obligations:
Define how parties should notify each other of a force majeure event and what steps they should take to minimise its impact.
Detail the Consequences:
Clearly state the effect on contractual obligations, such as suspension, time extensions, or termination rights.
Review Regularly:
Regularly review and update force majeure clauses to reflect changes in the business environment and emerging risks.
Conclusion: Adapting to the New Normal
Recent events have highlighted the critical role of force majeure clauses in protecting businesses from unforeseeable disruptions. These clauses are not just boilerplate language; they need careful drafting and consideration. By learning from the past and incorporating lessons into future contracts, Malaysian businesses can enhance their resilience and navigate uncertainties more effectively. Whether you're drafting a new contract or revising an existing one, ensure your force majeure clause is robust, clear, and adaptable to the ever-changing landscape of risks.
Should you have any questions related to the article above, please do not hesitate to contact our managing partner, Eugene Yeong for clarification.