Partner Article

The Recession ? An Extraordinary Event?

With Watson Burton LLP Law Firm

In the current economic climate, parties to contracts may find they need to rely on a “force majeure” clause in situations far from acts of God or in times of war.

A force majeure clause is essentially a clause inserted into commercial contracts to excuse non-performance of the contract by a party in circumstances where that party has been prevented from performing their part of the contract. It is a French civil law concept which can be translated into English as meaning literally “superior force”. Generally, a force majeure clause refers to an event or act that is beyond the reasonable control of the parties involved, was not reasonably foreseeable or, if it was foreseeable, then it could not have been avoided, and finally prevents the affected party from performing its contractual obligations.

Common circumstances that might render performance of a contract impossible are acts of God, such as weather conditions and natural disasters, or acts of war and terrorism and even strikes. For a force majeure clause to operate it must be included in the contract and state plainly what will constitute a force majeure event.

Recently, it has been questioned whether the collapse of the economy can constitute a force majeure event and consequently excuse non-performance of a party’s obligations under a contract. Although an example from the USA, in December 2008, Donald Trump, a successful American businessman, claimed that the force majeure clause in his contract with Deutsche Bank to complete the development of a 92 storey tower block in Chicago could be applied. Trump is relying upon force majeure on the basis that he is currently unable to complete the development due to the fact that the global recession (or as Trump calls it “Depression”) has rendered him unable to do so. Many are sceptical about Trump’s argument. There are concerns that the argument will fail both in law and due to commercial considerations, as its success would no doubt lead to a flood of cases where parties sued for non-performance of contractual obligations could claim force majeure.

There has not yet been any case law in the English Courts where a party has relied on force majeure specifically in relation to the economic crisis. However, a case that would perhaps suggest that the Court would not consider the recession to be a force majeure is Thames Valley Power Ltd v Total Gas & Power LD [2005] EWHC 2208 (Comm). The Claimant in this case contracted to buy gas from the Defendant. The contract between the parties contained a force majeure clause which the Defendant sought to rely on, on the basis that due to a rise in gas prices it had become uneconomical for them to supply the Claimant with gas.

Mr Justice Clarke held that the Defendant’s claim to force majeure was ill founded, emphasising the point that a force majeure event must render the Defendant unable to supply gas to the Claimant rather than it merely being impractical. He states that “Total is unable to carry out that obligation if some event has occurred as a result of which it cannot do that. The fact that it is more expensive, even very greatly more expensive for it to do so, does not mean that it cannot do so.” This case mentions the case of Tennants (Lancashire) Limited v C.S Wilson & Co Ltd [1917] AC 495 in which Earl Loreburn states that “the arguments that a man can be excused from performance of his contract when it becomes “commercially impossible” … seems to me a dangerous contention, which ought not to be admitted unless the parties have plainly contracted to that effect.”

Therefore, it seems unlikely that the courts will interpret the recession as a force majeure. There is a clear distinction between performance of a contract being impossible and merely an inconvenience. Perhaps a clear message to parties entering into contracts is that it is good practice and safer to draft express provisions dealing with precise circumstances that will constitute a force majeure.

If you have any comments or questions about this article or any Commercial Litigation matters, please contact Annie Tombleson of Watson Burton LLP at annie.tombleson@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .