Force Majeure, Iran War and Commercial Contracts
The issue of force majeure clauses in business is likely to raise its head sooner rather than later given the US-Israel-Iran war and the wider impact on energy supply and prices. At the time of publication, oil and gas transporting and supplies are being disrupted, prices are rising and the impact on the UK economy is being felt.
The last time force majeure became a contentious issue in businesses was in the wake of the covid-19 pandemic, and we can expect reasonably expect a wave of disputes involving force majeure clauses in the wake of the escalating Middle East conflict.
Force majeure
Force majeure is an event, act or circumstances beyond the parties’ reasonable control or responsibility, with the result that they are no longer bound by their contractual obligations. Obvious force majeure events are war, terrorism and ‘acts of God’.
The inclusion of force majeure clauses in commercial contracts is important and (if carefully drafted) protects both the parties, relieving either or both parties from their obligations in the event of force majeure.
However, whether a force majeure event arises such that the commercial relationship can be considered at an end depends largely on the nature of the event, the circumstances and the wording of the contract itself.
Contract wording
A regional war can have a direct impact on supply chains and prices. This conflict has already triggered the diversion of shipments and automatic cancellation of shipments on the basis of force majeure (as well as the termination of contracts on the basis of non-performance).
But the operation of a force majeure clause in a specific case depends on the precise wording and its interpretation, particularly around definitions of a force majeure event, the use of ‘reasonable endeavours’, causation, allocation of risk, insurance, mitigation of loss, notices and relief and so on.
A party seeking to rely on a force majeure clause will be require to prove on balance that the event qualifies as force majeure on the wording of the contract, and that it caused an inability to perform its contractual obligations.
Businesses should therefore be reviewing their existing contracts – the starting point for considering the application of force majeure - to determine how their commercial relationships and business operations could be disrupted, and the reliefs available. It would be wise to communicate concerns with the other contractual party and discuss adjustments to existing terms – whether temporary or permanent – to protect business operations.
Those who are negotiating new commercial relationships should exercise particular care when considering force majeure clauses, taking specialist legal advice on how best to protect your business interests in light of the growing conflict.
Supreme Court guidance
It’s timely to remind readers of the helpful decision in RTI v MUR (2024) where the Supreme Court set out four key principles concerning force majeure clauses:
· The party affected must be able to show the force majeure event caused the failure to perform the contract according to its terms. Causation is determined according to the contractual terms.
· The principle of freedom of contract includes the freedom not to contract (eg not to accept non-contractual performance)
· Clear words are needed to forego valuable contractual rights.
· Certainty and predictability are particularly important in English commercial law. Without express wording, a reasonable endeavours proviso does not require a party to accept an offer of non-contractual performance.
The Iran war will cause significant disruption to many businesses. Being mindful of the principles noted by the SC should prove a helpful starting point if force majeure issues arise, but it is always important to consider taking specialist legal advice before taking any steps.
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