Force majeure clauses are commonplace in sale and supply contracts. However, they do not always operate to provide the protection that parties expect. Recent strike action at the Grasberg mine in Indonesia has brought attention to the operation of force majeure clauses. The strike, which began on 15 September 2011, led the owner of the mine, Freeport McMoRan, to declare force majeure on its copper contracts towards the end of October 2011. Any traders affected (including those down the sale chain) should examine their contracts carefully before accepting or declaring force majeure.
Under English law, force majeure will only be available where a contract contains an express force majeure clause. Such a clause cannot be implied into a contract. A force majeure clause provides for one party (or both) to cancel the contract, to delay/suspend performance of their contractual obligations, or to be excused from performance for a period of time, upon the happening of specified events beyond the parties’ control.
It is for the party seeking to rely on a force majeure clause to prove their entitlement to do so. The benefit of the clause will only be available where and for as long as the circumstances of the event exactly fit those contemplated by the clause. For example, where a sales contract requires the supply of “copper of Indonesian origin”, shipped from “one good/safe berth/port/Indonesia”, a strike at Grasberg mine will not be enough to amount to a force majeure event in circumstances where copper could still be sourced from elsewhere in Indonesia (for example the Batu Hijau mine). It will not be relevant for a disaffected seller to argue that sourcing from an alternative supplier would render the contract less profitable (or even unprofitable).
The terms of a force majeure clause must be adhered to strictly, for example in relation to notice requirements. If you are seeking to declare force majeure, you must follow exactly the terms of the clause in the relevant contract (and if several contracts are affected by the same force majeure event, the requirements of each clause may vary). Conversely, if your contractual counterparty declares force majeure, it is important to check that the declaration is valid and made in accordance with the terms of the contract before accepting it.
Parties to contracts for forward delivery must be careful if they seek to declare force majeure to excuse themselves from performance. It may be too early to tell whether contracts for December 2011/January 2012 shipment will be affected by strike action. A premature declaration of force majeure could put the declaring party in repudiatory breach of contract.
In the event that a contract does not have an express force majeure clause, or such a clause fails to provide protection in the particular circumstances, where a contract is subject to English law, the doctrine of frustration may apply so as to automatically discharge the parties from the remaining obligations under the contract.
A party wishing to rely on frustration must prove: (1) that the event relied on occurred after the formation of the contract; (2) that the event occurred without the default of either party; (3) that the contract does not make sufficient provision for the event in question; (4) that the event so significantly changes the nature of the outstanding contractual rights and/or obligations that it would be unjust to hold the parties to the bargain.
The Courts have placed the doctrine of frustration within a very narrow scope so as to avoid parties using it as a means of escaping a bad bargain. In practice, it is rarely available. In particular, a contract will not be frustrated simply because it has become more expensive to perform.
The declaration of force majeure by Freeport McMoRan may lead traders to assume that they can also declare force majeure under related sale contracts. They should be cautious about doing so. Unless their related contracts contain a force majeure clause which is fully back-to-back, (including in particular as to the origin of the copper), this will not necessarily be the case. A close examination of the wording of their own clause, and strict compliance with its terms, will be necessary before making any declarations to a counterparty.
For more information, please contact Andrew Ridings, Partner, on +44 (0)20 7264 8158 or andrew.ridings@hfw.com, or Darren Wall, Associate, on +44 (0)20 7264 8229 or darren.wall@hfw.com, or your usual contact at HFW.
