The significance of force majeure provisions on contractual arrangements

The significance of force majeure provisions on contractual arrangements
17 Jun 2019

In recent times, the increase in the occurrence of events or circumstances beyond the control of governments, companies, communities and individuals has resulted in far reaching and significant consequences in all sectors of the global economy, from the Agricultural, Mining, Manufacturing and Construction industries to the Wholesale and Retail, Transportation, Storage and Communication industries. For example, in South Africa, protest action occurs on a frequent basis, which has had a major impact on production and delivery of materials and/or equipment to, inter alia, manufacturers and mines. During the course of 2018, Richards Bay Minerals (RBM), a subsidiary of Rio Tinto in South Africa was temporarily shut down on two separate occasions as a result of protest action that prevented access to the mine. In 2014 ArcelorMittal in Liberia, West Africa, declared a force majeure relating to its iron ore mining operations due to an outbreak of the Ebola virus which resulted in the evacuation of thousands of its employees at its iron ore mines, causing an absolute cessation of mining operations. More recently, the nationwide power outage in Venezuela had far reaching results on, inter alia, certain crude exports to customers in the United States giving rise to certain suppliers threatening to declare a “force majeure” to prevent being held liable for failure to deliver in terms of the Sectoral Sanctions applied to Venezuela by the United States in 2017.

Force majeure or vis major events (a superior force or event or circumstance beyond the control of contracting parties and as a result of which contractual performance is made impossible) recurrently effect parties to contractual agreements. Consequently, the inclusion of a force majeure provision in contractual arrangements is exceedingly significant. By including properly constructed force majeure terms into contractual agreements, the parties ensure their protection in the event of such circumstances arising and limit their liability for failing to perform in terms of an agreement by expressly catering for the suspension of a party’s obligations under such agreement (without penalties) until such time as the force majeure event has ceased. Consequently, the force majeure provision suspends the ordinary consequences of breach of contract, including specific performance or termination and the payment of damages and/or penalties, which are not applicable due to impossibility of performance.

The parties are free to include in their contractual agreements, all and any force majeure events and may customise the force majeure provisions contained in their agreements relative to industry specific requirements. Conventional force majeure events include, but are not limited to the following-

  • strikes, lockouts or riots;
  • acts of god, fire, storm, earthquakes;
  • breakdown, malfunction, or damage to plant, machinery, equipment or facilities;
  • epidemics or quarantines;
  • delay, shortage, lack of, or interruptions to supplies, electricity, gas, water, equipment, fuel and other materials;
  • road closures or lack of access to roads; and
  • inability to obtain or renew the required permits or licenses.

Typically, a force majeure clause will include an agreed period during which non-performance will be acceptable to avoid lengthy delays. This will ensure that a party has the right to terminate the contract to the extent that the period of the force majeure event is exceedingly lengthily. In order for parties to contractual agreements to achieve optimal protection, a force majeure clause must be detailed and at a minimum include full descriptions of the events or circumstances to be included, which events should not have reasonably been foreseen, avoided, protected against and/or overcome and which are not attributed to any acts or omissions of a party. considering and specifying in a contractual arrangement what occurrences constitute a force majeure must not be undervalued. Depending on the specifics and commercial practicalities surrounding the contractual arrangements and the circumstances of the parties in question, a party may prefer the contract to be capable of being terminated if certain force majeure events arise or for the delayed performance resulting from certain force majeure events to be accepted at a reduced price.

Should an agreement exclude a force majeure provision, the legal principle of supervening impossibility may be applicable. In such instances, unlike an expressed force majeure provision, the party relying on the principle must objectively prove that performance is impossible and that it is not merely difficult or more costly. Such party also bears the onus of proving that such an occurrence was unavoidable.

In conclusion, a carefully considered and drafted force majeure provision is imperative in commercial agreements so as to ensure that unknown future events, which may seem unlikely or improbable at the time of conclusion of the contract, will be dealt with appropriately and in the best interests of the parties concerned.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Tanya Pollak
Tanya Pollak

Tanya is a partner at Eversheds Sutherland. She specialises in corporate and commercial law bringing her own unique brand of practising law with a personal touch. Her main areas of expertise comprise mergers and acquisitions, joint ventures, BEE transactions, cross border transactions, corporate structuring and restructuring, conducting legal due diligences and advising on regulatory compliance.

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