Over the last weeks, many companies may have issued or received force majeure notices suspending performance where permitted by force majeure clauses in the relevant contracts based on the COVID-19 outbreak. As the crisis continues with deepening business disruption, many parties may also be looking to see if they are entitled to terminate their contracts without penalty based on continuation of the force majeure event.
If the relevant contract provides for termination for force majeure, a party looking to terminate will need to consider whether the event is covered by the specific terms of the force majeure clause, and the parties’ obligations with respect to the same, as is necessary when invoking force majeure to suspend performance, but will also need to be able to demonstrate how the force majeure gives rise to the right to terminate, as well as when that termination right arises.
Parties always need to be careful when looking to exercise rights of termination since the consequences of getting it wrong can be very costly; but terminations based on force majeure require special consideration, which are highlighted in this article.
Has a force majeure event occurred giving rise to a termination right?
The force majeure clause will set out the terms agreed between the parties to define the specific circumstances in which force majeure will arise, i.e., detailing specific types of event or a general definition of events beyond the control of the parties, which allow a party to suspend performance of its obligations under the contract. If the event is covered by the types of event specified in the contractual force majeure provisions, typically the force majeure clause will also require that the event must have an impact on the performance of the contract, such as delaying, preventing or hindering performance of the contractual obligations, although the precise wording of the clause may vary in each contract.
Thus, there is a clear causation requirement between the occurrence of the force majeure event and the delay or failure to perform the contractual obligation. If the contract expressly provides for termination based on the continuation of a force majeure event, then the party seeking to rely on the clause will bear the burden of proof that the force majeure event relied on has in fact prevented, delayed or hindered the performance of its contractual obligations.
Moreover, the party seeking relief will also need to show that the force majeure event relied on was the sole operative cause of its failure to perform its obligations under the contract, unless there are express words to the contrary in the contract. If there are other reasons or concurrent causes as to why a party cannot perform its contractual obligations, the party will not be entitled to rely on the force majeure to terminate, and a purported termination on the basis of such event will not be justified.
The causation requirement was considered in a recent English commercial court case (Seadrill v Tullow) which concerned a party’s termination of a long-term drilling contract for the use of a drilling rig based on a force majeure event, namely, a government imposed drilling moratorium. The force majeure clause provided that neither party shall be responsible for its failure to perform if performance of the contractual obligation had been delayed or temporarily prevented by a “force majeure occurrence” as defined in that clause. Although the force majeure event relied on by the notifying party (prohibition of new drilling) fell within the contractual definition of a force majeure event, such an occurrence would only excuse a party from a failure to perform if it caused the party’s failure to fulfill a specific obligation or term of the contract. Moreover, for a party to rely on an event of force majeure, it must be the sole operative cause of the inability to perform, unless there was some express wording to the contrary in the force majeure clause. Here, the judge held that the occurrence relied on was not the single cause of that party’s failure to perform as there were in fact two causative factors to the failure to perform. In that scenario the party was not entitled to terminate the drilling contract for force majeure.
Therefore, if a party is looking to exercise a termination right based on force majeure it must ensure that it understands and has investigated the causative factors to the failure to perform. It needs to be able to demonstrate that the force majeure event relied on as the basis for termination is the sole cause of its failure to perform its obligations under the contract.
When and how does the termination right arise based on the force majeure?
If the contract expressly provides for termination based on the continuation of a force majeure event this will be by reference to a specific period of time, i.e., that the right to terminate the contract arises in the event that the force majeure prevails for a stated number of days.
The termination clause in Seadrill v. Tullow conferred a right to terminate the contract forthwith in the event that a “force majeure condition” prevails for a period of 60 consecutive days upon giving notice to the other party. The judge relied on a distinction between the terms “force majeure condition” in the termination clause and “force majeure occurrence” used as noted above in the force majeure clause.
The judge held that the wording “force majeure condition” meant that time would count for the period of time necessary for the termination right to arise from the date when (i) there has been a force majeure occurrence within the meaning of the force majeure clause and (ii) that such force majeure occurrence has prevented a party from fulfilling a term of the contract for the stipulated period.
Therefore, it was necessary for the party seeking to invoke the termination right to show that the force majeure occurrence had impacted on the performance of its obligations by preventing performance for the duration of the stated period. The judge also found that it was necessary to identify the specific term or condition of the contract that was prevented or delayed by the force majeure occurrence in order to calculate when the relevant time period starts.
As this case highlights, parties will need to be careful about what time counts for the purpose of calculating the force majeure period necessary for the termination right to arise, and ensure compliance with any other specific notice requirements expressly stated in the clause before terminating for force majeure.
Consequences of getting a termination based on force majeure wrong
So, clearly, if a force majeure event has occurred, as defined within the relevant clause, it is crucial that any party seeking to rely on that event to terminate the contract can demonstrate that the event has caused, and is the sole cause, of the delay or prevention of performance of its contractual obligation.
It is also crucial to get the timing right before issuing a termination notice because if a party terminates too early, even by one day, that would not be a valid termination for force majeure. In this scenario, the purported termination will be unlawful. Moreover, an unlawful termination of a contract is likely to be a repudiatory breach of the contract giving rise to a claim for damages.
Parties should consider seeking legal advice before exercising these termination rights based on force majeure to ensure that they do so validly, and avoid incurring further damaging consequences.