Chitty on Contracts states that a “force majeure clause” is normally used to describe a contractual term by which one (or both) of the parties is entitled to cancel the contract or is excused from performance of the contract, in whole or in part, or is entitled to suspend performance or to claim an extension of time for performance, upon a happening of a specified event or events beyond the party’s control. Such clauses may assume a variety of forms, but in New Zealand, the term “the usual force majeure clauses to apply” has been held void for uncertainty. Force majeure clauses have been said not to be exemption clauses, although it is difficult to draw any clear line of demarcation between the two types of clauses, since the effect of each may relieve a contracting party of an obligation or liability to which the party would otherwise be subject.
The Laws of New Zealand state that “in practice, many contracts expressly provide for performance to be excused if rendered impossible by unavoidable causes such as of acts of God, the Queen’s enemies, force majeure, or vis major.” Stipulations of this nature (often generally called force majeure clauses) are effective, provided that such clauses are not uncertain in their terms. A force majeure clause must be construed in each case with due regard to the nature and general terms of the contract and in particular with regard to the precise words of the clause.
Many licence agreements contain a force majeure clause; i.e., a clause governing events happening beyond one’s control like an act of God or a pandemic. Each force majeure clause may be different, but the effect is the same—it relieves the party that is unable to perform, or is delayed from performing, their obligations under an agreement. In my opinion successful initiation of force majeure clause requires:
(a) A triggering event. Each clause will detail a variety of triggering events. Some examples include an act of God, a natural event, or epidemic or pandemic; and
(b) The required effect of the triggering event is that you are unable to legally or physically perform your obligations under the agreement.
Both of the above elements must be proven in order to successfully use the force majeure clause to get out of any obligation. What will count as a triggering event will depend on the exact wording of the clause in the document in my opinion.
Force Majeure Clauses in General
A contract might specifically provide for and manage the legal effect of external events by the inclusion of a force majeure clause. “Force majeure” literally translates from the French as “superior force.” Although there is no authoritative common law definition, the court in Matsoukis v Priestman & Co. described force majeure as meaning: “A circumstance beyond the control of a party to a contract, which enables that party to escape liability for failing to perform the contract as the result of the circumstance.”
The concept of force majeure has been formulated in various ways, but generally involves the following elements: (1) the event must be outside the control of the parties; (2) the performance of the relevant contractual obligations must be prevented, hindered or delayed; and (3) the effect must be that the event cannot be avoided or overcome by reasonable efforts to mitigate.
The concepts of force majeure and frustration are similar because they both hinge upon external events that are beyond the control of the parties. However, they are fundamentally different in nature because frustration is a doctrine of the common law whereas force majeure is a creature of contract with no common law existence outside the contract. Parties cannot rely upon force majeure to excuse failed performance if there is no clause in the contract. Force majeure provisions must be express and will not ordinarily be implied in the contract. Consequently, force majeure clauses are ultimately a matter of agreement between the parties and can be drafted to suit the particular circumstances.
Events of Force Majeure
A force majeure clause must first define the “events of force majeure.” The parties might agree upon a list of specific events. By itself, force majeure has been construed to include diverse events of natural or human intervention, such as “acts of God,” earthquakes, epidemics, the complete dislocation of a business or breakdown of machinery due to a universal strike. Other frequent examples of force majeure include wars, public disorder, embargoes, and changes of law or government policy. However, the diversity of the cases makes any exhaustive list impossible.
Contracts sometimes refer to force majeure clauses as hardship clauses. Such a clause has the effect of defining the relevant party or parties’ primary obligations so that, if the relevant event occurs, there will be no breach and hence no contractual liability to pay compensation. Typically, a force majeure clause operates to qualify an obligation so that upon the occurrence of a particular event, no contractual default arises; but, in addition, such a clause might have the effect of suspending the contract or allowing a party to cancel the contract.
For an abundance of caution in drafting, a non-exhaustive list of specific majeure events is often followed by a catch-all phrase, such as “any other events beyond the control of the parties.” However, such drafting runs the risk of attracting the ejusdem generis rule of contractual interpretation, whereby general words may be read down by reference to the type of events listed before them. Adverse changes in economic or business circumstances, unless expressly provided for in the contract, are generally not recognised as events of force majeure.
It is often said that force majeure events must be unforeseeable to the parties. If the parties anticipated the risk they might have taken a voluntary assumption of risk, which excludes reliance upon force majeure.
Licence Agreements
All licence agreements in New Zealand should contain a robust force majeure clause. I would go so far to say that if any licence agreement does not contain a force majeure clause then the drafter of the document may be negligent. The type of force majeure clause that I invariably include in my licence agreements states:
Neither party shall be liable to the other and neither party shall be deemed to be in default for any failure or delay to observe or perform any of the terms and conditions applicable to the party under this Agreement (other than the payment of money) caused or arising out of any act beyond the control of that party including (but not limited to) fire, flood, lightning, storm and tempest, earthquake, strikes, lock-outs or other industrial disputes, acts of war, acts of terrorism, riots, civil commotion, explosion, malicious damage, government restriction, unavailability of equipment or product, disease and/or virus of epidemic or pandemic proportions or other causes whether the kind enumerated above or otherwise which are beyond the control of that party and where such failure or delay is caused by one of the events above then all times provided for in this Agreement shall be extended for a period commensurate with the period of the delay.
The purpose of the above clause is to ensure that neither party will be liable to the other for any events outside their control. Common events are listed in the clause like fire, flood, lightning, storm and tempest and, of particular relevance to current events, the phrase “disease and/or virus of epidemic or pandemic proportions.”
No one can predict the future and all parties, especially a licensor and a licensee, should be afforded the protection of a well-drafted force majeure clause. Uncertainty will always pose a risk to interference with contractual relations, and a well-drafted force majeure clause is a necessary component of mitigating contractual risk, in my opinion.
Stewart GERMANN, IDI Country Expert for agency & distribution in New Zealand.
