The Effect Of A Force Majeure Clause In Contractual Agreements

Generally, where parties enter a contract, their intention is to be bound by the terms of the contract and to fulfil their obligations as provided for in the agreement and this is in captured in the principle of pacta sunt servanda which means that agreements must be kept.

However, there are certain clauses included in an agreement which suspends a party’s obligations under a contract in certain unforeseen circumstances and one of such clauses is a Force Majeure clause.

We will examine a Force Majeure Clause in detail in the article. First of all, what  is a force majeure clause?

Meaning Of A Force Majeure Clause

A Force Majeure clause is one  of the boiler plate clauses in an agreement that absorbs a party from liability for the inability to perform any obligation in an agreement.

This inability of a party to perform any obligation must be due to unforeseeable circumstances (generally referred to as ‘Acts of God’) which interrupts the expected course of events.

This clause generally covers natural disasters, riots or terrorism, war, pandemics, government sanctioned shutdown e.g. lockdown etc.

A Force Majeure clause is an essential element of a contractual agreement, as it predetermines the rights and remedies available to parties when an event outside their control occurs, causing the affected party to be incapable of performing their obligations under the contract. It operates to suspend a party’s obligation under a contractual agreement during the existence of the unforeseen event.

The resulting effect of a Force Majeure Clause is that where a force majeure event arises that prevents a party from fulfilling or performing their contractual obligations, the said event will not amount to a breach of contract.

A force majeure clause will excuse a party from delay or non-performance for events beyond their control and may allow both parties to terminate the contract in the event of such unforeseen circumstance.

A force majeure clause should set out a balanced position where the party claiming force majeure is relived from performance without liability whilst the other party has the right to terminate the contract.

Importance Of A Force Majeure Clause

A Force Majeure clause is of utmost importance in an agreement as it serves the following purposes.

1. It governs and sets out expectations of each party in the event of an unforeseeable event and gives parties the flexibility and freedom to set out the terms in which their commercial agreement will continue.

• It protects parties from potential future circumstances that may seriously affect the profitability of the contract if not considered.

• It allows parties to anticipate and plan for exceptional events beyond their control.

• It suspends the obligation of a party to perform while the force majeure event continues and when the force majeure event ends the obligation is easily and effectively re-activated.

• It provides the right to terminate the contract entirely or in part and without liability.

• It sets forth clear actions to be undertaken by the parties to invoke the provisions of the Force Majeure clause by providing for issuance of notice to the other side informing them about Force Majeure.

• It helps to mitigate and allocate risks and liabilities of parties suffering a loss where a force majeure event hinders the performance of a contract.

• It cannot be implied into a commercial contract. The force majeure clause must be expressly provided for in the agreement .

Where Will A Force Majeure Clause Be Ineffective

A force majeure clause is limited to the events covered under the clause and will therefore be ineffective where events arise which were not covered under the clause. Consequently, a force majeure clause should be broad enough to cover unforeseeable events which may occur to impair the party’s ability to carry out their obligations under the agreement.

Furthermore, a party claiming force majeure would have to establish that their inability to meet the contract was impaired or made impossible by the event.

Effect Of A Force Majeure Clause In Financial Transactions

The inclusion of a force majeure clause in financial transactions, such as loan agreements, has been a subject of debate, particularly in light of the post-Covid-19 landscape. A force majeure event refers to an unforeseen circumstance that makes it difficult or impossible for a party to fulfil its contractual obligations.

One school of thought argues against including a force majeure clause in financial transactions, citing the fact that trade and financial activities continued during the lockdowns imposed in many countries.

From this standpoint, it is contended that a pandemic cannot be classified as a force majeure event in such situations. In addition, it is posited that financial institutions need to generate profits to sustain their operations.

However, it is important to recognize the unique characteristics of financial transactions and the need for tailored considerations. Unlike other contracts, a general force majeure clause may not be deemed necessary in loan agreements, as financial institutions often have the ability to enforce collaterals in case of default.

Nevertheless, when incorporating a force majeure clause in financial transactions, it is essential to carefully draft the terms to ensure fairness to both parties.

Clear specification of the particular force majeure event that would be recognized and accepted under the agreement is advisable, considering the risks faced by financial institutions and the need for contractual certainty.

By adopting a balanced approach and considering the specific risks and circumstances in the financial industry, a well-crafted force majeure clause can provide a measure of protection for both parties. It allows for the recognition of extraordinary events beyond their control while upholding the principles of fairness and contractual obligations.

Ultimately, the decision to include a force majeure clause in financial transactions requires a thorough evaluation, considering the unique nature of the industry and the risks faced by all parties involved.

Striking the right balance between providing safeguards for unforeseen circumstances and maintaining contractual certainty is crucial in creating an equitable force majeure provision in loan agreements and other financial arrangements.

Conclusion

A force majeure clause is vital and fundamental in the drafting of contractual agreements as it protects the parties in cases of unforeseen circumstances and unpredictable events and protects their rights and obligations. It is therefore of high importance that it be included as a clause in agreements.

Berkeley Legal is a leading business law firm in Nigeria. We provide comprehensive and sophisticated range of specialized and personalized legal services that are designed to meet the various needs of highly diversified local and international clientele.

If you would like to know more about the effect of a Force Majeure Clause, please contact us at info@berkeleylp.com

The information provided in this article is for general informational purposes only and does not constitute legal advice.