The current US-China trade war could continue for years with more and more countries being dragged into the conflict. The increase in tariffs for specific goods, imposed by US and China, has caught out many companies unexpectedly in the supply industry worldwide. Can companies be excused of non-performance when they find themselves caught in a trade war?
A force majeure clause is a standard clause found in supply contracts. It exempts the parties from fulfilling their contractual obligations for causes beyond their control. Typically, a series of specific events are specified in the clause. Consider a scenario where tariffs make it difficult for a manufacturer to deliver their goods to its customers. The qualification test as to whether a manufacturer can use force majeure to excuse itself from contractual performance is as follows:
The manufacturer must show one of the events has occurred
The event has prevented, hindered or delayed the manufacturer from performing the contract
That its non-performance was due to circumstances beyond its control; and
There were no reasonable steps that the manufacturer could have taken to avoid or mitigate the event or its consequences
The English court’s approach to this issue is illustrated in Tandrin Aviation Holdings Limited v Aero Toy Store Llc (2010). Tandrin sold an executive jet aircraft to ATS for US$31.75m. ATS paid a US$3m deposit to an escrow agent but failed to take delivery of the aircraft or pay the balance. Tandrin cancelled the Agreement and sought recovery of the deposit.
The Force Majeure clause reads as follows: "Neither party shall be liable to the other as a result of any failure of, or delay in the performance of, its obligations ... for the period that such failure of delay is due to: Acts of God ... or … any other cause beyond the Seller's reasonable control..."
ATS’s main defence, to justify not accepting delivery or paying the balance, was that the "unanticipated, unforeseeable and cataclysmic downward spiral of the world's financial markets" triggered the force majeure clause in the Agreement.
The Court held that ATS could not rely upon the force majeure clause to justify its non-performance, as there were no connections between the specific events listed on the clause and the economic downturn or market circumstances. It is made clear that circumstance affecting the profitability of a contract or the ease with which the parties' obligations can be performed, is not regarded as a force majeure event.
Other situations such as “insufficient financial resources”, “miscalculation” and “a rise in cost or expense” are all not considered as force majeure unless they are specifically stipulated in the agreement.It is also not sufficient that merely an occurrence of a force majeure event will excuse a party to meet its contractual obligations. The contract needs to spell out the consequence of the occurrence of such an event. For example, when a strike is listed as an event, its consequence of port congestion caused by the strike should also be included in the force majeure clause.
It is vital that a force majeure clause is drafted clearly. Whether a force majeure clause can be triggered, depends on the specific event’s reference. Whilst an event is beyond the parties’ control, it needs to link together the non-performance and the event. It is vital that these clauses are drafted clearly as the Courts interpret a force majeure clause narrowly.
The force majeure clause is a useful tool in allocating risks between businesses. In the absence of a clearly drafted provision, such a tool cannot be used. The test to decide whether companies can rely on force majeure is stringent. It is important for businesses to recognize the difficulties and such recognition will help them to manage risks continuously throughout the contracted period.
Dr Alan Ma is partner at Gordon Dadds LLP