The economic downturn will not trigger a force majeure clause

Monday 9th August 2010

The Commercial Court has confirmed that a force majeure clause will not be triggered where the party trying to rely on it argues that the economic downturn has prevented it from complying with its obligations under a contract.  This case is a reminder that an agreement cannot be terminated simply because one of the parties has made a bad bargain or because the markets have changed since the date on which agreement was reached. 

The term "force majeure" is well known to lawyers and business people alike.  By way of reminder, the underlying principle of a force majeure clause is that a party (or parties) to an agreement is excused from (or entitled to suspend) performance of its obligations on the occurrence of unexpected events or circumstances outside that party's control.

In the recent case of Tandrin Aviation Holdings Ltd v Aero Toy Store LLC¹, the claimant, Aero Toy Store (ATS), attempted to argue that a force majeure clause in its agreement with Tandrin Aviation Holdings (Tandrin) was triggered by the economic downturn.

In brief, ATS contracted with Tandrin to buy a jet aircraft for the sum of US$31.75 million.  ATS paid a deposit to an escrow agent, but later failed to take delivery of the aircraft or to pay the balance.  Tandrin terminated the agreement for breach and attempted to enforce the provisions of the contract which provided that the deposit would be payable to Tandrin in such circumstances.  ATS refused to instruct the escrow agent to pay the deposit to Tandrin and argued that the "unanticipated, unforeseeable and cataclysmic downward spiral of the world's financial markets" had triggered the force majeure clause in the agreement.

The case ended up in the Commercial Court where Mr Justice Hamblen found that the force majeure clause did not excuse ATS' non-performance under the contract.  Mr Justice Hamblen gave the following reasons:

• It is well established law that a change in economic or market circumstances affecting the profitability of a contract or the parties' ability to perform the contract, is not a force majeure event.
• Case law has shown that a party will not be excused on the grounds of force majeure simply because a contract has become more expensive to perform.  Similarly, a miscalculation or a rise in cost or expense will not constitute force majeure.
• The force majeure clause in the agreement between ATS and Tandrin specifically referred to causes "beyond the Seller's reasonable control" (Tandrin was the seller).  The clause therefore only applied to Tandrin's obligations under the agreement and could no be stretched to apply to ATS in its capacity as the buyer.

This case is a useful reminder that force majeure will not operate to excuse performance made more costly as a result of the economic downturn.  In addition, this case reminds us how important the standard clauses towards the back of a contract (the so-called 'boilerplate' clauses) can be.

Practical points to take away:

• An agreement cannot be terminated simply because one of the parties has made a bad bargain or because the markets have changed since the date on which agreement was reached.  Changes in circumstances could be addressed by giving the parties specific rights of termination or by inserting a material adverse change clause giving the buyer the right to walk away.
• Force majeure will not be implied into a contract if there is no express clause.  This means that you must insert a force majeure clause into your contracts so that you are not in breach of contract if you are unable to perform your contractual obligations as a result of a cause outside your control.
• The term "force majeure" derives from French law and has no recognised meaning in English law.  It is therefore important to define what you mean by force majeure in your contractual arrangements.
• If there are any specific events or circumstances which you want to be covered by the force majeure clause, they should be expressly set out in the contract.
• When inserting a force majeure clause, you should consider whether it should apply to one or both of the parties to an arrangement.  For example, should it apply only to the Seller or can the Buyer also benefit from the clause?  If yes, should the force majeure clause excuse the Buyer from its obligation to pay under the agreement?
• A force majeure clause should address what should happen in the event the clause is triggered.  For example, should the Buyer have the right to terminate the contract in the event the force majeure event continues in excess of a given period of time? 
  

¹ LLC [2010] EWHC 40 (Comm)

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