By Basil Nabi Malik and Bilal Ahmad Khan
As is apparent now, the global outbreak of COVID-19 is having a profound impact on the economy of the world. Businesses are finding it difficult to comply with their contractual obligations on account of various reasons, including a stoppage of supply, price fluctuations, decreased working capital, and a lack of labour. In our previous briefing, we had explained the long-standing principles governing force majeure clauses, frustration, and impossibility. In this briefing, we seek to examine the relationship between force majeure clauses and profitability, that is, whether a typical force majeure clause may be invoked in the event of an economic downturn, at the onset of financial distress, or on account of other possible reasons stemming from profitability.
Force Majeure and Profitability
The language and phrasing of a force majeure clause is crucial in determining its scope and the events that it may cover. Although by no means exhaustive, some of the events that are often covered by force majeure clauses include Acts of God, floods, wars, and epidemics.
With that said, unless specifically mentioned in the clause itself, a price hike or huge economic downturn (which affects the profitability of the contract) are generally not considered to be force majeure events. Even in a situation where the occurrence of such events render it economically impossible for the party to perform its contractual obligations, such actions or omissions are still typically excluded from the ambit of a force majeure clause. Nonetheless, in some situations, force majeure clauses have been seen to explicitly incorporate such events in terms of the requirements of the parties.
However, even if a force majeure event has occurred, amongst other things, the failure to fulfil an obligation must be a direct consequence of the force majeure event in order for the clause to be invocable. Moreover, a lack of direct causation may also be exemplified by the availability of other avenues to perform the obligation in question (Tennants (Lancashire) Ltd v CS Wilson And Co Ltd [1917] A.C. 495). In most situations, the lack of profitability of a contract tends not to be considered a causal effective connection to the force majeure event. This is because a lack of profitability tends to make performance of the contract inconvenient and not impossible. There appears to be a lack of direct causation between the force majeure event and the non-fulfilment of an obligation on account of the unprofitable economic events complained of.
In order to successfully rely on a force majeure clause, common law jurisdictions typically require the parties to prove that due to the force majeure event it was legally or physically impossible for the party to perform its obligations under the contract (Brauer & Co (Great Britain) Ltd v James Clark (Brush Materials) Ltd [1952] 2 All ER 497).
In a situation where the force majeure clause requires a ‘prevention of delivery’ in order to be invoked, often enough, a rise in price (even if great) would not amount to a prevention of delivery, as the term “prevention” in such a clause may be seen to refer to physical or legal prevention and not an economical unprofitableness. Furthermore, excusing performance on the ground of it being “commercially” impossible is generally looked down upon, unless of course it is plainly contracted for by the parties (Tennants (Lancashire) Ltd v CS Wilson And Co Ltd [1917] A.C. 495). In essence, in most situations, the mere fact that a contract has become expensive to perform, even dramatically more expensive, does not appear to be a ground to relieve a party on account of force majeure (Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm)).
The same principle is in vogue in Pakistan, that is, the Islamabad High Court, in Atlas Cables (Pvt) Limited V Islamabad Electric Supply Company 2016 CLD 1833, has held that a change in economic/ market circumstances affecting the profitability of a contract or the ease with which the parties’ obligations can be performed cannot be regarded as a force majeure event. It was further noted that even if a party had procured the contracted material at rates higher than the ones at which the said party had agreed to sell such material to the other party, the same would not constitute a force majeure event despite the incurring of a loss in the transaction.
Conclusion
Force majeure clauses are to be read and interpreted according to the language used therein. Typically, and unless stated otherwise in the clause itself, issues of economic distress, financial troubles, or profitability may not usually be covered by the standard force majeure clauses. However, if a force majeure event does in fact occur, even then, amongst other things, a direct causal link between the force majeure event and the failure to fulfil the obligation would be required to be shown in order for such failure to come within the ambit of the force majeure clause in question.
In these times of uncertainty, it would be appropriate for parties to analyse and review their contractual obligations from the perspective of what has been mentioned above. At this time, parties are advised to review their documentation with a view to prepare and devise a robust response/ plan to combat any impending difficulties which may arise due to the pandemic COVID-19.
The information presented is not legal advice, is not to be acted on as such, may not be current, and is subject to change without notice. For further information, please contact Raja Mohammad Akram & Co.