Archive for April, 2010

Volcanic Eruptions & Terminating Contracts

Friday, April 23rd, 2010

As you will all know, last week air traffic in Europe was brought to a screeching halt by the eruption of a volcano in Iceland and the huge cloud of ash that it spewed into the atmosphere that covered most of Western Europe.  Not only did this strand hundreds of thousands of international travellers and cost billions of dollars in lost revenues, etc., it also stopped the flow of goods and, in particular, various perishable goods.  To give two examples, I have a client who operates a deli who takes great pride in having prosciutto ham delivered fresh from Italy and I have another client who is a florist who sometimes has special orders for flowers that are not grown in Ontario such as tulips from Holland.  In both instances, they obtain their products from Europe and if they needed any of those products last week, they were not going to get them because of the ash cloud and its resulting air travel disruptions.  So where does that leave them?

There is a common “boilerplate” clause that is often found in contracts and seldom thought about – if at all – by anyone, even the lawyers.  It is known as a “force majeure” clause and usually reads along the following lines:

Neither party is responsible for damages caused by delay or failure to perform undertakings under teh terms of this Agreement when the delay or failure is due to fires, strikes, floods, acts of God or the Queen’s enemies, lawful acts of public authorities, or delays or defaults caused by common carriers, which cannot reasonably be foreseen or provided against.

A few comments about these types of clauses.  The first is what is an “Act of God”?  While there is no all-inclusive list, the general approach is any natural or even supernatural disaster.  The Iceland volcano would clearly fall within this category. 

The second comment is to note the last words of the clause.  For example, if either my deli owner client or my florist client were caught without receiving an order of goods last week, they could rely on the clause.  However, what if they were to order their goods this week?  The volcano has not stopped its eruption, it has simply died down and what is being sent into the atmosphere is now just steam.  If they ordered the goods this week and then just before the orders were shipped by plane the volcano erupted again with more ash and the planes are grounded once more, then it would be difficult for them to say that the problem could not have been foreseen or provided against. 

The third comment is to note that force majeure clauses have been imported from French law and is not a naturally created concept of the English common law of contract.  As a result, you should look at your contracts to see if they include these clauses.  If they do, that’s fine.  If they do not, then the courts will not imply such a contractual term into your contract.

So what if the clause is there and it is applicable – what does this mean for you?  The answer is that it will relieve you from the contractual obligations.  So, if my florist client needed Dutch tulips for a wedding last Saturday and could not get them in time, it could have cancelled the order without having to pay for the flowers that never arrived.  This means that, for the florist, she would want to have such clauses in her contracts.  Similarly, the Dutch flower merchant would want that clause in the contract.  Suppose that my florist client had prepaid for the flowers.  If the merchant could not ship the goods, then the merchant would have to return my florist client’s money.  But the clause would similarly protect the merchant because my client would not be able to sue the merchant for whatever money was lost on her contract with the wedding party because either they cancelled the flower order or they went with other flowers that were less costly (so the florist lost part of her profit).

At the same time, this is another example of when it is helpful to have insurance to cover potential losses due to situations like the Iceland volcano.

Something to think about.

CALC