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Don’t Let a Force Majeure Clause Become Boilerplate

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A mining producer would typically be a party to a multitude of contracts, including those relating to the mining and processing of its products and their subsequent transport (by rail, truck and/or vessel) and delivery to its customers. Typically, a delay in or a failure to perform a party’s contractual obligations under those agreements would constitute a breach of contract under Canadian common law and the non-breaching party would have a claim for damages against the breaching party. However, the inclusion of
a force majeure (FM) clause allows a party to a contract to invoke a “force majeure right”, the effect being that the invoking party will be relieved of its contractual obligations to the extent that the performance of those obligations “is prevented or delayed by an event beyond its reasonable control”. The concept of force majeure does not exist under common law, but only exists by virtue of contract and therefore it must be included in the contract itself in order to be relied on. It is important to note that FM is not equivalent to the concept of “frustration” at common law. Rather, frustration of a contract occurs when an event so significantly changes the nature of the contract from what was contemplated that both parties are discharged from the whole of the contract. By contrast, an FM clause only excuses non-performance or a delay in performance as a result of, and during, the FM event such that neither party is in breach of the contract (nor liable for damages for breach of contract).

An FM clause in a contract should include general language covering “any event beyond the reasonable control of a party”. This broad language provides the parties with a lot of flexibility to try to bring many different types of events within its potential scope. However, as there can inevitably be disagreement among the parties in the future about whether or not a specific event falls within the meaning of the general language, it is recommended that the parties should also stipulate the specific FM events that they agree neither party should bear the risk of in the context of their particular contract having regard to the specific circumstances surrounding the contract and its subject matter (such as the services to be provided, the nature of the product to be transported, the location of the mining project, the type of equipment and labour used in performing the services).

A determination of whether an alleged FM event fits into the specific FM events articulated in the contract must be determined on a case-by-case basis. Generally speaking, the courts will give words in a contract their plain and ordinary meaning. Accordingly, if a party wishes to rely on a specific FM event, the ordinary meaning of that provision must contemplate the alleged FM event. Mining suppliers should carefully consider what events and circumstances relating to their ability to perform the provisions of a supply contract (or other related contracts) should be included in the FM clause, and should stipulate any event that they are concerned might potentially hinder or prevent the performance of their obligations under the contract. To mitigate risk, mining suppliers will want to, at a minimum, also include in their supply agreements the specific FM events contemplated in the related transportation and port agreements that could affect their ability to deliver their product under a supply agreement.

Examples of specific FM events to consider for inclusion in a mining supply contract are:

  • delays, interruptions in, or lack of, transportation or carriers;
  • communication breakdown or malfunction, or breakdown of, or damage or accident to, plant, machinery, equipment or facilities, including transportation, mine, railroad or port equipment or facilities;
  • road closures, impassibility of roads or lack of access to roads;
  • civil commotion, strikes, boycotts, lockouts, war, blockade, revolution or riots;
  • acts of god, fire, flood, adverse weather conditions, tempest, storm, high winds, slides, earthquakes, epidemics, or quarantines;
  • impossibility of obtaining, delay in obtaining, or shortage or lack of, interruptions to or contingencies of transportation, personnel, supplies, equipment, electricity, gas, water, power, fuel or other materials;
  • laws, rules or regulations or acts of government, government restrictions or control on imports;
  • inability to obtain or renew a permit or license

A lack of funds by a party should never be an FM event.

The parties should also consider whether after a certain period of delay or non-performance as a result of an FM event, either party should be permitted to terminate the contract (i.e. 60 days, 6 months). The applicable period of time that the FM event needs to last in order to permit a termination of a specific contract will depend on the subject matter of the contract and a consideration of whether a delay in or non-performance of obligations for that period of time would materially affect the substance of the contract such that either party should be permitted to end the relationship. In many cases, however, the early termination of a contract as a result of an FM event may not be an appropriate remedy, particularly for an exclusive or long-term contract that otherwise has few termination provisions available to the parties.

It is important to note that an FM clause does not actually amend any contractual provisions such as a liquidated damage payment clause or reduce guaranteed volume delivery requirements and the requirement to pay related deficiency payments. If the parties wish for those provisions not to apply or to provide for some type of reduction in guaranteed volume deliveries in a year as a result of an FM event, the contract should specifically state that and provide a mechanism for how those guaranteed volume deliveries are to be adjusted in the event of an FM event.

As a FM clause provides a “force majeure right”, in order to properly exercise that contractual right, an invoking party should strictly comply with the FM event clause regarding what exact steps are required to be taken by that invoking party to rely on it in the first instance (and in order to continue to rely on it) and the specific notice provisions set out in the contract must be strictly followed.