‘Force Majeure’ Clauses In Commodity Sale Agreements – What Should You Be Thinking About?

We have written previously about force majeure clauses in the context of market disruption events that have occurred or were anticipated (See previous alerts, 11-027, 11-007, 10-189 and 09-005, on force majeure). Lawyers spend a great deal of time analysing the impact of such events on their clients' contractual arrangements. This article seeks to suggest some ways in which in-house legal and business teams might treat force majeure as a moving issue that merits regular evaluation of what a contract should say, in anticipation of the unanticipated. In particular, it seeks to identify some guidance points as to what a review of a force majeure regime should focus on, including factors relating to the parties themselves, the nature of the trade and the jurisdiction that will determine its application. We focus here on the laws commonly chosen to govern transactions made in three key trading centres namely London/Geneva, Singapore and Houston.

The importance of tailoring

Some events are clearly easier to predict than others. Following the return of major flooding to Queensland's coal transportation network in January this year - the second time in two years - those buying or selling coal from the eastern Australian ports will no doubt be thinking carefully about how their contracts react to such interruptions. The developing infrastructure in Indonesia and seasonal rains combine to make disruptions a regular and predictable event. Political tensions in West African countries make disruption to oil exports and "declarations" of force majeure at export terminals somewhat commonplace, whilst socio-economic factors in South America have led to restrictions on the flow of agricultural commodities that have become the norm over the past few years. When considering how these types of events impact business flows we recommend that clients consider some of the less-visible considerations.

1. The nature of the contract

   The form of a force majeure clause included in a contract for the sale of goods may often be based, at least in part, on template wording derived from the standard conditions of sale of one of the parties or an industry standard trading agreement. That wording may be intended to apply across a spectrum of transactions envisaged by those who prepared the templates at the time that the templates were drafted. Whilst a clause that is drafted in this way may be a good starting point, it should not obviate the need to think critically about the...