Economic circumstances are not an act of God unless you
say so, says Greg Standing of Wragge & Co.
Go deeper with GlobalData
Sometimes, equipment is leased to enable the lessee to perform
an underlying contract. The fact that performance of the underlying
contract has become difficult or less profitable, does not excuse
the lessee from continuing to perform its part of the leasing
agreement or from liability if it fails to do so.
If a leasing agreement has been
drafted with it, a party seeking a way out of the agreement without
being in breach of it, may look to a force majeure clause for
assistance.
Such clauses typically release (or
suspend) one (or both) party from its contractual obligations (in
whole or part) without liability to the other party for loss that
may result, upon the occurrence of certain unexpected events
outside the party’s reasonable control.
Force majeure events are usually
defined in the contract by way of a non-exhaustive list including
industrial action, supply chain problems or subcontractor’s
default.
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By GlobalDataThey should be tailored to the type
of contract involved and the type of events likely to happen, and
are often combined with catch-all wording such as “other events
beyond the reasonable control of the parties”.
It is this generic terminology that
the party attempting to extricate itself from the contract may
latch on to, where changes in economic or market conditions have
led to the contract being uneconomical to perform.
In Tandrin Aviation Holdings
Ltd v Aero Toy Store LLC (2010), the purchaser of an aeroplane
sought to rely on a force majeure clause when, following the
economic collapse of the world’s financial markets, it could not
obtain financing to complete the purchase.
The relevant wording in the clause
relied on was “or any other causes beyond the seller’s reasonable
control”. The specific force majeure events that preceded that
wording, included act of God, war, insurrection or riots.
Importantly, the wording provided that the event had to be beyond
the seller’s control, not the purchaser’s.
While the generic wording was not
limited by the specified force majeure events, the court held that
it was telling that those specific events were not even remotely
connected to market conditions or the financing of the transaction.
The court concluded the defendant had not shown that the extreme
economic conditions were a force majeure event that could excuse
its performance of the contract.
Things to
consider
Whether a force majeure clause in a
contract is triggered, and what the consequences are, will depend
upon the wording of the clause.Generally, a change in economic
circumstances affecting the profitability of the contract, or
ability to pay the instalments, is not seen as a force majeure
event.
If parties intend it to be, the
clause should say so specifically.
Greg Standing is a partner in
Wragge & Co’s finance litigation team
