Corporate Focus - June 2010

The force majeure was not strong with this one – force majeure clauses and the credit crunch

It goes without saying that 2009 was a tough year for business in the UK. The global recession hit the commercial world hard, leaving many businesses unable to control debt levels or honour agreements with other parties. While insolvency may have proved an inevitable consequence for some, one particular company attempted to avoid this eventuality by relying on the terms of the contract to render it void, and thus avoid performance of their contractual obligations.

In Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm), Tandrin (‘T’) agreed to sell a new jet aircraft to Areo Toy Store (‘ATS’) for US$31.75m. A deposit of US$3m was paid into an escrow account with the balance to be paid upon deliver of the aircraft. However, ATS refused delivery of the aircraft and therefore withheld the payment of the remaining balance. T decided to terminate the agreement and sought recovery of the deposit.

ATS claimed that the economic downturn had resulted in an “unanticipated, unforeseeable and cataclysmic downward spiral of the world's financial markets” and this had the effect of triggering the force majeure clause contained in the agreement between the two parties.

For those of you who are unfamiliar with the operation of the force majeure clause, then in its simplest form, it excuses a party from liability if some unforeseen event beyond the control of the party prevents it from performing its obligations under the contract. The requirement for performance is usually postponed or suspended for a limited period of time, and may require notice in order to rely on the contractual clause. Properly drafted force majeure clauses should list the events which both parties feel will excuse delay of performance (e.g. industrial action, acts of God, terrorism and civil commotion).

The Judgment

It was held that ATS could not excuse their obligation under contract by relying on the force majeure clause. It was said that it was well establish in English law that a change in economic circumstances which alters the financial attractiveness of the contract or makes its performance more onerous, will not trigger the application of a force majeure clause.

In reaching this decision the court turned its attention to Thames Valley Power Ltd v Total Gas & Power Ltd [2006] 1 Lloyds's Rep. 441, where the defendant's attempt to rely on a force majeure clause was similarly rejected.

It must not be forgotten that the operation of a force majeure clause depends upon its construction. In the immediate case the list of events provided for in the clause did not include a financial crisis (or similar description). Therefore, such an event could not act as a trigger. While there is nothing to prevent parties mutually agreeing to have such a provision in the clause to protect them in the event of a future global recession, it must be borne in mind that the wording must be as clear and concise as possible.