Commercial Disputes Alert
21 April 2010
Authors:
Icelandic Volcano Eruption
Peter Morton
peter.morton@klgates.com
+44.(0)20.7360.8199
Jane Harte-Lovelace
jane.hartelovelace@klgates.com
+44.(0)20.7360.8172
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
The closing of international airspace in Europe and beyond by reason of the
eruption of the Eyjafjallajökull volcano in Iceland has caused massive disruption
and chaos and is likely to do so for some time. The effects have been felt not
merely directly by travellers who have found themselves stranded all around the
globe, looking for accommodations and alternative means of transport but by many
businesses that are reliant, directly or indirectly, on air travel functioning as
normal, in terms of movement of their goods or customers and maintaining their
supply chain.
We thought it would be useful to provide answers to some of the questions we have
been asked in recent days, both in respect of commercial contracts governed by
English Law and possible insurance implications:
Q: Can I cancel my contract because of the volcanic eruption?
A: You will need to check your contract to see if the reason why you want to
cancel is provided for in a force majeure clause. Such a clause will commonly set
out a series of defined force majeure events. Often there will be specific mention of
an Act of God which would ordinarily cover natural disasters such as a volcanic
eruption. The force majeure clause will then state the consequences of any such
event occurring. Such clauses commonly provide that either party may cancel the
contract without penalty if performance of the contract is prevented by a force
majeure event, as defined.
Q: What is force majeure?
A: It is a generic term for events beyond the control of the parties to a contract
which prevent, delay or hinder their ability to perform the contract. The term has
no specific legal meaning and for it to have any effect, parties to a contract need to
define those events which they agree constitute "force majeure".
Q: What is the effect of invoking a force majeure provision?
A: It depends on the terms of the provision as to whether one (or both) of the
parties are excused from the performance of the contract in whole or in part, or are
entitled to suspend or defer performance of the contract. If a party wishes to rely on
an event of force majeure as a reason for non-performance of the contract, in most
cases the onus is on that party to demonstrate that it is prevented, delayed or
hindered from performing the contract because of an event of force majeure (as
defined) and that there are no reasonable steps that could have been taken to avoid
or mitigate the event or its consequences.
Q: Are force majeure clauses enforceable?
A: Like all contractual terms, they can be relied upon if properly drafted. The more
clear, unambiguous and comprehensive the definition of force majeure and the
description of its consequences, the less scope there is to argue that the clause is
unenforceable. Ordinarily, the clause includes a general definition of force majeure
and a non-exhaustive list of specific circumstances which materially affect the
performance of the contract. Typical events that are listed as constituting force
majeure are Acts of God, storm, flood, fire, war/war-like operations, terrorist
activity and civil unrest.
Commercial Disputes Alert
Q: Can I keep or get back money that I have
spent on a contract terminated for force
majeure?
A: Again, it depends on the terms of the contract,
which should state the consequences of an event
of force majeure. Typical remedies are that (i) the
contract is cancelled and all sums paid by one
party should be fully or partially returned; or (ii)
performance of the contract is postponed to a
future date; or (iii) there be an independent
assessment of the apportionment of monies by a
nominated expert in the absence of agreement
between the parties.
Q: What if the contract does not have a
force majeure clause?
A: In the absence of a force majeure provision,
the legal doctrine of frustration may apply so as
to terminate the contract. Under English Law, a
contract is frustrated when, after the contract is
concluded, performance becomes impossible or
something radically different from that
contemplated by the parties at the time they
entered into the contract.
Where a contract is frustrated, all sums paid to
any party under the contract prior to
the frustrating event are recoverable, subject to
the other party's right to retain an amount for
expenses incurred in performance of the contract.
As a result, there is every incentive for parties
making a contract to incorporate a force majeure
clause. An express clause builds in a degree of
certainty. It guards against the possible
application of frustration which can produce an
arbitrary result. It is also open to the parties to
specify what is to happen in particular situations.
Q: Does insurance offer me/my company
protection from the consequences of the
Icelandic volcanic eruption?
A: The most common source of available
coverage for most businesses is likely to be first
party property insurance which is often
supplemented by business interruption
cover. The potential difficulty is that business
interruption cover is often linked to and
dependent on some form of physical damage to
the insured property. However, some policies
include additional forms of cover which are not
dependent on physical damage. For example,
some policies have contingent business
interruption cover which applies as a result of
interruption to the business of a supplier or other
business partner. Some policies have civil
authority cover which applies where there is an
order from a government authority which
interferes with normal business operations. The
specific policy wording will need to be
considered carefully to determine whether there
is likely to be any applicable cover.
It is worth considering whether there are any
other forms of policy which might respond.
Where losses have been caused by additional
costs of being stranded, the company's travel
policy may be triggered. Do not accept, without
a review of the particular policy wording, that
claims arising from the eruption are excluded as
has been widely reported in the press. Check
generally if you have any form of contingency
cover which could respond to your particular
situation.
It is certainly worth reviewing policies carefully
and putting in precautionary notifications. This is
particularly important as some policies have
stringent time limits for the notification of losses
and delay in notification may enable insurers to
deny policy cover
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21 April 2010
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