Key Contacts: Angelyn Rowan – Partner | Michael Cahill – Partner | Shane Kelly – Associate |
The outbreak of the recent conflict in the Middle East has once again exposed the vulnerability of global supply chains, shipping routes and energy markets. This comes a few short years after the global supply chain upheaval caused by the effects of the COVID-19 pandemic and the Russia-Ukraine war.
Disruption in the Strait of Hormuz, a critical artery for global trade, in particular in the energy and chemicals sectors, both of which supply key materials to the construction sector has already led to delays, increased costs and market volatility across the globe.
Against that backdrop, many Irish businesses are revisiting an often-overlooked contractual provision: the force majeure clause.
Under Irish law, force majeure is not a standalone legal doctrine. Its effect depends entirely on the wording of any given contract. In practice, clauses addressing force majeure are designed to excuse or suspend contractual obligations where unusual or unforeseen events occur that are outside of a party’s control and prevent or hinder the performance of a contract. A typical non-exhaustive list of examples includes the outbreak of a war, acts of terrorism, the imposition of sanctions or an embargo by one country against another and the occurrence of natural disasters such as an earthquake.
Whether the effects of the current conflict in the Middle East trigger an event of force majeure under a particular clause will largely depend on the wording of the clause and a careful examination of the wording is required. Matters for consideration would include:
- Does the force majeure clause in the contract expressly include “war”, “hostilities”, “sanctions”, “supply chain disruption” or words with similar effect?
- Has the performance of the contract become impossible, been hindered or merely more expensive or inconvenient (the latter will generally not be sufficient for sustaining a force majeure claim); and
- Has the affected party taken reasonable steps to mitigate the impact of the event?
A party seeking to rely on a force majeure clause must demonstrate a clear causal link between the triggering event and its inability or material difficulty in the performance of its obligations under a contract (i.e. the force majeure event must be the direct and proximate cause of non-performance).
The current conflict may have particular implications for Irish businesses involved in international trade, manufacturing, transport, construction, pharmaceuticals, technology and energy-intensive industries generally. Delays in shipping, the imposition of sanctions and fuel price volatility could all give rise to contractual disputes in the months ahead.
Employers, contractors and, indeed, sub-contractors should now be proactively reviewing their commercial agreements to identify:
- The scope of existing force majeure clauses and the specific wording used;
- Notice requirements and timing obligations (these are usually applied strictly); and
- Termination rights.
Where a party successfully invokes force majeure, its obligations under a contract may be suspended and/or it may be granted an extension of time or relief from delay damages. The lessons from the effects of the COVID-19 pandemic and the outbreak of war in Ukraine remain relevant in that careful drafting of contractual provisions can significantly reduce commercial exposure.
Another area of focus is the drafting of price adjustment clauses in construction contracts. Such clauses would affect any increases in the costs of fuel and materials in particular.
For many businesses, the question is no longer whether geopolitical events can affect contractual performance but whether their contracts are prepared for when they do.
Philip Lee LLP’s Construction & Projects Group are available to assist with any queries in relation to force majeure clauses and their impact on the construction sector.
