The construction industry is particularly prone to difficulties in the interpretation of contracts given the range, volume and complexity of documents used. Thankfully though, we need not apply special rules in the interpretation process. In a suitably seasonal gift to the legal industry, Her Honour Justice Chu handed down a judgment in the Hong Kong Court of First Instance on 24 December 2009 that addressed the fundamental rules that all clients and their advisers would do well to remember.

Yen Wing Choi & Lee Shui Chi Shirley & Ors v Match Power Investments Limited (HCA 1829/2005, Unreported)

The plaintiffs were purchasers of various units in a Kowloon property development known as One Beacon Hill. Each unit came with the option of purchasing a car parking space for HK$1.00. Not long after the execution of the assignments for their units, the defendant's staff asked the plaintiffs to go to the defendant's office to select a car parking space. They were told to bring along their option letter (which they did).

After selecting their respective car parking spaces, the plaintiffs returned the option letter (which was stamped 'cancelled' and returned to them) and signed several documents. These included the provisional agreement for the purchase of the chosen car parking space, a document reminding them of their right to instruct independent solicitors on the conveyance, and a third document called the Settlement Agreement.

The manner in which the terms of the Settlement Agreement ought to be interpreted became a key preliminary issue. The plaintiffs claimed that the development had been completed late and that the defendants accordingly owed them interest and damages under the terms of their formal purchase agreements. The defendants pleaded that under a clause in the executed Settlement Agreements these plaintiffs had fully and finally settled their claims against the defendants when exercising their option to purchase the car park space.

Summary

The judge applied the accepted rules of contract interpretation, which we set out below. On the facts before her, the judge ruled that a reasonable person, having all the background knowledge and in the situation of the plaintiffs at the time when they were at the defendant's office, would have understood the words "full and final settlement of all the purchaser's rights relating to the purchase of the property" to cover only the exercise of the option to purchase the car park space. A reasonable person would not have thought that the words were also intended to settle their claim for interest and damages arising from the late completion of the whole development.

General Rules of Interpretation

General Principle

A court is required to ascertain the common intention of the parties. It will assess objectively what a reasonable person would understand the contract to mean having regard not only to the text, but also the surrounding circumstances known to the parties at the time of the contract, and the purpose and object of the transaction. This may differ from the subjective understanding, or motives, of the parties themselves.

Use of evidence of antecedent negotiations and communications

The court must therefore be careful not to use evidence of earlier negotiations and communications to show what the subjective intentions of the parties were. Such evidence of what the parties respectively thought was the effect of their agreement is inadmissible. Nor is evidence admissible of the dealings between the parties and their conduct after the instrument was made.

This is not to say that such evidence will not be admissible at all, as it may be required to prove whether the contract was properly formed (as distinct from its meaning and proper interpretation).

Use of the whole contract

It is the court's duty in construing a written contract to try to discover the objective intention of the parties using the whole of the instrument, since the meaning of any one part of it may be revealed by other parts. The words of every clause must, if possible, be construed so as to render them all harmonious with each other. The contract is not a series of isolated parts, and no provision can arbitrarily be regarded as meaningless.

Where the words are unambiguous

If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable. This holds true even if it may be suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust, and it certainly won't try to make a bargain for the parties. Rather, it must seek to understand what the parties meant by reference to the words that they chose.

Of course, the fact that a particular construction leads to a very unreasonable result will be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties intended it, and if they did intend it the more necessary it is that they made that intention abundantly clear.

Humans frequently convey their meaning unambiguously although they may have used the wrong words. Lord Hoffman said in the leading case of West Bromwich Building Society that the definition of words is '[a] matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean'.

Where the words are ambiguous

If the language is open to more than one construction, the court will prefer that which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, even though the construction adopted is not the most obvious, or the most grammatically accurate.

Departure from the ordinary meaning

The court may depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. But whilst a court should generally let words bear their ordinary meaning, it should also respect the parties' use of words that (as established by evidence) have a technical meaning known to their trade, location or as particularly agreed by the parties.

Commercial construction of the contract

Finally, the court should construe commercial contracts fairly and broadly, without being too astute or subtle in finding defects. Lord Diplock, amongst others, approved of the supremacy of 'business common sense' overly semantic and syntactical analysis of a particular word: a shift from a literal interpretation towards a more commercial approach. This approach should not be limited to documents drafted by businessmen, and should apply also to documents drafted by lawyers.

Individual Rules of Interpretation

The law has also accumulated individual maxims of interpretation – but consider each in light of the general, overarching rules of construction.

• Errors and mistakes of meaning and syntax will be corrected or accommodated to make the agreement in line with the intention of the parties.
• An uncommercial bargain will not be taken to be the intention of the parties without very clear language.
• Print over type, and writing over print – the bespoke, specifically chosen words of the parties will prevail over, say, a printed standard form (unless it says otherwise).
• Inconsistencies – given the temptation to cut and paste, the order of stated obligations in an instrument might not be logically set out in priority of importance. Parties must therefore construe the contract as a whole and deal with inconsistencies without reference to the order or place of the inconsistent clauses.
• Recitals may be resorted to in instances of ambiguity, or considered at any time to evidence the intention of the parties.
• Consider if the Latin 'rule' of contra proferentem applies – namely, that ambiguity in a document will be construed against the party that drafted or put forward the clause in question. Interestingly, Chu J said in Yen Wing Choi that had it been necessary to consider this rule (which it was not), then it appeared 'a classic case for the operation of this rule'. The defendant might have achieved the waiver/settlement it pleaded for by using a simple, clear and straightforward document instead of burying the provision in another document.

Other important rules apply where a 'blank' is left in a material part of a contract. In this circumstance, it may be that the Latin 'rule' of ejusdem generis ('of the same kind') applies.

There are special rules of construction peculiar to local jurisdictions, exemplified by rules relating to exemption clauses and liquidated damages clauses. Indeed in many jurisdictions, terms will be implied by both national and international statute into construction contracts or contracts between employers and professionals. Your solicitors can advise you on all of these.

Conclusion

In Yen Wing Choi the plaintiffs pleaded unsuccessfully on two other possible grounds. Fortunately, in this case the rules of interpretation ensured they were not left disadvantaged.

A new feature of the civil justice reform system came into effect on 1 January 2010, nine months into the revamp. Steven Yip and James Yeung report that the introduction of mediation, as prescribed by Practice Direction 31 ('PD 31'), is expected to have a profound impact on the way parties conduct cases.

Coverage of Mediation

Basically, PD 31 applies to all civil proceedings in the Court of First Instance and the District Court which have begun by writ or through originating summons but were ordered to continue as if the cause or matter had been begun by writ. PD 31 does not apply to the proceedings in the Construction and Arbitration List or the Personal Injuries List as these courts have had their own mediation procedures for many years (ie PD31, paragraph 2).

Key to Avoid Losing Costs

If the parties are legally represented, they are required to file a Mediation Certificate with the Court at the same time as the time tabling questionnaire – shortly after the close of the parties' pleadings (paragraph 9).

The Mediation Certificate consists of three parts. Under Part I of the Mediation Certificate, the parties have to state whether they are willing to attempt mediation with a view to settling these proceedings. If the answer to the above question is negative, the parties have to state the reasons why they are not willing to attempt mediation.

Part II of the Mediation Certificate requires the solicitors to sign a statement certifying that the signing solicitor has explained to his/her client the availability of mediation, the respective costs of mediation as compared with the costs of the litigation, and that to the best of his/her knowledge and belief that the information stated in Part I of the Mediation Certificate is true and correct.

Part III of the Mediation Certificate requires the parties to sign acknowledgment that the parties understand PD 31 and the availability of mediation to resolve the dispute instead of litigation. The parties also acknowledge that the information set out under Part I is true and correct.

Mediation Notice

A party (the Applicant) may serve a Mediation Notice on the other party (the Respondent) as soon as the Mediation Certificate is filed (paragraph 10). The Mediation Notice should contain information such as:

• whether the Applicant wishes to attempt mediation to resolve all or parts of disputes
• the mediation rules the Applicant proposes to adopt
• the proposed mediator and the estimated costs of the mediator
• the proposed venue of the mediation and the estimated costs of renting such venue
• the proposed minimum level of participation to qualify as a sufficient mediation attempt 
• the proposed time frame of mediation
• whether the Applicant requests or opposes an interim stay of the legal proceedings pending the mediation process
• whether the Applicant's willingness to pursue mediation is dependent upon an interim stay of proceedings being granted, and
• the proposed payment of fees and costs for the mediation, and whether the same could be recoverable as costs of the proceedings if mediation fails (optional).

In the case Chun Wo Construction & Engineering Co Ltd & Anor t/a Chun Wo-Fujita-Henryvicy Joint Venture v China Win Engineering Limited [2008] HKCU 904, Hon Lam J looked at the question as to whether costs of the mediation can be recovered by the successful party as costs in the proceedings. Hon Lam J held that costs of mediation are generally costs incidental to the proceedings and therefore recoverable by the successful parties. This is however subject to any prior agreement between the parties as to costs of mediation. In this case, the parties adopted the HKIAC Mediation Rules, which provide that each party shall bear its own costs regardless of the outcome of the mediation or of any subsequent proceedings. Hon Lam J therefore found that the parties are bound by their prior agreement on the costs of mediation.

One may take from this case that if a party intends to recover costs of mediation at the conclusion of the proceedings, the relevant costs of mediation clause must be expressly ousted from the mediation rules when the party fills out the Mediation Notice.

Mediation Response

Within 14 days of receiving the Mediation Notice (or such other time as the parties may agree or as the Court may direct), the Respondent should serve a Mediation Response (paragraph 11). Basically, the Respondent should make corresponding responses to the proposals stated in the Mediation Notice. If the Respondent does not agree to any particular items contained in the Mediation proposal, the Respondent should set out his/her own counter proposals in respect of such items for the Applicant's consideration.

It is important that the Respondent should seriously consider the mediation proposal and avoid rejecting the proposal without a convincing reason. In a recent case (Leung Catherine v Tary Ltd [2009] HKEC 1669), the defendants had rejected the plaintiff's invitation to mediate on the basis that "the proceedings had reached an advanced stage" and "the issue of liability is in dispute". The Honourable Mr Justice Fung rejected both arguments and reiterated that an unreasonable refusal to attempt mediation, especially when the other party has made the request, is relevant conduct in litigation in exercising discretion on costs. The consequences of unreasonably refusing to mediate will be discussed in the latter part of this article.

Mediation Minute

The parties should attempt to resolve any differing proposals and record the agreement in a Mediation Minute. The Mediation Minute should be signed by both the Applicant and the Respondent or their respective solicitors (paragraph 12).

Court Directions

If the parties cannot resolve their differences during mediation, they can either make a joint application to the Court for directions or apply individually. The Court is empowered to resolve the differences between the parties as appropriate.

It should be noted that the Court cannot force a party into mediation if that party is not prepared to mediate. The Court is only empowered to order directions as to the logistics of the mediation such as the venue, dates and minimum level of participation etc (paragraph 13).

Interim Stay of Proceedings

In appropriate circumstances, the Court may order an interim stay of proceedings for the purpose of mediation. Having said that, any interim stay ordered should avoid disruption to the milestone dates and postponement of the trial dates (paragraph 16).

Where One or More Parties are Not Legally Represented

The Court may, upon application of either party or by its own motion, give directions that the parties should follow the procedure above to mediate with necessary modifications (paragraphs 18-20).

Unreasonable Failure to Mediate

One of the key features of the introduction of mediation in PD 31 is the costs consequences for parties who unreasonably refuse mediation.

It is expressly stated in the Practice Direction that in exercising its discretion on costs, the Court takes into account all relevant circumstances. This includes any unreasonable failure by a party to engage in mediation where established by admissible materials. Legal representatives should advise their clients of the possibility of the Court making an adverse costs order where a party unreasonably fails to engage in mediation (paragraph 4).

It is expressly stated that the Court will not make any adverse costs order against a party who has engaged in mediation to the minimum level of participation agreed to by the parties or directed by the Court prior to mediation (paragraph 5).

The Court will also not make any adverse costs order if a party has a reasonable explanation for not engaging in mediation. Active 'without prejudice' settlement negotiations, or other forms of engaged alternative dispute resolutions (ADR), may provide for reasonable explanations. Although if such negotiations have broken down, the parties should consider the appropriateness of mediation (paragraph 5).

The UK Court of Appeal decision in Halsey v Milton Keynes General NHS Trust (2004) provides some guidance on what is considered "unreasonable" in the eyes of the Court. The case states that all circumstances need to be considered when determining if a party has unreasonably refused to mediate, including:

• the nature of the dispute
• the merits of the case
• whether other methods of settlement have been attempted
• whether the cost of mediation is disproportionately high
• whether mediation will cause delay to the trial, and
• whether mediation has a reasonable prospect of success.

For cases listed in the Construction and Arbitration List (where Practice Direction 6.3 applies), it is stated clearly that the court will use its discretion in deciding what constitutes an unreasonable refusal to mediate, however it will not take into account:

1. what happened during the mediation
2. why the mediation failed, or
3. whether any failure in the mediation may be ascribed to unreasonable conduct by any party.

There is no such section provided in PD 31, however it recognises that the Court will only look at admissible evidence in determining the reasonableness of a party which refuses to mediate. In other words, the Court will not look into evidence protected by legal profession privilege or without prejudice communications between the parties (paragraph 6).

Conclusion

Since 1 January 2010, it has become essential that all parties seriously consider attempting mediation, unless there are strong and compelling reasons not to. In that case, it would be prudent for the legal representatives of the party refusing mediation to set out clearly the reasons for not being willing to mediate. This will invariably be an important element that the Court will take into consideration when the issue of costs arises.

To avoid the awkward situation where you win the case but lose the costs, it is important to treat any mediation proposal put forward by your opponent very seriously.

James Yeung, Senior Associate
T: +852 2841 6886
james.yeung@minterellison.com

The phrase 'subject to contract' is commonly used in the construction industry. Due to such reasons as time constraints and the industry's liking for a 'practical' approach, in practice instructions are often given to commence work subject to the entering into of a formal agreement.

In RTS Flexible Systems v Muller [2010] UKSC 14 (10 March 2010), the English Supreme Court ruled that even where terms in a letter of intent were stated to be "subject to contract", it is possible for the subsequent conduct of the parties to legally bind them to an agreement without having executed a formal contract as intended.

This case provides an informative reminder of the basic principles of contract law on binding obligations. As is almost always the case, it is necessary to examine the underlying facts and the parties' conduct in each case to determine whether or not a legally binding agreement has come into existence.

Negotiations can form basis for binding contract

In RTS, the parties entered into negotiations for RTS to supply and install automated packaging equipment for Muller. They had intended to enter into a detailed written contract to set out all the terms for the supply of equipment and carrying out of the work. The terms however were still un-finalised when it was agreed that work should commence.

In February 2005 Muller sent RTS a letter of intent, with RTS writing back the following month to confirm that it had started work subject to Muller accepting two points (subsequently agreed to). It was common ground that the parties entered into a contract based on these letters (the LOI Contract), the purpose of which was to enable work to begin on agreed terms.

The LOI Contract provided, amongst other things, for the parties to finalise, agree and sign a contract based on Muller's standard terms known as the MF/1 terms, and for the LOI Contract itself to expire on 27 May 2005. However, work continued after this date prior to the parties finalising the terms of the formal contract.

Amongst other factors, the LOI Contract provided for the whole agreed contract price and not just the price of the works to be carried out during the length of the LOI Contract.

RTS were provided with the first draft of the contract in mid-March 2005. Negotiations ensued, culminating in a final draft including all of the agreed terms in early July 2005. Amongst these was the term that the 'Contract may be executed in any number of counterparts provided that it shall not become effective until each party has executed a counterpart and exchanged it with the other' (Clause 48). Some variation to the terms of the contract were agreed in August 2005. No contract was ever signed.

The trial judge accepted Muller's argument and found that after the expiry of the LOI Contract, the parties reached full agreement on the work to be done "for the price that they had already agreed", and a new contract was concluded. He held that it was unrealistic to suppose that the parties had not intended to create legal relations. The contract however did not incorporate the MF/1 conditions because, among other reasons, the counterparts clause (Clause 48) prevented the incorporation of the MF/1 conditions into the contract unless and until executed by each party.

RTS appealed and the Court of Appeal agreed that no final agreement had been reached as to all the essential terms and – on the wording of Clause 48 – any contract (not just the MF/1 conditions) was prevented from coming into existence until a written agreement was executed. It held that the trial judge misinterpreted Clause 48: the definition of 'Contract' in that clause did not apply to just the amended MF/1 conditions, but also prevented any contract from coming into existence until the parties had entered into a written agreement. Muller appealed to the Supreme Court.

The Supreme Court reversed the Court of Appeal's decision and ruled that a binding contract was reached on terms even broader than those found by the trial judge, namely, that the agreed terms were those of the final draft contract of 5 July based on the amended MF/1 conditions, and that the parties had by conduct waived the requirement for formal execution of the contract. On the other hand, the issues outstanding subsequent to 5 July were not essential matters requiring agreement prior to a binding contract but only variations to the already binding contract. The Court paid much weight to the fact that the price had been agreed and that extensive work had been undertaken. (Decisions of the United Kingdom courts, though not binding, are highly persuasive to Hong Kong courts.)

Exercise caution if proceeding with work before formal contract

Regarding letters of intent, an issue which can give rise to confusion is whether or not a binding contract has come into being. For a relatively less complicated agreement such as a simple sale and purchase of goods, a binding contract would clearly have been reached through the parties' conduct in supplying the goods and making payment (even if only partial payment). In RTS, the Supreme Court found that essentially all the terms were agreed between the parties and substantial work was then carried out. Even though the agreement was subsequently varied in important aspects (by the events of 25 August), that only constituted a variation of the already binding contract. The fact that the terms of the agreement were intended to be formalised in a later document was inconsequential. The parties had by their conduct waived such earlier agreement to execute a formal contract.

The effect of the words that an agreement is 'subject to contract' could therefore depend largely on the subsequent conduct of the parties. The Supreme Court recognised that in a case where a contract is being negotiated subject to contract and work begins before the formal contract is executed, it cannot be said that there will always or even usually be a contract on the terms that were agreed subject to contract. It stated that the court should not impose binding contracts on the parties which they have not reached and all will depend upon the circumstances.

Therefore, the words 'subject to contract' may merely show that there is an intention of the parties for the agreement reached thus far to be binding, but do not intend for it to be already binding. At the very least, the statement would not serve a party's claim that no binding agreement can be formed in the future.

An important reminder is that it is not only written words and negotiations that determine whether or not a binding contract exists, but also each party's conduct.

Instructions to begin work before a final and comprehensive agreement has been reached should therefore be treated with caution. It is necessary to take into account the extent of the work instructed and whether or not carrying out such work could reasonably amount to acceptance by conduct of terms still being negotiated. It is a matter of extent and reasonableness.

The decision by the Supreme Court also serves as a reminder to use clear words, and to take care when drafting a letter of intent and all negotiation correspondence. A clear statement along the lines of 'for the avoidance of doubt, the commencement of any work and partial payment therefor does not constitute the acceptance by either party, or the formation, of a binding contract' should assist in making the position clearer if the parties opt for a non-binding arrangement in the meantime.

Careful drafting of contract documents and correspondence in relation to what is agreed and not agreed would help prevent unintended consequences and disputes. As Lord Clarke, delivering the unanimous judgment of the court of five justices, remarked: 'the moral of the story is to agree first and to start work later.'

Malcolm Chin, Associate
T: +852 2841 6870
malcolm.chin@minterellison.com

The recent volcanic cloud and flight bans in Europe remind us of the damaging impact that mother nature can have on businesses. Even after the ash has cleared and flights are fully operational again, the extent of the disruption caused by the ash clouds may linger for many years in the form of contractual disputes.

The impact of flight delays on ordinary people's lives has been widely reported in the media, yet it may take weeks or even months before we can start to evaluate the impact on businesses around the world. Food shipments have perished, production lines have been suspended and sporting events have been cancelled or postponed. The costs associated with these incidents are significant. The knock-on effects, including delivery delays down the supply chain, revenue losses and rescheduling costs for postponed events (e.g. revised marketing materials) are even more significant. This begs the obvious question – who is going to pay?

Clearly, a volcanic eruption in Iceland is the furthest thing from anyone's mind when drafting a contract. There are, however, a number of contractual and legal mechanisms that may be of assistance to manage exposure in these most unforeseen circumstances.

Contractual Force Majeure

In common law jurisdictions such as Hong Kong, a force majeure clause (if your contract has one) is your most likely saviour. While each clause will be different, they usually have the following elements that will need to be established if they are to be relied on:

(a) the first step is to establish that a 'force majeure event' has occurred. What constitutes an event is always different, but generally speaking events that are beyond your reasonable control will be covered. Therefore, flight delays caused by a volcanic eruption are likely to be force majeure events. If your definition of a force majeure event references 'acts of God', a volcanic eruption is likely to fall within this definition

(b) it is not enough that a force majeure event has occurred. You must prove that the event has prevented, hindered or delayed your ability to perform, either partly or wholly, your obligations under the contract, e.g. the flight delays caused by the ash cloud have delayed delivery of key components in a production line, which can not be obtained from alternative sources. You must be able to show that performance of the contract has become physically or legally impossible and not merely difficult or unprofitable

(c) you will need to prove that your non-performance is due to circumstances beyond your control. While in this case no one can be expected to have controlled the volcano, relief may not be available if a 'reasonable and prudent person/operator' would have taken pre-emptive steps that would have avoided the impact of the force majeure event. It is important to note that ordinarily you will not be relieved for events brought about by your own negligence or wilful default

(d) it is important that you follow through with the mechanics of the force majeure clause, such as giving the proper notice of the occurrence of a force majeure event to your counterparty

(e) another important factor is ensuring that you take reasonable steps to mitigate the consequences of a force majeure event. If this obligation is not expressly stated in the contract, it is likely to be implied by a court of law, and

(f) force majeure clauses will generally grant you relief from your obligations under a contract only to the extent that performance has been prevented or delayed by the force majeure event. Obligations not affected will need to continue to be complied with as required by the contract.

While the above elements are common to many clauses, it is necessary to consider the exact terms of each clause to determine whether force majeure relief is available under a particular contract.

Other protection

Apart from contractual force majeure, the following options are also worth considering when unpredictable circumstances arise:

(a) taking advantage of any other contractual provisions, e.g. specific termination rights, termination for convenience clauses and rights to delay satisfaction of unsatisfied conditions precedent

(b) does the jurisdiction in which you are operating or the governing law of your contract provide any form of statutory relief? For example, the PRC and other civil law jurisdictions (e.g. France) have statutory force majeure regimes that may provide relief even if your contract does not protect you

(c) common law relief such as frustration of contract. Frustration will only serve to terminate the contract and will only be applicable where a contractual obligation has become incapable of being performed, not just delayed or more difficult or expensive, and

(d) whether your insurance coverage will provide protection against costs and losses suffered by you or your customers as a result of your inability to perform your contractual obligations.

Moving forward

When the ash settles, the events of the last month or so will bring into sharp focus the terms of companies' standard form contracts and law firms' precedents, as unfortunately many force majeure clauses and other contractual provisions will be found wanting in these unpredictable but financially damaging circumstances.

Against this backdrop, we recommend that clients and law firms alike pay greater attention to force majeure clauses when drafting and negotiating contracts. In the most extraordinary of circumstances, the force majeure clause is likely to be your greatest tool when managing risk, losses and costs. In particular:

(a) give careful consideration to the definition of a force majeure event and what should and should not fall within this definition. This definition should always be tailored to the particular circumstances of each transaction and particular consideration needs to be given as to whether a force majeure event affecting another person in your supply chain should constitute force majeure in your contract

(b) consider the extent to which a party must have taken appropriate pre-emptive measures to protect against the force majeure event, in order to be able to rely on the clause

(c) discuss with your counterparty what happens in the event of a force majeure event and include these consequences in the force majeure clause, including the circumstances in which you can terminate the contract

(d) if you are the 'middleman' in a transaction, it is particularly important to ensure that the terms of the force majeure clause negotiated with your supplier is adequately reflected in the force majeure clause that is negotiated with your customer, otherwise known as 'back to back' obligations. If this is not the case, you may find that your supplier is excused from performance of its obligations but that you cannot invoke the force majeure provisions of your contract with your customer. In this situation, you will be liable to your customer as a result of circumstances beyond your control and without recourse to your supplier

(e) if you are sourcing goods from a particular supplier to satisfy a contractual obligation, we recommend that your contract specify that you are only required to source the goods from that supplier. In the absence of such a clause, if your source of supply fails, your force majeure clause is unlikely to protect you. In these circumstances, you may be required to source the goods from a different source, even if this is on unfavourable terms, e.g. at an increased price

(f) in the context of supply of goods contracts, include an allocation clause. It is inevitable that when the force majeure event is resolved a supplier's immediate ability to supply will be limited and it will have multiple customer obligations to fulfil. An allocation clause will provide a clear and transparent mechanism (e.g. pro-rata or priority treatment for valued customers) in which to rationalise limited supply between each customer, and

(g) ensure that there are proper notification provisions included in your force majeure clause. The last thing you need when a force majeure event has disrupted your business is to be trying to determine how and when you should give notice to your counterparty or, worse still, to lose the force majeure protection because you don't comply with the formalities.

The Icelandic volcanic eruption caught many people off-guard. While this article discusses some of the legal options available and the importance of obtaining proper contractual protection moving forward, people and companies should not lose sight of the importance of maintaining commercial relationships. In these difficult circumstances, it is those relationships that will inspire the individuals involved to try as best they can to reach acceptable outcomes for all parties involved.

Thomas Keenan, Associate
T: +852 2841 6888
thomas.keenan@minterellison.com