press release
Credit crunch no excuse for reneging on contract promises warn lawyers
15 February 2010
Businesses who are struggling to secure affordable bank credit are
advised not to use the recession as a reason for getting out of an
unprofitable contracts according to commercial contract experts at
Browne Jacobson.
The warning follows the recent High Court case, Tandrin Aviation
v Aero Toy Store (ATS), in which the defendants tried to pull out
of a contract to buy an aircraft on the grounds that the global
recession, which had affected their ability to obtain funding to
complete the purchase, was a force majeure event. The High Court
judge disagreed.
Force majeure is a common clause found in commercial contracts
which can free one or more parties from their legal obligations
when an extraordinary event or circumstance occurs which is beyond
their control. Events include wars, natural disasters, public order
disturbances and government actions.
According to a recent survey by the Federation of Small
Businesses 43% of the 1200 businesses taking part said cash flow
was a major obstacle to achieving business objectives, and 23%
cited problems with obtaining affordable finance.
Richard Nicholas, a partner in the commercial team at Browne
Jacobson, said:
“We may be officially out of recession but many businesses are
still struggling to obtain affordable funding to keep their
operations afloat. So it’s not surprising that some may be tempted
to use clauses in their contracts to free themselves from their
legal obligations.
“It seems only right that force majeure should not include
economic downturns, particularly where it is possible for the
parties to deal with a lack of funding another way such as
incorporating a “hardship” clause or to make the deal dependent
upon the purchaser first obtaining funding.
“This case makes it clear that the recession should not be
treated as a force majeure event. It is rather a challenge that
buyers and sellers must face together on their own terms.”