COVID-19 demonstrated that unforeseen events can and will occur that significantly affect businesses across all industries. Such events not only have the capacity to impact business financial performance but may also have consequences on all parties’ contractual rights and obligations in business dealings.
There may have never been a better example of extenuating circumstances making it impossible to perform a contract than the COVID-19 pandemic. Examples range from hospitality venues being unable to operate due to public health directions to cruise ships and airlines facing restrictions on permissible travel.
More recently, extreme flooding in New South Wales and Queensland and the war in Ukraine are also events causing far reaching consequences on a range of business dealings, both domestically and internationally. These types of events may give rise to the impossibility of fulfilling obligations under a contract. Force majeure clauses in contracts will assist in ensuring you are not liable for this impossibility.
Force majeure is derived from French, meaning superior or overwhelming force. Accordingly, force majeure is the risk that the performance of a contractual obligation may be delayed or prevented by an extraordinary event or circumstance beyond the control of the parties.
The underlying principle is that when certain events occur outside a party’s control, that party is excused from, or entitled to, suspend performance of all or part of its obligations under the contract. That party will not be liable for failure to perform the obligations to which it is otherwise bound.
Force majeure is a contractual right, not a statutory or common law protection. This means that a party’s right to avoid its legal obligations under force majeure is determined by provisions of the relevant contract between the parties. Generally, most commercial contracts contain force majeure clauses.
Standard force majeure clauses usually contain the following elements:
1. Definition of what constitutes a force majeure event. Typical inclusions are:
(a) Any act of God, flood, bush fire, drought, earthquake, landslide, storm, lightning strike, cyclone or other natural disaster;
(b) Epidemic, pandemic or other public health and safety emergency;
(c) War, threat of or preparation for war, armed conflict, imposition of sanctions, embargo, blockade or breaking off of diplomatic relations;
(d) Sabotage, malicious damage or vandalism;
(e) Nuclear, chemical or biological contamination;
(f) Collapse of buildings, fire, explosion or accident, (other than in the case of a party’s fraud, negligence or wilful misconduct);
(g) Interruption, material reduction in the rate of, or failure of any utility service (other than where the interruption, reduction or failure of that utility service is caused by an act or omission of the party seeking to rely on this clause); and
(h) Any breakage, failure or malfunction of, or accident involving, any plant, equipment, machinery or other facility owned or operated by a party or its related bodies corporate that occurs notwithstanding that the party or related body corporate has taken all reasonable steps to avoid or guard against such an event.
2. Detail of the effect on the parties when the clause is invoked, that is, the relief available;
3. A causation requirement, that is, the force majeure event must have caused the party to be prevented, delayed or restricted from performing its obligations; and
4. Separate obligations on the affected party, for example, to mitigate the effect of the force majeure event by providing notice within a prescribed time or whether performance must be recommenced.
Be it pandemics, extreme weather events, or times of war, it is a real possibility that these types of events may occur more frequently and subsequently interfere with contracting parties’ rights more often.
The exercise of a force majeure clause may lead to some or all of the following effects:
1. Suspension of the contract for the duration of the force majeure event, but the obligations do not go away;
2. Non-liability where once the force majeure clause is triggered, the non-performing party’s liability for its non-performance or delay is removed whilst the force majeure event continues;
3. A right to terminate where the relevant term of the contract provides that the parties may terminate the agreement without liability. This caters for circumstances where a delay may dictate that the performance of the contract is commercially unfeasible.
Where termination of a contract is through force majeure, the loss lies where it falls.
Generally, this means that the obligations already incurred by the parties will remain and the parties will not be liable for any future obligations arising out of the contract.
However, consideration should be given to unfair contract terms under the Australian Consumer Law1, and the common law penalty doctrine, to ensure that any termination of contract through force majeure will not leave the party relying on the clause open to liability.
The COVID-19 pandemic was an example of how events beyond the control of the parties may have significant and lasting affects on businesses, their customers, and suppliers. More recently, extreme weather events such as flooding in New South Wales and Queensland and international events such as the war in Ukraine, also demonstrate contracting parties’ susceptibility to both domestic and international pressures that prevent their contractual obligations from being performed. It is important that consideration is given to such possibilities when contracting, and to be aware of your right to exercise force majeure clauses when such circumstances arise.
If you are a party to a contract that is affected by events beyond your control, to the extent that the contract is unable to be performed, you may have a right to enforce a force majeure clause if such a clause is contained in the relevant contract.
Depending on the particular force majeure clause, the relief available to you will vary from the ability to terminate the contract, to a temporary suspension of the contract, all the while removing any liability for non-performance.
Should you require advice on force majeure clauses in contracts, or your right to exercise a force majeure clause please contact us for a confidential discussion.
1 Competition and Consumer Act 2010 (Cth) Schedule 2.