Force majeure and the new (ab)normal: business resilience into the future

By Stuart Cosgriff, Nick Thomas and Jessica Lighton
16 Apr 2020
Businesses should review their existing force majeure clauses and existing supply chains with a view to building resilience into their practices to address future shifts in what is considered normal and "beyond the reasonable control of a party" under force majeure clauses.

Already in 2020 the world has seen more focus on force majeure than it has for the last few decades (with the possible exception of the Y2K experience). The global COVID-19 pandemic has caused most of this, but in parts of Australia, we have also had an extraordinary drought, an unprecedented summer of bushfires and an episode of flooding rains.

While most of us are considering what existing force majeure clauses and concepts mean, we also need to consider what they mean into the future.

What is force majeure?

Force majeure is not a doctrine recognised under Australian common law or statute. In agreements between commercial parties, their rights and liabilities in respect of force majeure will be addressed in their contract.

Typically, force majeure operates to (whether temporarily or permanently) excuse a party to a contract from performing their obligations due to an event or circumstance which was not foreseeable to, and beyond the reasonable control of, that party. The affected party may be entitled to seek relief from some or all of its contractual obligations under the force majeure provisions of a contract, provided that party was not reasonably able to prevent or overcome the event or circumstance through the exercise of due diligence.

Because force majeure is a creature of contract, how the definition of force majeure is drafted in the contract will affect what events or circumstances will qualify as a force majeure. The contract will also allocate the risk of the occurrence and impact of that event between parties. Definitions may be either exhaustive (i.e. only the matters specifically referenced in the clause can give rise to force majeure) or non-exhaustive (i.e. the clause lists matters as examples, and other unspecified matters might also give rise to force majeure). In either case, most clauses refer to, at minimum, qualifying events such as natural disasters, fire or bushfire, war, invasions, epidemics, or "Acts of God".

As such, in order to understand your contractual rights in respect of recent events, it is crucial to carefully read any force majeure provisions in the contracts your business may be subject to and understand that force majeure events require an analysis of both the contract clause and the relevant event on a case-by-case basis.

Force majeure and changing perceptions of "normal"

By nature of the drafting, non-exhaustive definitions which provide for other, unspecified events to potentially qualify as force majeure are more flexible and adaptive than exhaustive definitions. However, both exhaustive and non-exhaustive forms of drafting rely on what is considered "foreseeable to" or "within the reasonable control of" a party at the time the contract was entered into rather than when the event arises.

We expect that once the immediate impacts of the current COVID-19 pandemic are resolved, governments and businesses will turn their minds to the terms on which they contract generally, and force majeure definitions and clauses will assume a more prominent role in negotiations between contracting parties, as has been the case in recent years.

For a period, negotiations will be characterised by competing views on "market practice" and the prescription of force majeure events or classes of them. Potentially, there will be a trend towards the greater use (and acceptance) of non-exhaustive or "catch-all" definitions (such as "any [other] event which could not have been foreseen by and is beyond the reasonable control of a party"). This will mean that, in time, there will be competing views on the events which will fall within the reach of such "catch alls".

Arguably, an outcome of the recent bushfire season and flooding rains in NSW is that the types of climatic events which could be regarded as reasonable for a contracting party to provide for (or against) 10 to 20 years ago will not be considered reasonable for a contract entered into today. Perceptions of what is considered an “abnormal”, and an appropriate force majeure, event will shift over time in response to changes in the climate, political environment, and so on. As such, what is considered reasonable behaviour to avoid a force majeure event at the time of contracting lags behind what is considered reasonable at the time of a potential force majeure event, meaning the contract drafting is constantly playing catch-up to shifts in the perception of normal

Although it is likely the current unprecedented series of extreme events in Australia would be considered abnormal by today's standards, these events, either on their own or as part of a trend, are likely to shift future perceptions of normal, and therefore contracting parties’ understanding (or assumed understanding) of what are considered to be force majeure events. In short, relying on the protections given by a typical force majeure clause may become a less comforting strategy for businesses to mitigate their risk in exposure to "extreme" events in the future.

What can I do to prepare my business for the new (ab)normal?

While forecasting (and contracting for) the "future normal" today can be fraught with peril, recent events provide an opportunity for businesses and governments to consider what they will and will not include in force majeure provisions they are currently negotiating (for more information see our earlier Insights piece here and our COVID-19 Response here).

We expect that businesses and governments which respond to the current crises with a combined strategy of building resilience into their own practices and supply chains, and thoughtful approaches to contracting on these matters, which will make them better prepared for the future. For instance, they can:

  • review force majeure positions in current "upstream" and "downstream" contracts to identify exposures to be mitigated and managed, and be ready to pursue entitlements and respond to claims as needed;
  • negotiate upstream and downstream supply contracts to contain equivalent relief for force majeure events, so as to avoid exposure to liability to downstream customers if the upstream supply is interrupted;
  • build greater resilience into practices and policies, such as upgrading IT systems to support flexible working arrangements (though many will have done that already in the last month or so!), provide greater emphasis on resilience from extreme weather events in the infrastructure, buildings, plant, equipment and products which they make or use, and make provision for disaster recovery and business continuity;
  • review how effectively existing corporate governance, crisis management command structures and business continuity plans have responded to the most recent extreme events and refine these as needed;
  • update risk registers, risk appetite statements and disaster management plans, ensuring there is regular reporting on these matters for Board consideration; and
  • build redundancies into supply chains - where possible, consider the extent to which the business is reliant on a single supplier or source of supply, particularly if the supplier or source is located overseas.

Please contact us if you would like assistance to prepare your business for the new (ab)normal future.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.