The Australian bushfires, floods and coronavirus COVID-19 have brought force majeure clauses to the fore, as businesses look up and down their supply chains to spot vulnerabilities – and whether their suppliers, or they themselves, can comply with their contractual obligations. There are already reports that parties to resources contracts (particularly, timber, LNG and copper) have sought force majeure relief in recent weeks, and of imported building supplies being held up, and the economic impacts from all three natural disasters will continue to grow. China's lockdown, travel bans and expected reduction in economic growth alone are expected to significantly impact Australia's education, retail, agricultural, tourism and resources exports.
So what do you need to know about force majeure clauses? We'll be doing some deep dives in the coming weeks for particular sectors, but we'll start now with the basics.
Force majeure – what to look out for when seeking relief
While the ability for a party to rely on a force majeure provision depends on the terms of the relevant contract, parties should consider the following:
- Is it force majeure?: Whether the relevant event constitutes a "force majeure" as defined in the contract. This can range from a list of specified events, through to more generic references to "acts of God", but typically relate to events that are beyond a party's reasonable control.
- Notices: If the event is "force majeure", the party seeking relief should ensure that it complies with the terms of the contract. Typically, force majeure provisions require notice to be given specifying (to the extent practicable) details of the relevant event, the extent to which relevant obligations are affected and, potentially, the anticipated length of delay that will arise from it.
- Mitigation: The party affected by the force majeure event is usually expressly required to use its reasonable endeavours to mitigate the effect of that event on its ability to continue to perform its obligations under the agreement.
- Relief and termination: Relief is typically only available for the duration of the actual delay arising out of the event of the force majeure, with termination rights able to be invoked where a force majeure event subsists for an "extended" period of time (that time period being dependant on the circumstances relevant to the contract).
If your force majeure clause doesn't cover you, what about frustration?
At its most extreme, parties may argue that the contract is frustrated altogether – that is, that without the fault of a party, the contract is incapable of being performed due to an unforeseen event (or events), resulting in the obligations under the contract being radically different from those contemplated by the parties.
Establishing frustration, however, can be difficult as it does not apply to hardship. The fact that the method for performance contemplated by a contract has been affected, or the burden of performance has been increased, by an event or events occurring without fault, does not amount to frustration unless performance in accordance with the contract has become practically impossible.The doctrine of frustration is also applied within very narrow limits. For a party to succeed in claiming frustration, they must show that the parties never agreed to be bound in the fundamentally different situation that has unexpectedly emerged.
What to consider when negotiating force majeure provisions
In industries that are significantly exposed to natural disasters – for example, the resources industry and transport sector – the use of force majeure in contracts is an important risk mitigation contractual protection. The Australian bushfires, floods and the COVID-19 outbreak also provide an opportunity for parties to consider what they will, and will not include, in force majeure provisions they are currently negotiating, such as:
- Force majeure: Parties should consider whether the list of force majeure events should be inclusive or exhaustive and - just as importantly – they should consider whether they will make clear when a force majeure event will not apply. For example, some contracts specify that:
- no force majeure event will discharge a party from an obligation to pay money; and
- general economic or trading conditions, and failures to obtain access or accreditation rights, do not constitute force majeure events.
- Another variation of this is to make clear that an event such as a failure of a supplier's equipment will not of itself constitute a force majeure event.
- Notices: Given it may not always be practical to specify the length of delay caused by a force majeure event at the time the notice is delivered, parties should consider an obligation on the affected party to provide periodic supplemental notices for the duration of the force majeure. Another matter to consider is whether the force majeure notice should specify the extent to which the relevant event is covered by insurance.
- Mitigation: If express mitigation obligations are included, parties should consider the extent of these. For example, a carve out to the obligation to mitigate may provide that a party does not have to settle any labour or other industrial dispute contrary to its own interests. Another matter to consider is whether an obligation on the parties to meet and endeavour to reach agreement as to how to best minimise the impact of a force majeure event is appropriate.
- Supply interruptions: If the contract involves an obligation for supply of a critical product, consider including mechanisms that require the supplier to treat the customer equitably with other customers if supply of the relevant commodity will be curtailed in a force majeure scenario eg. a requirement that the supplier supply the commodity that is available pro rata amongst customers with firm supply rights. Without such protections, the supplier in a force majeure situation that can supply some product will always be motivated to supply what is available to customers under contracts with the highest price.
- Termination: In the event of a prolonged force majeure event, in addition to termination rights, parties should consider if express re-negotiation rights should be triggered and whether the supplier should have an obligation to assist a customer with obtaining alternative supply.