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In today’s uncertain and ever-changing times, force majeure clauses have been appearing more and more often, both in the news and in contracts. But what exactly are they? How can they be used by you or your business? Why would you want to insert or rely on them in a contract?
In this article, we’ll tackle these questions.
What Is A Force Majeure Clause?
A force majeure clause is a creation of contract law that can relieve a party from performing its contractual obligations due to an event outside the reasonable control of the parties. It is based on the common law doctrine of frustration, which allows mutual discharge of the contract where performance becomes impossible.
For this to be accepted, the performance of a contract must be radically different from what is intended by the parties. However, unlike the doctrine of frustration, the conditions under which a force majeure clause can be enforced can vary for each individual contract. This is because common law does not govern force majeure clauses in the same strict way.
Traditionally, force majeure clauses were intended to refer to things like ‘acts of God’, wars and strikes and abnormal weather conditions. If such an act occurred, its impact on the business of a party would be considered. For example, in the English case of Matsoukis v. Priestman & Co (1915), the effect of a strike was enough to dislocate the business of the party attempting to rely on the clause. This allowed the discharge of their contractual obligation.
More recently, these clauses have been drafted to cover specific circumstances that might impact the commercial interests of the parties in the particular business relationship set out in the contract. For instance, if severe flooding damages roads and disrupts transport routes, a supplier may invoke a force majeure clause to avoid penalties for delayed deliveries, as the event was beyond their reasonable control.
Situations & Events That Trigger the Force Majeure Clause
It’s easy to assume a force majeure event is unlikely or extreme – something that rarely happens in everyday business. However, a variety of unexpected circumstances can qualify as force majeure events, and interpretation varies significantly between jurisdictions. It’s crucial to ensure your force majeure clauses clearly specify what qualifies as such an event, as courts don’t automatically apply these clauses unless the event precisely matches the wording in your contract. Given the unpredictability highlighted by recent global disruptions, preparing your contracts with carefully drafted and specific force majeure clauses can protect your business from future uncertainties.
Let’s explore some practical examples of situations where a clearly defined force majeure clause could apply.
Natural Disasters And Extreme Weather Events
Storms, fires, floods – extreme weather events can significantly disrupt your business operations. Being prepared for these situations not only protects your business practically but also legally. If your business operates in an area prone to extreme weather, it’s crucial to explicitly address these scenarios in your contracts with carefully drafted force majeure clauses. Even if severe weather isn’t common in your location, an unexpected storm or fallen tree can halt deliveries and disrupt operations. Clearly defining these possibilities in your contracts ensures you’re not leaving your business exposed to unnecessary risk. When it comes to unpredictable weather, specificity and preparation are essential.
Pandemics And Public Health Crises
In recent years, the COVID-19 pandemic has highlighted the importance of updating force majeure clauses to clearly cover modern risks. Today, a well-drafted force majeure clause typically includes language such as ‘public health emergencies, disease outbreaks, epidemics, and pandemics (including events related to the SARS-CoV-2 virus and COVID-19 disease)’ as specific force majeure events. A standard clause might read: ‘Neither party is liable for any breach of, or failure to perform, its obligations under this Agreement to the extent that such breach or non-performance results from a force majeure event.’
However, it’s essential to tailor these clauses specifically to your business operations and risks. For instance, if you operate a retail or hospitality business, explicitly including events like snap lockdowns or government-mandated restrictions that affect in-person trade ensures comprehensive protection and clarity for both parties.
Government Actions And Legal Restrictions
Sudden regulatory changes, such as government-mandated shutdowns or trade restrictions, can unexpectedly disrupt your ability to fulfil contractual obligations. When drafting a force majeure clause, it’s crucial to explicitly reference these potential government interventions, including new laws, public orders, or official restrictions. This ensures your business is clearly protected, reducing your exposure to liability if such government actions prevent you from meeting your contractual commitments.
War, Terrorism, And Civil Unrest
You may feel that war, terrorism, or civil unrest are unlikely to directly affect your business, but even indirect impacts can significantly disrupt your operations. For example, if one of your suppliers operates in a region experiencing civil unrest, your business could face substantial disruptions to your supply chain. Therefore, it’s crucial to explicitly address scenarios involving war, terrorism, or civil unrest in your force majeure clauses. Clearly specifying these potential risks ensures your business is well-protected and prepared for the unexpected, regardless of your location.
Supply Chain Disruptions And Labor Strikes
As a business owner, it’s likely you don’t directly manage every part of your supply chain. Events such as equipment failures, labour strikes, or supplier delays – situations entirely outside your direct control can seriously disrupt your operations. Including specific references to supply chain disruptions in your force majeure clauses can help protect your business from liability in these unforeseen circumstances, ensuring you’re prepared and legally safeguarded when unexpected events occur.
Key Elements Of The Clause
To be properly relied upon, force majeure clauses must first pass the underlying test. Essentially, the force majeure event must have been within the contemplation of the parties when they made the contract. It must also have been outside the control of the contracting party.
The elements of force majeure clauses more broadly require that:
- It can occur by either human or natural forces
- It cannot have been reasonably foreseen at the time by the parties
- It was completely beyond the parties’ control and its consequences could not have been prevented
It is perhaps obvious given these elements, but you will not be able to rely on a force majeure clause if doing so would rely on your own acts or omissions.
In Matsoukis v. Priestman & Co (1915), it was found that in general, force majeure clauses cannot be extended to cover delays caused by bad weather, football matches or a funeral, as these were ‘usual incidents interrupting work, and the defendants, in making their contract, no doubt took them into account’.
In this case, dislocation of business due to a coal strike was covered by such a clause. This case is particularly relevant if you are trying to rely on a more general force majeure clause from a time before COVID-19 was well understood. Let’s say your force majeure event is defined as an ‘act of God’. The question then becomes whether COVID-19 can be included within this principle.
This will depend on the specific drafting of the contract. Thus, the use of a specialist contract lawyer is advisable. If COVID-19 only caused mere delays to your business, you might still be liable to perform your obligations under the contract. However, if it affected core parts of your business like your machinery, you might be able to rely on the clause.
The key question in any case is whether the outbreak of COVID-19 has caused real restrictions limiting you from performing your contractual obligations, or whether it is merely the source of some inconvenience or financial loss.
Though not necessarily required, the force majeure clause should include a requirement that the party relying on the clause advise their opposite number as soon as reasonably possible of their inability to complete the contractual obligation. They should also specify how long the non-performance will go on for, as well as anything that can be done to ensure contractual continuity in the meantime.
Lastly, it is crucial to realise that relying on a force majeure clause does not provide a warrant to not perform the entire part of the contract. It allows certain contractual obligations to be discharged where they are actually affected by the specific force majeure event. If an event does not affect a contractual obligation, it is likely that you will still need to perform it.
When Do You Need Force Majeure?
This question can only be answered accurately once your specific circumstances have been examined. It depends heavily on what your business relies upon, including factors such as:
- Your operating jurisdiction and its legal framework
- Potential risks and specific restrictions that might impact your business
- Your obligations under customer and partner contracts
In the current climate, industries facing higher risks – particularly businesses operating internationally should strongly consider including force majeure clauses, as they face increased vulnerability to non-performance triggered by sudden government actions or unforeseen global events.
How To Draft An Effective Force Majeure Clause
So, what exactly does a good force majeure clause look like? As we’ve noted, the more tailored a force majeure clause is to your specific circumstances, the more effective it will be in offering legal protection. While there is no one-size-fits-all solution, certain general elements should be considered to ensure your clause provides robust coverage. Keeping these elements in mind will help you draft a strong and reliable force majeure clause.
Specific Events
Force majeure clauses should explicitly define the specific events that trigger them. Without clear and precise definitions, the clause is unlikely to be effective.
Notice Requirements
It’s important to clearly specify how and when a party must notify the other if a force majeure event occurs. Clearly defined notice requirements ensure transparency and open communication, creating fairness for all parties involved.
Mitigation Obligations
Invoking a force majeure clause doesn’t mean the affected party is completely relieved of responsibility. The clause should clearly state any obligations the affected party has to minimise or mitigate the impact of the event, demonstrating responsibility and good faith.
Duration & Termination Provisions
A force majeure clause should include provisions detailing the duration for which the clause remains effective during an event, and clearly outline the conditions under which either party can terminate the agreement if disruptions persist beyond a certain timeframe.
Potential Pitfalls And Considerations
When drafting force majeure clauses, it’s important to avoid common pitfalls that can limit their effectiveness:
- Ambiguous Definitions:
Clearly define what constitutes a “force majeure” event. Vague descriptions can lead to misunderstandings or disputes over enforceability. - Lack of Specific Events:
Tailor the clause to your specific business context. Not including relevant events unique to your industry may prevent effective protection. - Ignoring the Burden of Proof:
Remember that the party invoking the clause usually needs to provide evidence that a force majeure event occurred and directly impacted their obligations. - Unclear Notification and Mitigation Obligations:
Specify clear requirements for promptly notifying the other party and outline the necessary steps to reduce or mitigate any impacts. - Uncertain Rights to Suspend or Terminate:
Clearly outline when and how contractual obligations can be suspended or terminated due to a force majeure event to avoid potential disputes. - Conflicts with Insurance or Statutory Protections:
Be cautious of potential conflicts between your clause and existing insurance policies or statutory rights that might limit its enforceability. - Jurisdictional Variations:
Interpretation of force majeure clauses can vary widely depending on jurisdiction, so ensure your clause aligns with local legal standards and practices.
Why Professional Legal Advice Is Important
Since force majeure clauses aren’t governed by broader common law principles, they’re interpreted strictly according to standard rules of contract interpretation. If there’s any ambiguity, courts will generally interpret the clause against the party relying on it. For this reason, it’s critical to have an experienced contract lawyer carefully draft and review your force majeure clause. A poorly written or ambiguous clause could fail precisely when you need its protection the most, potentially causing serious consequences for your business.
Let Sprintlaw Help With Your Contract Review And Drafting
If you need clear, tailored, and legally sound force majeure clauses, don’t hesitate to reach out to our team of legal experts. Whether you’re enforcing an existing clause or negotiating a new agreement, careful consideration and precise drafting are essential.
Due to the strict interpretation of these clauses, it’s vital to plan thoroughly and seek expert legal guidance. Sprintlaw’s experienced contract lawyers can provide the tailored advice and drafting support you need to protect your business. We’ve supported countless businesses of all sizes to manage risk and strengthen their contracts – let us help you too.
Key Takeaways
Understanding the correct use and legal drafting of force majeure clauses is key to effectively managing your business risks. To summarise what we’ve discussed:
- A force majeure clause can relieve parties from contractual obligations if unexpected events beyond their control occur.
- Traditionally covering events like natural disasters or strikes, modern clauses often specify additional relevant risks to your business.
- Clearly defining which events trigger the clause is critical, as courts strictly interpret these provisions based on the contract’s wording.
- Parties must provide prompt notice and attempt to mitigate impacts when invoking force majeure.
- Clauses should clearly outline rights and conditions for suspension or termination of obligations.
- Jurisdictional differences can significantly impact how these clauses are enforced, making professional drafting essential.
- Consulting an experienced contract lawyer ensures your force majeure clause provides clear and effective protection for your business.
If you would like a consultation on force majeure clauses, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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