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.
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.
Since it is not subject to broader common law rules, a force majeure clause is interpreted through the normal rules of contractual construction. They are construed strictly and against the party putting them forward if there is any ambiguity.
So, it’s critical to have a contract lawyer review your force majeure clause before putting it into your contract. If the clause is sloppily drafted or legally ambiguous it is likely to come back to bite you when you need to rely on the clause.
How Do Force Majeure Clauses Work?
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 on the commercial interests of the parties in the particular business relationship set out in the contract.
For example, in the context of COVID-19, a typical force majeure clause will now classify ‘public health emergencies, disease, epidemics and pandemics (including events related to the SARS-CoV-2 virus and COVID-19 disease)’ as force majeure events.
The main clause will then usually state that ‘neither party is liable for any breach of, or failure to perform, its obligations under this Agreement to the extent that the breach or non-performance resulted from a force majeure event’. Relying on this clause essentially ratifies a breach that results from a defined force majeure event (these example clauses were taken from the Queensland University of Technology website).
As previously stated, force majeure clauses can be tailored to your specific business. For example, you could specify snap lockdowns which prevent retail or in person restaurant trade as force majeure events to ensure your business is covered.
When Can You Rely On Force Majeure Clauses?
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 realize 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 Clauses?
This question can only be answered when your specific circumstances have been examined. It depends on what your business relies upon, as well as numerous factors such as:
- The state in which you operate
- The specific restrictions which might damage your business
- Your obligations to customers
High risk industries in the current climate would certainly include businesses that operate internationally. Currently, this would likely carry a high risk of non-performance if certain government actions were to take place.
Whether you are trying to enforce a force majeure clause under a pre-existing contract or negotiating the inclusion of one in a new contract, it is crucial that they are carefully considered.
Their strict interpretation necessitates careful planning before any further action is taken. Sprintlaw can provide expert contractual advice for these tasks.
With an ever changing COVID situation, understanding both the use and construction of force majeure clauses is crucial to all businesses. If this sounds like something you’d be interested in, you can reach out to us for a free, no-obligations chat at firstname.lastname@example.org or 1800 730 617.
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