In light of the recent chaos, and devastation caused by the Australian bushfires and the outbreak of the coronavirus, we delve into the relevance of “force majeure” in enforcing performance of contracts, and what this means for Australian businesses and their contracts during these troubling times.
Key takeaways
- Businesses should use caution in assessing existing contractual agreements to understand the risks, and opportunities available if contractual obligations are delayed or not performed;
- In negotiating future contractual terms, businesses should:
- be aware of, and prepare for, future risks that may impact the capacity to meet contractual obligations;
- consider the consequences of the occurrence of a force majeure event; and
- consider the impact on continuing operations in the event contractual obligations were suspended for an extended period of time.
- In the context of the bushfires and the coronavirus, the availability of force majeure depends on the drafting of the contract in question, and the assessment of the severity of the conditions in determining whether performance should be suspended.
What is force majeure?
Force majeure addresses the risk that a contractual obligation might be delayed or not performed due to circumstances or events beyond either party’s control.
Force majeure clauses are frequently used in commercial contracts, and are the result of agreement between the contracting parties.
What does a force majeure clause look like?
To rely on force majeure, the contract must specify that either party will not be liable for non-performance of contractual obligations due to a force majeure event.
Generally, a force majeure clause will include:
- specific events that will constitute force majeure (i.e. acts of terrorism, pandemics, natural disasters etc.)
- events caused by factors beyond the reasonable control of the party, whose consequences could not be foreseen or avoided, making the performance of the contract impossible, not merely difficult or uneconomical;
- requirements regarding notice by the claiming party to the other party including complete details of the event of force majeure and procedures utilised (if any) to circumvent the event of force majeure; and
- the relief provided (i.e. suspension of the contract, extended time for performance, relief from liability of breach or termination of the contract if the event subsists for a specific period of time).
Will events like the coronavirus pandemic and bushfire disasters constitute force majeure?
Bushfires
The unprecedented bushfires that recently ravaged Australia nation-wide have left extensive and ongoing social, environmental and economic impact. As a result of the impact of heavy smoke, road closures and destruction of property, it has brought force majeure to the forefront of discussion in several sectors of Australian business and economy.
The availability of force majeure in this context depends on the drafting of the contract in question, and the assessment of the severity of the conditions in determining whether performance should be suspended having regard to industry regulations such as Work Health and Safety obligations.
For example, Telstra successfully claimed force majeure in suspending its Migration Plan agreement during the bushfires in NSW and QLD over concerns regarding front-line worker’s health and safety. In this case, the relevant clause of the agreement stated that Telstra would not be in breach, or liable for failure or delay in performing its obligations under the agreement in circumstances that included severe weather conditions which would be expected to impact or put at risk, the health and safety of its employees.
As climate-related events become increasingly frequent and extreme, it is recommended that a suitably drafted force majeure clause should be considered in industries that may be impacted by major weather events and disasters such as this.
Corona virus
On 30 January 2020, the outbreak of the novel Coronavirus, otherwise known as 2019-nCoV or COVID-19, was declared a Public Health Emergency of International Concern. Consequently, the fallout of the outbreak has led to global travel bans, disruptions to work, school and university attendance and factory closures in China leading to major disruptions in supply chains which continue to impact the global economy and local contracts.
Coronavirus may trigger force majeure in a variety of ways. However, extending the definition of force majeure events to include concerns such as pandemics, quarantine, or travel restrictions, for example, would likely provide relief in this circumstance.
Given the disruptions to work and trade, relief may also be available for secondary consequences of the event triggering force majeure. For example, the closure of a specialised supplier leading to a shortage of parts, making assembly of the product impossible, could trigger force majeure in this context.
As the impact of the virus becomes increasingly apparent, businesses should familiarise themselves with existing contractual obligations, and the alternate ways in which they may rely on force majeure.
