Force Majeure Clauses
TABLE OF CONTENTS
Due to the impacts of COVID-19 and pending commercial losses, contracts have come under increased scrutiny as parties seek to mitigate losses or to exit unfavourable contracts.
One such contractual provision that is increasingly being relied upon during the commercial fallout of COVID-19 are Force Majeure clauses.
What is a Force Majeure Event?
A force majeure event is one in which circumstances arise that were not anticipated by either of the parties at contract entry. Force majeure clauses are designed to deal with these circumstances and concern the responsibilities of parties who are unable to fulfill their contractual obligations.
A force majeure clause will only be triggered in the event that performance of the contract has become impossible. Excessive cost or inconvenience is not sufficient to meet the requirement of impossibility.
Does my contract contain a Force Majeure clause?
As force majeure clauses are a contractual mechanism and not a common law concept such as that of “frustration”, the general rule is that such clauses will not be implied into a contract. It is critical then to examine the terms of any contract that you are subject to when assessing if coronavirus will impact your contractual obligations.
What are my options?
In the event that your contract does contain a force majeure clause, it is important that you consider any defined events and the action you wish to take. Often contracts refer to natural disasters, government actions or pandemics. Given the World Health Organisation’s declaration of COVID-19 as a pandemic on 11 March 2020, it is likely that such a defined event as a pandemic would be triggered.
Where your contract does not define force majeure events, the circumstances that may fall within that definition are wider and may require interpretation to determine if they apply to COVID-19.
This contractual term applies to entities contracting in different countries. As such, governments are stepping in to protect domestic commercial life with the China Council for the Promotion of International Trade now issuing “force majeure certificates” to assist Chinese companies who may be contracted to foreign companies. The first such certificate was issued on 2 February 2020 allowing an automotive parts exporter to exit their contractual obligations, cutting potential economic losses.
It is uncertain whether Australian businesses can expect similar assistance, however, the World Health Organisation’s declaration of COVID-19 as a pandemic may go some way in removing some ambiguity. It is important to note that some jurisdictions maintain rules governing the interpretation of force majeure clauses and so parties should also examine which jurisdiction their contract is governed by.
Should I trigger my Force Majeure clause?
If you decide to invoke a force majeure clause, it is important to consider the contractual notice period that applies. Further, the onus of proof for demonstrating that COVID-19 has made fulfilment of your contractual obligations impossible lies with the entity seeking to rely upon it and their unique circumstances and context.
An ill-considered attempt to trigger such a clause can fail and subsequently create further legal implications such as contractual repudiation which itself is a contract breach.
Given the high stakes involved in incorrectly relying upon such clauses, parties affected by COVID-19 should consider the legal and commercial implications of invoking the operation of such a clause, including whether parts of the contract may still be completed or complied with later.
In the event your contract does not contain a force majeure clause, you may have the option of claiming the common law concept of contract “frustration”.
Frustration occurs when blameless post contract conditions make it impossible to perform the contract. Certain jurisdictions provide legislation covering such circumstances and may discharge parties from their obligations.
Before attempting to invoke or dispute the invocation of force majeure clauses, it is important to carefully consider the legal and commercial impacts of that decision. MC Lawyers and Advisers are available to assist you in navigating your commercial obligations at this time. Call us now to arrange a free consultation and discuss how COVID-19 impacts you.