What is force majeure? How does force majeure impact your business?
If you have been unable to meet your contractual obligations during this last year because of COVID shutdowns and restrictions, can you avoid your commitments, or even terminate the contract since you have not been at fault? And can you protect your company in the future from a similar situation should it occur?
These are the most common questions I have been asked over the last year by commercial clients. Many whose businesses have been badly affected by the COVID restrictions and shutdowns.
Most experienced commercial operators will have heard of force majeure. Roughly translated and in its legal context, it means an irresistible natural event, independent of human foresight or behaviour. Commonly, this will include such things as riots, acts of war, severe weather events and, more generally, what we often refer to as acts of God. Epidemics and pandemics may well qualify when they result in government shutdowns. But in Australia, it will depend upon the contract and how well-drafted is your force majeure clause.
Force majeure in Australia is not a doctrine of the common law, nor is it an equitable remedy that can be called upon. It just does not apply at all unless the parties include it in their agreement. So, force majeure is a creature of the contract between the parties and as with other contractual provisions, a court will interpret a force majeure clause strictly according to its wording.
Merely because an event has occurred outside the parties’ control does not give rise to force majeure unless the party affected is prevented or delayed from performing. And all available efforts to mitigate the effects of the event must also have been taken. If only part of the contract is affected, then it is likely that only that part will obtain relief and other obligations will still have to be met. Importantly, the fact that the event is causing a loss of revenue, profit or even economic viability, is not enough to trigger the relief.
What if the contract does not include a force majeure clause at all? Is there anything else?
Well yes … maybe …
The common law does contain a doctrine of frustration that lawyers will revert to in circumstances where there is no force majeure clause and where, through no fault of the parties, the contract as a whole becomes impossible to perform. This is a very high bar and would require such things as loss or destruction of the supply under the contract (a loss of a plane, ship, or cargo overboard for example), or in the case of a contract for unique personal services, the provider becomes incapacitated or unavailable. In short, proving frustration will be a difficult challenge compared to a well-drafted force majeure clause in a contract.
The lesson is that this ancient contractual protection of force majeure, that is said to go back to Roman times, is rising out of the boilerplate drafting usually found in commercial agreements and getting the attention it deserves once more. In the age of unpredictable governments and international trading partners, and spurred on by COVID-19 shutdowns, protection against unforeseen risks has never been more important to business.