Force majeure in a major pandemic

To say the world has been turned upside down is all but literally true in many respects.  Where there is the slightest sneeze of Covid-19, governments have made shut down decisions that that have impacted the ability of businesses to operate and perform their contractual obligations.

A feverous question is whether COVID-19 an event of force majeure and does it relieve the affected party from its obligations?  Below we set out the issues.

What constitutes Force Majeure?

Force majeure under Australian law only arises if there is a force majeure clause in a contract.  There is no common law or equitable doctrine which can be drawn on in the absence of a force majeure clause in a contract.

If a party cannot perform its obligations and the contract does not provide for force majeure, the only similar alternative to force majeure is the doctrine of frustration.  To successfully establish frustration, it must be proven that an event beyond a party’s control has occurred that has so radically changed the situation in which a contract is to be performed that the contract should be regarded as having come to an end.  If frustration applies, a contract is considered terminated.  Frustration is not helpful if the parties wish to continue a contract after the delay event ceases.

A key advantage of a force majeure clause is that only the obligations of the parties that are affected are suspended and only for the period that they are affected.   Any unaffected obligations will continue and the contract can continue in full force once the effects of the force majeure event are over.

Elements of a force majeure clause

Most force majeure clauses will have these elements:

  • the event must be outside of the parties’ control;
  • performance of contractual obligations must be prevented, hindered or delayed; and
  • the effect of the event cannot be avoided or overcome by reasonable efforts to mitigate.

Additionally, the contract may say that the event must not have been foreseeable for a party to rely on force majeure.

While it is easy to establish that Covid-19 is an event outside of the parties’ control, whether the second two elements are present will depend on the particular circumstances of the contract.  The issue of any foreseeability requirement will also depend on the timing and manner in which the parties’ obligations are affected by the event. As Covid-19 has been around for some 6 months in Australia, it may now be either an event that is foreseeable or the effects of Covd-19 are foreseeable thereby potentially preventing reliance on a force majeure clause in new contracts where foreseeability is a factor.

Force majeure clause nuances

An important consideration is whether the force majeure definition specifies the events giving rise to relief. Traditionally, contracts included pandemic relief, which would apply to COVID-19.  Where the clause does not provide specific relief, relief may not be available and mounting a COVID-19 argument based on, for example, natural disaster, lockout and/or civil unrest may not succeed, however relief under a force majeure clause based on the impact of governmental powers has a good chance to succeed.

Often force majeure clauses refer to events ‘preventing’ a party from performing an obligation.  This means that an obligation must become impossible to perform, rather than more difficult or costly.  Other clauses may refer to “delay”, “impede”, “hinder”, or “impair”, however courts will usually require that performance be significantly more onerous, not just more expensive difficult to perform or less commercially viable.

Further requirements for force majeure

  • Causation: There must be a causal nexus between the relevant event and the impact on the party seeking to rely on the force majeure clause. Economic loss or hardship is unlikely to be strong enough reason.
  • Notice: A party may be required to give notice of the relevant event in order to seek relief.
  • Known events: Where a party has entered into a contract after late February, when the COVID-19 epidemic became known, it will not be entitled to relief on the declaration of a pandemic.
  • Requirement to mitigate: The terms of the contract may also require a party to show evidence that it has taken all reasonable steps to avoid the event or the impact of its consequences.

Insurance

Both parties may have insurance for losses arising from force majeure events, but it must be established that the non-performance and associated loss is directly related to or caused by the force majeure and that the loss is allocated to the period of the effect of the force majeure.

The future of force majeure clauses

Parties should ensure that future agreements have a force majeure clause with a clear definition of a force majeure event that covers the current COVID-19 pandemic and future events of a similar nature and also:

  • provides for reasonable notice periods in the event an obligation is affected by a force majeure event;
  • includes the right to suspend or terminate the agreement without penalty if the force majeure event continues for a prolonged period;
  • provides for payment to be suspended until obligations under the agreement can be performed; and
  • requires the affected party to use reasonable efforts to minimise the effect of the force majeure event on the performance of their obligations under the agreement.

Takeaways

Force majeure is a technical area of contract law that requires careful consideration of the facts and the law to make an assessment as to whether a force majeure event has occurred which gives right to seek relief.

Further references

Related articles by Dundas Lawyers

Relief for companies during COVID-19

Director’s identification numbers to become a reality

Electronic execution of documents by directors

Standing down employees – when can it be done?

Further information

If you need advice on how force majeure may be affecting your ability to perform your contractual obligations, please feel free to contact me for a confidential and obligation free discussion.

 

Michael Adami - Dundas LawyersMichael Adami LLB.,GDLP.,BA.
Special Counsel
Telephone: (07) 3221 0013
e: madami@dundaslawyers.com.au

 

 

Disclaimer

This article contains general commentary only.   You should not rely on the commentary as legal advice.   Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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