Australia: COVID-19: What you need to know about force majeure clauses and your business’ contracts

The disruption caused by the COVID-19 virus across the supply chains of businesses in almost every industry has resulted in business’ contractual rights and obligations coming under the spotlight – specifically in terms of what can be used to excuse a party from performing their contractual obligations temporarily or, in some cases, indefinitely. One of the key legal provisions this update is focussing on is force majeure clauses.

What is a “force majeure” clause?

“Force majeure” clauses are usually relied on to mitigate the risk that the performance of a contractual obligation may be delayed or prevented by an unforeseen event or circumstance beyond a party’s reasonable control. They are often associated with acts of god.

What do you need to know about them?

They work in two different ways – if your business is struggling, you may wish to exercise your right of force majeure upon a contractual counter-party to provide some temporary, or even permanent, contractual relief.

Alternatively, your contractual counter-party may choose to exercise this same right against you. In this situation, you will likely wish to establish whether they can validly do so and work out what you should do next (considered further below).

They are creatures of contract – no general Australian law force majeure remedy exists. It must be specifically included in a contract. A force majeure clause must be specifically included in a contract in order to attempt to rely on this remedy.¹

If your business wishes to excuse itself from a contract and it does not have a force majeure clause, there are alternatives including:

• Varying the terms of the contract.²
• Considering whether the doctrine of frustration of contract can be relied on.³  
• Entering into informal discussions with the counter-party.

They must be reviewed in detail – the devil is in the detail and each clause requires a thorough review before acting on (or challenging) them.

These clauses usually contain four main elements which should be separately considered:

• A definition of what constitutes a force majeure event.
• The relief provided to the party that relies on the clause.
• A “causation requirement” specifying the parameters of the connection between the event and effect on a party’s ability to perform the obligation.
• Separate obligations on the parties (e.g. a right to make alternative arrangements for the duration of the event.)

There exists an obligation on the party affected by a force majeure event to mitigate its effect – this essentially means that the affected party should be taking reasonable steps to lessen the effect of the event on its ability to perform its obligations.

What to do when you receive a notification of force majeure – once you have established your counter-party’s basic right to exercise their right of force majeure:

1. You need to understand why the affected party served notice of a force majeure event. The affected party needs to be able to demonstrate why it should be able to exercise its right of force majeure.⁴
2. You should check to see the associated rights for which the contract provides. This could be a termination right, a step-in right or information sharing rights for the duration of the event.

REMEMBER: The sooner you can map out where you stand, the better.