Force Majeure Clauses

Aug 18, 2020 Ben

 

Force_Majeure.png

What are force majeure clauses?

A force majeure clause is a term in a contract that excuses a party from performing a contract when something beyond that person's control happens that stops them performing the contract. Where it operates, the person is excused from liability for non-performance. In each of these causes the critical question is what exactly does the clause say and how does it work in the circumstances of the case. 

The party who wants to be excused from performing their obligations has to prove the force majeure clause applies. That could potentially involve showing:

  • the existence of a force majeure clause in the contract
  • how the clause works
  • the existence of an external event that triggers the operation of the clause
  • that the external event caused their inability to perform
  • any requirements about giving notice to the innocent party have been fulfilled

If the matter goes to court then the clause will be interpreted strictly because it effectively changes the rights the parties would otherwise have to insist on performance. 

What is an example of a force majeure clause?

Here is an example for illustrative purposes only:

"A force majeure event means the declaration of an epidemic or pandemic but only to the extent that it is beyond that person's control and the risk of it occuring was not expressly assumed." 

How may force majeure clauses operate in Covid 19?

How such clauses may operate has assumed significance in recent times because of the impact that Covid-19 is having on business relationships accross the world. That is so especially because of Covid-19 being declared by WHO as a pandemic given that some contracts list a pandemic as a "force majeure" event. Moreover, the response of the government and the restrictions that were imposed on people and business could mean that the effects of the health emergency also need to be considered (as opposed to just the declaration of it).

What matters could give rise to disputes?

A range of factors could lead to disputes including:

  • the construction of the force majeure clause
  • whether there is in fact a "force majeure" event
  • if the "force majeure" event caused the inability to peform or does the contract require something less than that e.g. hinderance in performance
  • whether, at the time of entry, the parties knew of the existence of the "force majeure" event so that they should be prevented from relying on their own wrongdoing

Naturally, these disputes will occur in a range of context including where a supplier of goods or services will seek to be excused from delivery to the buyer. 

Frustration vs Force Majeure

Frustration is a common law doctrine, as opposed to a contractual clause, that excuses future performance because external events make it impossible to peform. There are similaries between the two concepts but contractual clauses can more effectively explain the circumstances in which performance is excused.

There is significant scope of disputes about whether a contract has been frustrated because of Covid-19. For instance the sale of a business may or may not be frustrated by the restrictions imposed by governments, however, much will depend on the circumstances known to the parties and what was foreseeable at the relevant time of entry into the contract. 

In NSW there is specific legislation that deals with adjusting rights where frustration occurs. 

What can you do if someone relies on a force majeure clause or frustration?

Problems arise where goods or services or money has been provided and the other side contends they should be excused from liability. To address that scenario it is important to look at statutory remedies and the availability of claims in equity. 

It is important to look at the contract itself to see how the contracts specifies the effect of reliance on a force majeure event. In that regard it should be noted that such clauses may have the effect of suspending, extending or excusing performance. 

 

* Disclaimer:- This publication contains general information which may not suit your particular needs or circumstances. It may be summarised and include generalisations. Details that may be important in your specific circumstances might not be included. Litigant strives to ensure that the information in this publication is accurate and up-to-date, but does not represent or guarantee that it is accurate, reliable, current, complete or suitable. You should independently evaluate and verify the accuracy, reliability, currency, completeness and suitability of the information, before you rely on it. The information in this publication is not legal or other professional advice. You should obtain independent legal or professional advice that is tailored to your particular circumstances if you have concerns. To the maximum extent permitted by law, Litigant excludes liability for any loss, however caused (including by negligence), relating to or arising directly or indirectly from using or relying on any content in this publication. Litigant asserts copyright over the content of this publication.