COVID-19 – Contracts Part 1 – Force Majeure (3 April 2020)


Introduction

A global emergency like COVID-19 has not been seen in living memory. Countries are shutting their borders and confining citizens to their homes. Non-essential commerce is grinding to a halt and uncertainty hangs over the economy like a cloud.

So, what do you do when your supply chains dry up, your workers are confined to their homes and it becomes impossible to continue to perform your contractual obligations? What do you do when your suppliers tell you they are in this situation?

There are several legal concepts that you need to know about in this situation. In this article we deal with one of them – force majeure.  Our next article will deal with the concept of a contract being frustrated.

What is Force Majeure?

The doctrine of force majeure, or ‘superior force’, derives from Roman law. In some countries (such as France and China) it automatically applies to relieve a person of their liability for failing to perform a legal obligation, where that failure was caused by circumstances beyond the person’s control which made performance impossible. The intervening circumstances are the ‘force majeure’.

In Australia the doctrine of force majeure does not apply automatically in this way. But most contracts will contain a ‘force majeure clause’. Generally speaking, it will say that the occurrence of certain circumstances outside the parties’ control will relieve a party from liability for failing to perform a contractual obligation, to the extent that the circumstances prevent the party from performing the obligation.

Was the failure to perform truly outside the party’s control? Is there anything the party could reasonably have done to work around the circumstances and perform the obligation? If not, you are probably dealing with force majeure. The question then is then whether it is covered by the wording of your contract.

Does your Force Majeure Clause apply?

If your contract contains a force majeure clause, and it probably will, the specific terms of that contract will determine when the clause applies and will define your rights and obligations when strict contractual performance becomes impossible.

The definition of “Force Majeure Event” within the contract will be particularly important in determining whether your force majeure clause covers the current crisis. Does your force majeure clause identify specific examples which the parties agree are Force Majeure Events, does it give a general description of force majeure, or does it do both? This will have a big impact on how broadly the clause applies, and whether it covers COVID 19.

Some definitions of Force Majeure Event are better than others for capturing the circumstances created by COVID 19. Words to look out for in the definition of Force Majeure Event include “epidemic” or “pandemic” or some other characterisation of a broad contagion. Event definitions such as “catastrophe” or “change in law” are less obviously applicable (for now) but may still apply.

Dealing with a Force Majeure Clause

A force majeure clause will usually set out the procedure for communicating with the other contracting party (or parties) when force majeure occurs. Follow that procedure carefully!

Generally, it will require the party whose obligation is affected to issue a notice to the other parties of the circumstances and the likely impact as soon as possible after they become aware of the circumstances constituting a force majeure.

A Force Majeure clause will often require follow up notices be given within certain time frames, as the Notice itself usually only suspends the obligations of the parties for such period as the Force Majeure event continues. However, in some clauses the right to terminate can arise after a certain period of time has elapsed and the Force Majeure event still continues.

Most force majeure clauses will require the party to put some demonstrable effort into overcoming the force majeure and minimising the impact, and to inform the other party of that effort.

For example, if an upstream supply failure means you cannot deliver a product on time, you would need to notify the customer as soon as you find out about the problem and then try to find an alternative supplier and minimise the delay.

However, these are only a few of the issues that arise with respect to force majeure clauses and the most effective way to deal with them properly is to get legal advice.

To get specific advice about your situation, please contact Greg Mohen, Emma Leys, Tom Darbyshire or John Park.

Coming next – Frustration of contracts

Part 2 of our COVID and Contracts series will deal with the doctrine of Frustration. This is somewhat similar in effect to Force Majeure and may be relied on by contracting parties where there is no Force Majeure clause in your contract or perhaps where COVID 19 does not trigger a Force Majeure Event in your contract’s definitions.