COVID-19 and Force Majeure Clauses In Contracts

03 AUG 2021

 

What is a ‘Force Majeure’ Clause?

A force majeure clause relieves a party from temporarily or permanently performing contractual obligations when an unexpected, external event that is outside of the control of a party has occurred which prevents performance.

Force majeure is formulated from contractual negotiations (as opposed to being a protection at common law), therefore parties to a contract can negotiate force majeure clauses and can define the scope of what constitutes a force majeure event.

Are COVID-19 Related Disruptions Triggering Events?

The outbreak and ongoing response to COVID-19 by State and Federal Government via the imposition of restrictions and lockdowns has meant that businesses have found it difficult to deliver on their contracts.

In such circumstances, your contracts may help you if they include an effective and comprehensive force majeure clause.

Of particular importance is the definition of what constitutes a triggering force majeure event, as this will assist you to claim the benefit of a force majeure clause. For instance, in respect to COVID-19 disruptions, does a force majeure clause define a force majeure event as including ‘pandemics’, ‘epidemics’ and/or ‘government orders’?

What Is The Effect Of A Force Majeure Clause?

This depends largely on the terms of a force majeure clause.

Where a force majeure clause is activated (usually by the affected party complying with particular notice requirements as stipulated in the contract) it may be the case that the clause will provide that the affected party’s obligations will be suspended until they can be performed again when the force majeure event ends or, in some cases, that the parties will be able to terminate the contract if the force majeure event is ongoing for a particular period of time.

What If Your Contract Does Not Have A Force Majeure Clause?

If your contract does not have a force majeure clause, you could look to bring the contract to an end by way of claiming that the contract is ‘frustrated’ at common law. 

This means that an intervening event has occurred through no fault of the parties, which makes a contractual obligation impossible to perform or transforms a contractual obligation into a radically different obligation to the one when the parties had entered into the contract.

However, relying on the principle of frustration can be problematic as it is often not easy to establish and is narrow in scope.

This enforces the importance of having force majeure clauses in your contracts because without one, you risk breaching the contracts and having to pay damages if circumstances beyond your control prevent you from performing your contractual obligations.

Key Takeaway

Given the unprecedented and unexpected events brought upon by COVID-19, a valuable lesson for businesses moving forward is to seriously consider and/or review force majeure clauses in their contracts so as to allow for greater flexibility and protection in the future.

For example, if you are entering into contracts with a force majeure clause, it should be expected that a force majeure triggering event would now expressly reference ‘pandemics’, ‘epidemics’ and ‘government orders’.

If you would like advice or assistance in relation to force majeure clauses, contractual negotiations and advice generally or any other Commercial matters, please contact our accredited business law specialists and Partners Justin Thornton on jthornton@marsdens.net.au and Rahul Lachman on rlachman@marsdens.net.au or otherwise by calling them on (02) 4626 5077. 

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

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