Force majeure: Contractual measures for divine intervention

‍What you need to know:

• Force majeure provisions are typically included in contracts to relieve one or more of the parties from performing their obligations when particular events occur such as natural disasters, war, terrorism, industrial action, and 'acts of god'.
• Force majeure is distinct from the common law principle of frustration and, depending on the drafting of the force majeure provision, can be more beneficial to the parties.

What you need to do:

• As force majeure is not an accepted common law doctrine, specific provisions need to be included in contracts to provide relief to the parties.
• Project personnel should seek advice to ensure that contract drafting clearly describes what constitutes a force majeure event, the conditions upon which relief will be granted and the specific relief available, as well as appropriately balancing the rights and obligations of the respective parties.

Detailed Insights:

What is force majeure?

Force majeure is a common term used to describe contractual provisions which address events that may delay, affect or prohibit the performance of contractual obligations by either party. Generally, if an event fits within the definition of a force majeure event, it will provide relief for the affected party in relation to their contractual obligations.

In Australia, there is no common law origin for force majeure. Accordingly, commercial entities need to prepare and agree to a specific clause defining both the enlivening event and the operation of the clause (ie, what relief is provided and its practical application) should the entities want relief where such an event occurs.

Force majeure events commonly include both man-made and natural events, including:

• extreme weather;
• natural disasters;
• war;
• terrorism;
• government action; and
• industrial action.

The Doctrine of Frustration: ‘It was not this that I promised to do’

Force majeure should not be conflated with frustration. Frustration is an established common law doctrine which applies where a supervening event renders the contract incapable of being performed because the circumstances are radically different from when the contract was executed. The effect of frustration is that the contract is terminated from the point of the supervening event.

Frustration is not a doctrine lightly applied by the courts. When determining whether the supervening event rendered the contractual obligations only capable of being performed in a manner radically different than that contemplated in the contract, courts will consider the construction of the contract in light of its surrounding circumstances. General indicators of frustration include circumstances where:

• there is a supervening event that occurred post-contract signature through no fault of either party;
• the event was not contemplated or foreseeable by the parties at the time of contract signature; and
• performing the contractual obligation is subsequently impossible, illegal or fundamentally different.

Due to the limited scope of frustration and its significant consequences (ie termination), force majeure clauses are often included in contracts to:

• provide more targeted and temporary relief; and
• appropriately allocate risks between the parties.

Of course, the doctrine of frustration could still apply in a contract that includes force majeure provisions if the event sufficiently undermines the original commercial deal. However, reliance on frustration to terminate the contract may lead to a lengthy and costly dispute resolution process, compared to relying on an express termination right.

Drafting Force Majeure Clauses

As force majeure is not a rooted in the common law, the scope and application of force majeure provisions depends solely on the drafting of the relevant clauses. The following elements are common to most force majeure clauses:

• the supervening event must meet the contractual definition of Force Majeure Event (or equivalent). Usually, the definition will apply to circumstances where there is a supervening event outside the control of the affected party which materially affects the performance of the affected party's contractual obligations;
• the affected party must provide notice and make all reasonable efforts to mitigate the effects of the intervening event in order to obtain relief;
• the clause will set out the specific relief provided to the parties going forward including entitlement to costs, delays to schedule and, where the intervening event continues for an unreasonable time, termination.

The construction and operation of force majeure clauses are ultimately at the discretion of the contracting parties. It is within the interests of both parties to include express force majeure clauses that clearly describe what constitutes a force majeure event, the conditions upon which relief will be granted and the specific relief available. Careful drafting is necessary to ensure the clauses appropriately balance the rights and obligations of the respective parties based on the commercial deal being struck.

COVID-19 and Force Majeure

The abrupt onset of COVID-19 worldwide highlighted the importance of force majeure clauses in contracts. Almost overnight, countries were forced into lockdowns, crowd density limitations were put into effect and global supply chains were short-circuited. As a result, many commercial contracts had to contend with restrictions on the ability of parties to perform their obligations.

Whether the COVID-19 pandemic constituted a force majeure event ultimately depended on the drafting of individual contracts. In many cases, commercial contracts did not contemplate such a supervening event or did not clearly describe the contractual relief, leaving parties in a state of contractual limbo.

While lawyers and contract managers are not fortune tellers, it is important in contract drafting and negotiations to set the parameters of what will constitute a force majeure event, including the real-world operation of the contract should force majeure be enlivened. This will provide both parties with certainty regarding relief and liability, setting appropriate expectations and reducing the risk of costly disputes and litigation.

Defence’s approach to Force Majeure in materiel acquisition and sustainment

Although there is no reference to 'force majeure' in the ASDEFCON suite, the drafting adopts the term 'Excepted Risk' to describe events that are typically considered to be force majeure events, including:

• acts of God, including natural disasters;
• war, invasion, acts of foreign enemies, hostilities between nations, terrorist acts, civil insurrection or military usurped power;
• confiscation by governments or public authorities; and
• ionising radiation, contamination by radioactivity from nuclear fuel or waste, or combustion of nuclear fuels.

The ASDEFCON suite provides that the contractor is entitled to postponement of contractual obligations in the event of an Excepted Risk. The suite also provides a 'catch-all' provision that postponement may be provided in an event or circumstance:

• that delays the contractor’s performance of contractual obligations;
• is beyond the reasonable control of the contractor; and
• could not have been reasonably contemplated by the contractor before entering the contract.

Postponement is only available where the contractor has, among other things, met notification requirements and taken reasonable steps to minimise delay and mitigate loss.

The Excepted Risk term is also used more generally throughout the Conditions of Contract to reduce the contractor's liability to the extent that the loss was not caused by and could not have been reasonably been prevented by the contractor. This is consistent with the Defence Liability Principles.

It is worth remembering that the ASDEFCON templates only provide for postponement of contractual obligations in the event of an Excepted Risk or ‘catch all' event. Other relief such as claiming of costs or entitlement to termination is not available in these circumstances.

Further Information

If you have any questions, or would like specific advice on force majeure or the options available to you, please feel free to contact us.

Authors:

Rory Alexander, Managing Partner

Brenton Lam, Associate

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