Recent extreme weather events experienced in Australia have caused significant delay and disruption to countless projects, and in the process undermined the ability of many parties to fulfil their contractual obligations.
Events such as these have prompted many to ask the question: ?What if I cannot comply with my obligations for reasons beyond my reasonable control? Will I be excused from my contractual obligations or be relieved from liability for a breach of contract??
The answer to this question will depend upon the terms of the relevant contract.
Where a contract has not been ?frustrated? at common law, a party will not be excused from performing its obligations and will be liable to the other party for damages arising out of its breach unless the contract provides specific relief in this regard.
WHAT IS FORCE MAJEURE?
Clauses providing relief in circumstances where the performance of contractual obligations is disrupted or made impossible by a supervening act or event are commonly referred to as force majeure clauses.
Force majeure clauses are utilised in the mining sector and extractive industries. They allow a party affected by a force majeure event to avoid liability for non-performance, provided the clause is complied with.
Where there is no clause in the contract which explicitly provides for relief of this nature, then none will be available.
Where there is a clause in the contract which explicitly provides for relief, the scope of relief available and entitlement to the same will be governed strictly by the terms of the relevant clause.
SEEKING RELIEF IN CONTRACTS
Force majeure clauses are creatures of contract. Rights afforded by force majeure clauses do not exist outside the agreed terms of the contract, will not be implied by the general law and are a matter for commercial negotiation between contracting parties.
Force majeure clauses should be drafted so that the intentions of the parties are easily construed from the clause as a whole, on the basis of works expressly stated.
What are the risks?
A force majeure event generally has the following characteristics:
(a) It can happen with or without human intervention.
(b) The parties could not have reasonably foreseen it at the time of entering the contract.
(c) It is beyond the reasonable control of the parties and the parties could not have reasonably prevented its consequences.
A well-constructed force majeure clause clearly defines what constitutes a force majeure event. Where no definition is provided, there is a risk that the relevant clause will be found to be void for uncertainty.
Matters commonly defined as constituting force majeure effects are the occurrence of floods, cyclones, earthquakes, landslides, fire, acts of terrorism, riot, war or civil commotion, industrial action (including strikes and lockouts, whether legal or otherwise) and changes in government policy or law.
For whose benefit?
Force majeure clauses may be mutual or may operate for only the benefit of a specified party or parties.
Even where the operation of a force majeure clause is mutual, parties will often have different objectives in the negotiation of force majeure clauses.
Where a contracting party is the purchaser of products or services under a contract, it is in their interests to limit the operation and scope of force majeure clauses. By contrast, where a contracting party is the supplier of products or services under a contract, it is in their interests to expand the operation of force majeure clauses, an aim best achieved by incorporating a broad definition of what constitutes a force majeure event.
The effect of a force majeure event
It is important that force majeure clauses contemplate and provide for the impact that the occurrence of a force majeure event will have on the contracting parties? obligations under the contract.
It is common for clauses to be drafted so as to suspend parties? obligations under the contract, to the extent that performance of those obligations is compromised or prevented by the force majeure event. Where this is so, it is important that parties consider and adequately provide for whether and how suspended obligations are to be performed once the relevant event has ceased (for example, by catch-up deliveries in addition to contracted quantities or staggered provision of additional quantities).
In other cases, clauses are drafted to relieve parties of obligations that cannot be performed because of a force majeure event rather than suspending those obligations.
Often, in addition to the suspension or relief from obligations during a force majeure event, provision will also be made for one or all contracting parties to terminate the contract where a force majeure event prevents performance of contractual obligations for a defined period (for example, three months or 12 months).
Contractual hurdles for reliance
Force majeure clauses will commonly require the contracting party relying on the clause to provide prescribed notices to other contracting parties, and take steps to mitigate the effects of a force majeure event, as a condition of obtaining relief.
INVOKING A FORCE MAJEURE CLAUSE IN EXISTING CONTRACTS
As outlined above, what constitutes a force majeure event, and the requirements for obtaining relief in a force majeure event, will differ from contract to contract, depending on the specific terms of the relevant clause.
The following issues should be addressed in circumstances where performance of contractual obligations is hindered or becomes impossible as a result of events beyond a party?s control.
Is there a force majeure event?
Find the contract and consider its specific terms:
(a) Is there a force majeure clause?
(b) If so, does the event which is hindering or preventing the performance of relevant obligations fall within the definition of a ?force majeure event??
(c) If not, is relief available under other clauses (eg particular clauses dealing with delay, variations, suspension etc)?
What is the scope of relief?
Consider the scope of relief provided in the case of a force majeure event. In some cases, all obligations under the contract will be suspended or excused for the duration of the force majeure event.
In most cases, contractual obligations will only be suspended or excused to the extent that performance of those obligations is directly hindered or prevented by the occurrence of the force majeure event, with parties being obliged to continue performing all obligations which they are capable of delivering upon in the circumstances.
Often, if the force majeure period continues for a specified period, further relief in the form of termination may also be available.
Entitling elements
Consider what is required under the relevant clause to activate the entitlement/protection which it affords. Strict compliance with pre-conditions to relief is important.
Force majeure clauses require that the party claiming force majeure give notice to the other contracting party of the force majeure event. Initial notice will be required as soon as practicable or within a stated period of time.
In addition to initial notices, it is required that a party relying on a force majeure clause to excuse or suspend its obligations give regular updates as to the status and effect of the force majeure event. In giving notices under force majeure clauses, the party giving notice must ensure that its notices comply with the contract?s general notice provisions.
A party seeking to rely on a force majeure clause will more often than not have an obligation to take such actions to mitigate the effect of the force majeure event.
It is important to maintain thorough contract records which demonstrate both compliance with notice provisions and efforts taken to mitigate the effect of force majeure events.
Get advice
When entering into significant contracts it is prudent to take advice in relation to the inclusion and drafting of force majeure contracts, to ensure that your interests will be appropriately protected.
In the case of existing contracts, where you are unsure as to whether relief (and the scope of) is available under your contract, the requirements that must be met for obtaining relief, or mitigation measures which are appropriate in the circumstances, it is important to obtain timely advice on such matters, so as to ensure that existing entitlements are not lost or compromised as a result of non-compliance with contractual mechanisms and formalities.
Bill Morrissey is a Partner and Julia Lawrence a lawyer at McCullough Robertson Lawyers. Email: bmorrissey@mccullough.com.au