The COVID-19 pandemic has undeniably affected all areas of life. The limitations around trade and services continue to impact businesses both on local and global levels. As outlined in previous lockdowns it is increasingly important to address the risk of non-performance of contractual obligations and reconsider contract protections, significantly ‘force majeure’ clauses. 

What is a force majeure clause?

A force majeure clause allows a party to terminate or vary their contractual obligations due to an event that is beyond the control of the party and affects their performance of the contract.

The pandemic is a prominent example of a force majeure event.  

Why is it important to include a force majeure clause in your contract?

In Australia, the concept of force majeure is not recognised at common law nor is there an equitable doctrine with the same effect – it is instead a contractual concept. To be able to utilise this concept and the remedies it provides, parties must formulate and include a force majeure clause within their contracts.

A force majeure clause, when drafted appropriately, allows the affected party to notify the other that they are unable to perform certain obligations under the contract due to the uncontrollable event. Usually, for the duration of this event, the contractual obligations affected by the event are suspended. 

Without a force majeure clause, the parties are left with the doctrine of frustration, which provides limited remedies. Frustration requires a party to prove that an event beyond their control significantly affected the circumstances in which obligations under the contract were to be performed. Even if frustration does apply, its usual function is to terminate the contract. Consequently, even if the frustrating event ceases, the parties cannot continue with the contract unless they go through the processes of creating another one.

The use of force majeure clauses not only allows for the contract to continue it also provides more flexible remedies, when parties cannot perform their obligations due to uncontrollable events. Parties can distinguish between obligations that are affected by the events and those that are not. Accordingly, unaffected obligations can continue to be enforced while the affected ones are suspended for the duration of the uncontrollable events. That being said, the force majeure clauses can still allow the parties to terminate the contract. 

Construction of Force Majeure Clauses

The effect and applicability of force majeure clauses depend heavily on their construction and inclusion within a contract.

As there are no standard force majeure clauses in Australia, it is important to construct them in a way that is appropriate and suitable for the context of the specific transaction and risk allocations. There are, however, certain features of force majeure clauses which are similar across contracts. These features include:

• A description of what constitutes a force majeure event, usually by way of including an open and/or closed list of events. 
• Obligation for the party affected by a force majeure event to notify the other that such event has or may occur;
• Relief for the affected party through suspending obligations impacted by the event; and 
• An option to terminate the contract if other remedies become impracticable or the event continues past an agreed period.

To learn more about what you can do to mitigate the contractual risks caused by the pandemic or to discuss your contractual agreements, please do not hesitate to contact us on (02) 8858 3211.

NB: Bengisu Mersinli is a Legal Intern under the supervision of Katherine Hawes, Principal Solicitor, Digital Age Lawyers.