If you are a business owner who has executed contracts on behalf of that business, you may have heard the words “Force Majeure” being thrown about recently. To be frank, a contract that has a well drafted force majeure clause in it could mean a world of difference to your business right now.
However, good force majeure clauses are hard to find at the best of times. It is important that you review all of your contracts to obtain whether there are clauses of this nature, and whether they are drafted in a manner which may prove beneficial to your business right now.
This article outlines what a “force majeure” clause is, and whether you can use those provisions if they exist in your contracts.
What is a Force Majeure Clause?
“Force majeure” is a legal concept designed to provide relief to parties affected by an “unavoidable or unforeseeable event”.
It is important to note that your force majeure clause must be expressly stated within your contract. It cannot be implied into the contract (for example, not written, but assumed to be a term within a contract).
Further, not all force majeure clauses were created equal. The application, operation and meaning of force majeure clauses are different throughout the various jurisdictions of the world and when it comes to the drafting of contracts in Australia. Some countries apply the concept of “force majeure” within its contracts, whether it is written or not. However, in “common law” jurisdictions like Australia, the scope and applicability of the force majeure clause all depends on the way in which it has been written. Further, some force majeure clauses are then read in the context of different State legislation.
Force majeure clauses seek to deal with the impact on contracts whereby events happen which are entirely out of the control of the contracting party. They deal with the relief that is or would be available in instances where a party is not able to perform their obligations under that particular contract.
Of most importance, you can only successfully access the force majeure clause if you can prove that the performance of the contract would be IMPOSSIBLE. It is not enough to show that is has become inconvenient, costly or inefficient. It is not something you can access simply because you have come into financial difficulty arising from a down turn in business.
Is COVID-19 enough to trigger a force majeure clause?
The answer is….it all depends!
You need to ask yourself the following key questions:
Has the situation relating to COVID-19 now made your contract impossible to perform or is it merely harder? The two situations are very distinct.
Yes: It is impossible if you are mandatorily made to cease business through Government direction, and this direction was not foreseeable when entering into that contract;
No: There is shortage of materials or shortage of skilled workers (as can ordinarily happen in business) and therefore reasonably foreseeable?
No: COVID has placed you in financial hardship, inconvenience your business.
If you have answered “yes” to the above, you need to ask yourself whether your COVID-19 issue covered by legislation in NSW, South Australia or Victoria.
In Australia, three jurisdictions have created legislation that may impact your ability to simply walk away from your contract (for example, where usually under an instance of force majeure, you would get your deposit back, certain legislation may state that a party is not required to hand that back).
We advise that you check your “contract jurisdiction” clause within your document (or if there is no clause, determine the location where the contract is predominately performed). If that jurisdiction is New South Wales, Victoria or South Australia, speak with your lawyer about the specific impact of the following pieces of legislation on your “force majeure” situation:
- NSW (Frustrated Contracts Act 1978)
- South Australia (Frustrated Contracts Act 1988)
- Victoria (Australian Consumer Law and Fair Trading Act 2012)
Do you have a “force majeure clause” in the contract or similar “hardship clause”? What does it say?
Is the clause drafted widely enough to cover a COVID-19 event? (ie. does it specifically say natural disasters, or all disasters?)
Does the operative part of the clause cover the consequences of a COVID-19 event? Does the operative clause go into any more detail about what happens to the contract if COVID-19 falls within the definition of a force majeure event? Does it say that the contract is void, or does it simply allow a party to give notice of termination?
The answer to each question depends on a case by case analysis of the contract in light of the principles referred to above.
If you have a force majeure or hardship clause within your contracts, and you are interested to know whether they apply to your own circumstances, please do not hesitate to contact Kathryn Adams on 0452 614 454.
If you have a force majeure or hardship clause within a contract, it could substantially benefit your business and give you some relief from obligations you have within such a contract.
Please note that this situation with COVID-19 is developing rapidly. Therefore, please It is important keep up to date with all relevant information and be prepared to respond to each announcement as quickly as you can.
This blog is intended as general information only. It does not purport to be comprehensive advice or legal advice. Readers must seek professional advice before acting in relation to these matters.