What is a “force majeure clause”?

It is not unusual for business contracts to contain a force majeure clause, where a contracting party affected by a force majeure event (Affected Party) will typically be relieved from performing its obligations under the contract. A force majeure event is often associated with events beyond a person’s control and could constitute an “Act of God.”

For an event to constitute a force majeure event, it must:

be beyond the reasonable control of the Affected Party;
have impacted the Affected Party’s ability to perform its obligations under the contract; and
involve the Affected Party taking all reasonable steps to avoid or mitigate the event impacting its contractual obligations.

As the government continues to take increasing measures to control the COVID-19 pandemic, a force majeure event can be triggered by the government exercising its powers (act of government). We have seen examples of this with the stay-at-home orders, cancellation of business activities such as a pause on construction, and border closures.

Naturally, each contract is different and may contain varying force majeure clauses and will need to be considered on a case-by-case basis as to whether some of these measures taken by the government to stem the outbreak of COVID-19 in the community, fall within the meaning of the relevant force majeure clause. If you believe your business has been impacted by a force majeure clause, it is important to seek legal advice as soon as possible. Our experienced team of commercial lawyers are here to assist.

COVID-19 and force majeure clauses

Where a force majeure clause exists in a business contract, and the Affected Party has been impacted by a force majeure event, in some circumstances, relief can be provided by way of:

extending the time for performance of the Affected Party’s obligations under the contract, usually by the same period for which the performance is delayed; or
terminating the contract, often mutually by the parties, if the event continues for more than a specified period.

In any event, relief may be conditional upon the Affected Party showing evidence that it has taken all reasonable steps to avoid the event or the impact of its consequences.

Where a contract contains a force majeure event provision, but such a provision does not give rise to any sort of relief, it is unlikely that the Affected Party will have an entitlement to any relief under the contract.

Are there notice requirements for a force majeure event?

Where a contract contemplates a force majeure event, an Affected Party, affected as a result of COVID-19, may be required to give notice to the other party under the force majeure clause. Such a notice is often required to be prompt, in writing, supported by relevant evidence and describing the manner in which the Affected Party has been precluded from performing the contract.

Given the nature of COVID-19, having the ability to proliferate rapidly, businesses that are parties to any commercial contracts should consider:

whether there are any notice requirements under the contract to enable any entitlement to relief; and
time limitations under the contract on providing such notice to the other party.

Considering discharge by “frustration”

In the absence of a force majeure provision in a contract, the contracting parties may be able to terminate the contract on the basis of an unforeseeable event that is beyond the control of the contracting parties. This is otherwise known as frustration of the contract whereby the parties may be able to terminate the contract or be discharged from their obligations under the contract by frustration.

In order for the court to be satisfied that the contract has become frustrated and therefore terminated:

the unforeseeable event would have had such an effect on the contractual duties of the parties that the primary purpose of entering into the contract is no longer evident;
the event was outside the control and knowledge of any of the contracting parties prior to the event occurring; and
upholding the contract would be unfair and unreasonable.

Hence, a contract may be terminated by frustration as a consequence of the contracting parties (Affected Party) being impacted by COVID-19.

Practical steps your business can take

A good starting point as a business owner, is to review your existing contracts to determine whether the contract includes a force majeure provision or if the contract can become frustrated. Parties should be mindful that a wrongly asserted force majeure event or ill-founded frustration of contracts may entitle the other contracting party to claim damages or to terminate the contract. Therefore, businesses should obtain legal advice in respect of contracts that may be impacted by COVID-19.

Our experienced Sydney Commercial Lawyers can look over your business contracts, particularly any force majeure clauses that may be evident and provide tailored advice on what your obligations and rights are.

If you have any questions or concerns about your business contracts, get in touch with us on 02 9262 4003 for a confidential discussion or submit an online enquiry to get started.

The content of this article is intended as a general guide to the subject matter. For specific legal advice about your individual circumstances, please contact our experienced lawyers.

Geeti Chawla

Geeti is an integral member of the Ivy Law Commercial and Estate Planning team, acting on a broad range of matters including business sales and company acquisitions, capital raising, contract law, family provisions and estate planning.

Geeti is passionate about helping her clients achieve optimal outcomes and is highly regarded for both her empathetic nature and strong commercial acumen.