FORCE MAJEURE – “THE BACK DOOR CLAUSE OR IS IT?”

What does this mean in a legal contract?

All of a sudden, these “force majeure” clauses are now gaining the attention of a lot of people and especially lawyers. Normally they are clauses that are little used or taken any notice of when in a contract as they are not usually relied upon until now.

I have done many contracts, and this has never been an issue previously. In simple terms a “force majeure” event is an unforeseeable circumstance that prevents someone from fulfilling a contract and its obligations. Literally the meaning is “superior strength”. 

These clauses are normally included in contracts to remove liability for natural and unavoidable catastrophes that can interrupt the expected course of events and restrict the parties to the contract from fulfilling their obligations because of circumstances beyond their control. 

This has been more relevant to many people now especially in relation to the bushfires, flooding (depending on the circumstances and causes of flood) and now of course the COVID-19 virus (the virus). 

Big Events

Since November in the Manning Valley (and NSW) we have experienced a few events that could fit this character. We have experienced severe bushfires, smoke inhalation, flooding and now the pandemic of COVID-19 virus. 

After the bushfires we had heavy rain and floods. Now comes the virus. As we all know this novel virus began in Wuhan in China, especially if you believe Mr Trump. 

The World Health Organisation has declared it a pandemic and may soon be declared to be a Public Health Emergency of International Concern.

It is now widely reported that the economic risk of the virus is even greater than it was during the SARS outbreak and there is much talk about a looming economic recession. You only need to look at the stock market falls and job losses. 

From a legal perspective, it is a brave new world for all lawyers out there. This virus has had secondary and flow on effects that none of us had ever imagined or even contemplated, until now. It is not only about suffering extreme flu-like symptoms causing extreme health risks, but also flow on effects in relation to and the completing of contractual obligations. 

Doubt Arises

This means, that because of the virus and its effect, doubt is put into place in relation to the ability by parties of a contract to perform their obligations in the short-term (or at all) in accordance with the terms in a contract or it may even prevent the parties to be able to carry out their contractual obligations even if they wanted to. 

A “force majeure” clause is usually included in commercial contracts to excuse one or both parties from the performance of the contract in some way if a defined “force majeure” event occurs. You need to read the fine print with this one. 

This may sound very interesting and straight forward, however, in all legal contracts it is all in the fine print. The definition of a “force majeure” event suddenly becomes of extreme interest to everyone especially if it is impacting upon your business. 

Many clauses include such words as “acts of God”, “extreme storm or weather events”, “earthquake”, “flooding” and “epidemics”. I’ve not seen previous reference to pandemics so legally is an epidemic a Pandemic. 

Who Was To Know?

It also can encompass human actions such as “Wars” and “Terrorism”. However for events to constitute a “force majeure” they must be unforeseeable, external to the parties of the contract and unavoidable.

Historically the concept of “force majeure” originated in French Civil Law and is now an excepted standard in many jurisdictions that derive their legal systems from the Napoleonic code. This includes the common law systems in Australia, United Kingdom and United States of America. 

The concept of “force majeure” is a direct contrast with the concept of “Pacta Sunt Servanda” (agreements must be kept), which is the basis of any contract. If agreements are not kept, then there are financial consequences when a contract is being breached. In theory, it is not supposed to be easy to escape contractual liability and proving that events were or are unenforceable can be difficult by their definition. 

Out Of Our Control

As the world turns, we are becoming more and more aware of natural threats that are out of our control and which we were not aware of previously. This certainly is evident with issues of climate change, solar flares, asteroid bombardment and super volcanos, just to name a few catastrophic events that have taken place in recent times. 

As a human race we are also developing our own created human threats and challenges such as cyber attacks, nuclear and biological warfare capabilities. These have raised questions about what is and what is not foreseeable in a legal sense. 

Every good lawyer will tell you it depends on the circumstances of each and every case. 

This area of law unfortunately will no doubt come to the forefront and there will be a lot more litigation and legal cases tested and explored in our courts. 

Our world is rapidly changing. The human race is either creating or having to deal with these changes that mean the concepts that underpin “force majeure” are shifting rapidly. 

There are many examples of “force majeure” events and there are many that are grey in meaning.

For example, say an avalanche destroys a supplier’s factory in the French Alps, this event might cause long shipment delays which may result in damages. The supplier depending on the clause might apply the “force majeure” defence, arguing that the avalanche was unforeseeable, external and irresistible, those being the three tests applied by French Law and the basis of the concept. 

Unfortunately, unless the contracts specifically named an avalanche as removing the supplier’s liability, the court could well deicide that the factory owner is liable for non-supply. This would especially be true if the courts have previously deemed that such an event as foreseeable, because a similar event had occurred, even if it was a long time ago (i.e. if avalanches are foreseeable then one of the three tests would fail). 

Similarly, a war in a conflict-ridden zone may not be unforeseeable especially if there has been conflict in a particular area in the past. This could also apply to flooding in a frequently effected area. 

What’s Relevant

In the past, the relevance of these clauses tended to arise from cases that centred upon events such as dock workers taking industrial action in the form of strikes or storms interfering with shipping or trade. The same principals apply equally to the current causes of business interruption. The clauses continue to evolve as the world turns and catastrophic events occur. 

The September 11 attacks of terrorism started to appear as trigger events in a “force majeure” clause for example.

The same can apply to ransomware attacks which may significantly affect, and have affected, well known global organisations, especially in Europe. 

In the past, cyber security related issues were not included in such clauses, but as these events have become more frequent, they are now becoming incidents listed as a “force majeure” event in general commercial contracts. 

Similarly, and thinking well ahead, it may be contemplated that as climate related events become more extreme, then an appropriately drafted “force majeure” clause will become increasingly important to the world of trade and commerce in future years. 

Local Effects

Getting back to our situation, the continuing effects of our bushfires have also suddenly caught the attention of “force majeure” clauses in commercial sectors of our community. For example, in relation to the short-stay letting industry such as Airbnb, many people believe that it is unfair that people should lose their booking fees, where it would be unfair to do so as a result of bushfires or such other calamity beyond the control of everyone. Often no one is to blame but some will lose out, but you need to read the cancellation fine print. 

The current virus should prompt lawyers and businesses to consider their obligations as to whether they are able to perform contractual obligations and whether “force majeure” clauses can be relied upon. This is especially true where there are supply chain interruptions, out of the control of all parties. Just look at the supermarket shelves and businesses that rely upon China for goods that had been promised to the supplier.

The legal argument in relation to relying upon such clauses will need investigation at a critical level as to whether events are within, or beyond, the reasonable control of a party, that is, whether certain events fall within the scope of the definition of the clause or can be argued that the “force majeure” event can be relied upon.

Check The Clauses

Often these clauses expressly include or exclude certain events. Such clauses may be in contracts where the present day conditions were never contemplated when these contracts were being drafted. The burden of proof is on the shoulders of the party who wishes to rely upon the clause and attention needs to be paid to; 

That appropriate notice requirements have been complied with. 

The event or circumstances are clear and referred to in the clause and could not have been reasonably avoided. 

Steps have been taken to mitigate the effect of the event or circumstance. 

An example of “force majeure” may include:

“Neither party shall be liable in damages nor have the right to terminate this agreement for any delay or default in performing this agreement if such delay or default is caused by conditions or events beyond its control including but not limited to; “acts of god”, “government restrictions”, “Wars”, “Insurrections”, “epidemics” and any other cause beyond reasonable control of the party whose performance is affected.”

This now brings the attention to us all as to what is an “act of god”. This is another whole new story. 

If you have such a clause in your contract and need legal advice Paton Hooke Lawyers can help. 

James Paton  

Paton Hooke Lawyers and Conveyancers

 

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