The Covid-19 Outbreak and Contract Relief in the Form of Force Majeure

Introduction

The new lunar year of the Metal Rat has regrettably commenced amidst an abundance of wretched disasters. Whether flood, fires and most distressingly, the global pandemic of the Covid-19 outbreak. There seems to be no shortage of devastating events affecting people’s lives and their ability to do business.

In the context of contract law, “force majeure” may be able to provide a party with some relief from contractual obligations that it cannot perform. Force majeure clauses are common features of commercial contracts and are designed to suspend any obligations (and associated liabilities) which cannot be performed as a result of an event beyond the contemplation and control of the parties.

What is a force majeure event?

Force majeure comes from the Latin meaning “superior force” extending to definitions of “chance occurrence or unavoidable accident”. As the concept arises as a feature of contract law and not under the common law, its meaning in any particular contract must be defined or risk the potential of the concept being held void for lack of certainty.

Definitions of force majeure commonly refer to “circumstances beyond the control of the parties”, “acts of God”, (which has been judicially considered to cover events such as hurricanes, floods, and earthquakes[1]), and other disruptive events such as global pandemic, war, terrorism, civil unrest, strikes and even the threat of such events. The meaning of the phrase “circumstances beyond the control of the parties” has been interpreted broadly by the courts to cover events which neither party could prevent.[2]

The rules of contractual construction will apply to the interpretation of the meaning of a force majeure definition within a contract. If there is any ambiguity in the definition, the rule of contra proferentum will apply, unless the parties have expressly excluded it, meaning that the clause will be interpreted against the interests of the party responsible for drafting the definition. Also when general wording follows a list of specific events, the rule of ejusdem generis will apply so that a catch-all phrase like “any event beyond the reasonable control of the parties” will take its meaning from the events listed before it.

Force majeure may be triggered under a contract at the point in time that a party apprehends that it will not be able to undertake, continue or complete its contractual obligations because of a force majeure event.

Force majeure clauses

Proper drafting should ensure that any definition of force majeure is clear. A seller or provider seeking an expansive definition should insist on a meaning which prefaces examples of particular events with the words “including but not limited to…” to not limit the interpretation of the term. On the other hand, a party who is a buyer or receiver should seek to keep the clause as narrow as possible to avoid the possibility of non-compensable interruption to completion or supply as the case may be.

There are generally three essential elements to force majeure:

  1. it can occur with or without human intervention;
  2. it cannot have been reasonably foreseeable by the parties; and
  3. it was completely beyond the parties’ reasonable control, and they could not have prevented its consequences.

It should be noted that force majeure cannot extend to cover a party’s own acts or omissions and further, a force majeure event must be a legal or physical restraint and not merely an economic one.[3]

Most force majeure clauses will not excuse a party’s non-performance entirely and will only suspend it for the duration of the force majeure event. However, some force majeure clauses will also provide the parties with a right to terminate the contract in the event that the force majeure is not remedied within a specified amount of time.

The clauses will also commonly require a party relying on force majeure to notify of it promptly, to mitigate the loss of the other party and to attempt to remedy the event, to the extent that it is reasonable in the circumstances to do so.

What if there is no force majeure clause?

In the absence of a force majeure provision, a party to a contract faced with an event which makes it impossible to perform its obligations will need to resort to the common law concept of frustration.

The doctrine of frustration provides for an automatic mutual discharge of the contract where performance becomes impossible, with neither party being at fault, and the obligations under the contract being “radically different” from those contemplated by the parties to the contract. This may be helpful, but these conditions are more limited than those which may be agreed between parties to define force majeure, meaning that sometimes a party will be left with no relief. Additionally, as frustration is not a creature of contract and a mutually agreed definition, it means that the party claiming it may carry a greater burden to establish its application. South Australia has enacted legislation specifically designed to soften the limitations of the doctrine[4].

Conclusion

Force majeure is an important drafting consideration in the negotiation of any commercial contract, particularly for parties involved in agribusiness and or international trade of some form. For existing contracts which contain the term, it is a significant provision for its ability to deliver convenient relief from the pressures of performance in the face of an uncontrollable disruptive event.

Force majeure provisions cannot in their own right save a business from a devastating event. However, they may reduce the liability and the stress on the parties suffering from it.


[1] Matsoukis v Priestman & Co [1915] 1 KB 681, 685-7; Sharp v Batt (1930) 25 Tas LR 33 at 49–50

[2] B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419.

[3] Yrazu v Astral Shipping Company (1904) 20 TLR 153, 155; Lebeaupin v Crispin [1920] 2 KB 714, 721

[4] Frustrated Contracts Act 1988 (SA)

For more information, please contact:
Kate Bickford

Kate Bickford
Director
p.  +61 8 8124 1836
e.  Email me

Marianna Danby

Marianna Danby
Associate
p.  +61 8 8124 1833
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this article, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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