Many people have heard of “force majeure”, a term that appears very frequently in Australian commercial law and contract clauses. Today we will discuss some key points about force majeure clauses in contracts.

What is force majeure?

We know that when a contract is signed, the parties to the contract each owe certain duties and obligations to one another. For example, if A and B enter into a sale-of-goods contract and A fails to deliver the goods within the time stipulated in the contract, A may be in breach of contract.

However, if the contract contains a force majeure clause, meaning that when extraordinary events or circumstances beyond the control of both parties prevent the performance of contractual obligations, the parties may be relieved of liability.

Common situations that may constitute force majeure include:

Floods

Earthquakes

Large-scale strikes

War

Epidemics

Tsunamis, and the like

As shown above, force majeure generally refers to events that are beyond the reasonable control of the parties, rather than ordinary, commonly occurring events of normal probability. Accordingly, the following situations are generally unlikely to be treated as force majeure:

1. Adverse outcomes caused by a party’s own negligence;

2. Matters altered by ordinary external forces;

3. Ordinary and foreseeable rainy weather, and the like;

Of course, this is not absolute. Whether a particular event can qualify as force majeure depends heavily on how the contract is drafted.

How important is it to include a force majeure clause?

Let us look at two examples.

1. Company A is an entertainment company whose artist is scheduled to hold a concert in location B. Company C, as the event organiser, is responsible for providing the venue and related arrangements for Company A’s concert. Under the contract, Company A’s payment to Company C is a material term, and Company C’s provision of a usable venue by the contracted date is likewise a material term. Unfortunately, on the eve of the concert, the area where the venue is located experiences several days of torrential rain and the venue is flooded. Although the rain eases as the concert approaches, the organiser is unable to clear all the standing water in time. The concert cannot proceed as scheduled. Because the contract does not contain a force majeure clause, Company C may face the risk of being held liable for breach of contract.

2. Company X and Company Y enter into a sale-of-goods contract. Company X undertakes to deliver one tonne of foodstuff to Company Y before 1 May 2022, and Company Y undertakes to pay a deposit of xxx before 1 February 2022 and settle the balance within 10 days of delivery. The parties include a force majeure clause providing that a failure to deliver caused by war, strikes, weather disasters or other force majeure events will relieve the non-performing party of liability. On 30 April 2022, a major earthquake strikes the area, the roads are damaged, and the foodstuff scheduled for delivery is stuck in transit. Company X is unable to deliver on time. Because the contract contains a force majeure clause, Company X may be relieved of liability for breach of contract.

The importance of how the clause is drafted

Does the mere presence of a force majeure clause completely shield a party from liability when “force majeure” prevents performance? That depends largely on how the clause is drafted. In general, if one party to a contract wishes to avoid, as far as possible, liability for non-performance caused by “force majeure”, the broader the coverage of the clause, the more favourable it is for that party.

For example, one issue that has arisen in the wake of COVID-19 concerns force majeure clauses triggered by a pandemic / epidemic.

If a contract’s force majeure clause simply states that “a party is unable to perform the contract due to a pandemic / epidemic”, what problems might that create?

1. First, there is no definition of pandemic / epidemic. Unlike earthquakes or tsunamis, which are relatively easy to define, what constitutes a pandemic / epidemic is highly ambiguous. Generally, narrowing the scope of what counts as a pandemic / epidemic will help avoid later disputes. For example, the clause might specify that “pandemic / epidemic” refers to one designated as such by a particular government body or by the World Health Organization.

2. Another problem with this kind of drafting is determining what actually counts as force majeure caused by an “epidemic”. Taking COVID-19 as an example, when COVID-19 broke out in Australia, the government implemented various policies — such as caps on gathering numbers, travel restrictions or lockdowns — which reduced available manpower and resources. Do these knock-on effects count as force majeure?

From this it can be seen that not only is the existence of a force majeure clause important within a contract, the way in which the clause is drafted also directly affects the parties’ liabilities.

Final thoughts

Force majeure clauses are extremely important in commercial contracts. Without such a clause, when an uncontrollable event causes a failure to perform a contract on time, the non-performing party will face the consequences of breach and may be required to pay corresponding compensation and bear the associated liability. However, drafting a force majeure clause is itself a skilled task. To effectively manage the risks and losses that force majeure can cause, please consult a qualified lawyer to draft your contract.