Time for CEOs to review force majeure clauses in commercial contracts

Is force majeure an act of God or a foreseeable event?

Is force majeure an act of God or a foreseeable event?

Due to climate change and COVID-19, a boilerplate clause in many contractual agreements is suddenly more important than ever to Australian business owners. Find out how the concept of force majeure affects you and what you can do now to minimise commercial risks from unprecedented events.

What is force majeure?

Commonly known as the ‘act of God’ clause, force majeure refers to a contractual provision for an unforeseeable circumstance that will affect the ability of a party to the contract to perform its contractual obligations. The purpose of a force majeure clause is to cover an event over which no party to an agreement has control.

Around the world, parties to contracts have invoked force majeure provisions to address non-performance during events ranging from acts of war, SARS and Ebola outbreaks, to the Global Financial Crisis.

In Australia, however, force majeure applies only to the extent determined in a contract. Which means that wording is everything.

Does COVID-19 qualify as a force majeure event?

In the high-profile dispute between Cricket Australia and Channel Seven, Cricket Australia is invoking force majeure to defend scheduling changes to the cricket season that the broadcaster regards as a breach of contract.

In very broad terms the pandemic likely does meet the criteria for an unforeseen event, but as in all legal contracts, the wording of relevant clauses is everything. For example, the term ‘natural disaster’ is general and could arguably cover a wide range of extraordinary events. But if your agreement specifies relief for non-performance as a result of flood and not fire, for example, you have little recourse to legal protection if your factory burns down.

What you can do now to future-proof your business

The effects of COVID will be felt for some time to come. Exactly how long, no one knows. Accordingly astute CEOs recognise the need to review existing contracts for force majeure clauses, and seek legal advice.

Which of your existing contracts have provisions that explicitly or implicitly relate to force majeure? They may be upstream (such as with suppliers) as well as downstream (with customers).

Having identified such provisions in an existing contract, is it possible to renegotiate the terms of each affected agreement? Given the pandemic has affected most links in the supply chain, negotiating existing terms is cheaper than going to court.

For contracts up for renewal or negotiating new agreements, how can you rephrase existing clauses or introduce new provisions to protect you, to the degree possible, from the next catastrophic event?

The future is here – and should be written into your contracts

The wildfires of January 2020 ushered in a year of unprecedented events that Australian business owners will not soon forget. Future-focused SMEs will address provisions in new and renewing contracts to mitigate the risks of whatever comes next. Between climate change and COVID-19, one thing’s for certain: business owners will no longer be able to claim a catastrophic event was unforeseeable.

 

Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

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