Background

A force majeure clause is a mechanism in a contract by which parties try to manage and allocate the risks arising out of events outside of their reasonable control. Unlike the doctrine of frustration (which operates at law), force majeure is strictly contractual.

Accordingly, in the wake of COVID-19 it is important for parties to commercial arrangements to consider their rights and obligations under existing force majeure clauses and to contemplate how to manage such risks in the future.

Practical approach

In order to manage force majeure during this pandemic, entities might wish to do the following:

  • New contracts – consider how to best manage COVID-19 related commercial risks in forthcoming contracts. You may wish to draft provisions which specifically and only deal with COVID-19 or you mat prefer to draft or redraft a force majeure clause to encompass epidemics and/or pandemics.
  • Existing contracts – determine whether these contracts include a force majeure clause, and if they do, consider:
    • whether the contractual definition of force majeure encompasses the current COVID-19 pandemic;
    • the consequences of the application of the force majeure provision; and
    • to what extent (if any) does the triggering of the force majeure clause affect the rest of the contract, such as a right to terminate for convenience.

Legal issues

As force majeure is only contractual, it is not implied as a matter of law.

This means that the drafting of the clause is hugely critical. Courts tend to interpret force majeure clauses strictly because the courts encourage parties to perform contracts where possible. Similarly, where a force majeure clause is ambiguous in its meaning, the court will interpret the clause against the interests of the party seeking to rely upon it.

Accordingly, whether or not COVID-19 triggers force majeure in your existing contracts depends on the facts and circumstances of each individual contract. However, the following are some general preliminary legal issues to consider:

  1. A contractual definition of ‘force majeure’ or ‘force majeure event’ which refers to an act of God might encompass COVID-19 depending on the proven source and cause of the pandemic. Courts have traditionally held that an “act of God” is an event “due to natural causes directly and exclusively, without human intervention, and that…could not have been prevented by any amount of foresight and pains and care reasonably to be expected(Nugent v Smith (1876) 1 CPD 423 per Lord Justice James at 441). This means that if COVID-19 is directly and exclusively due to natural causes without human intervention, then it will likely be considered an act of God. However, this also arguably means that a pandemic is unlikely to be an act of God if it was caused by the intentional human release of the pandemic such as in the case of biological warfare or its affects on performing the contract could have been prevented.
  2. If your contractual definition of ‘force majeure’ or ‘force majeure event’ refers to a pandemic or epidemic, then it would likely apply to COVID-19.
  3. If your contractual definition includes some other general or catch-all (like “or any other event beyond the parties’ reasonable control’), then the application of this catch-all might be limited in its scope by reference to the other specified events which precede the general catch-all (Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd [2006] FCA 1324 per Justice Kiefel at [62]).
  4. However, this does not answer what may happen if the force majeure clause is nothing but a general catch-all. In this case, it is possible that the courts will approach the provision as thought it refers to an act of God but such ambiguity would likely be interpreted against the interests of the party wishing to rely upon the clause.

Final thoughts

If you believe that a force majeure clause in your existing contract applies to COVID-19, you must consider whether the pandemic has caused the party’s inability to perform the terms of the contract and which contractual rights and remedies follow the triggering of the force majeure clause.

Finally, all entities should learn from this pandemic and consider how to draft force majeure clauses in the future. That is particularly so given that generally referring to an act of God may not suffice now that some amount of foresight and pains and care reasonably to be expected could mitigate the impacts of the next pandemic.