Liquidated damages clauses can be found in pretty much any commercial contract that you come across and must be paid by one party to the other in the event of breach.
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What are Force Majeure Clauses?
Force majeure clauses are contractual provisions designed to protect the parties to a contract in the event they are unable to fulfil their contractual obligations as a result of an unforeseeable or unavoidable event. These clauses are the common law equivalent of the statutory doctrine of frustration, and will often be included in contracts to circumvent the strict limitation of the doctrine of frustration.
In essence, force majeure clauses provide relief by excusing non-performance of contractual obligations following the occurrence of a specified event, normally by suspending certain contractual obligations for a set period of time. Depending on the constructions of the clause, force majeure provisions may sometimes permit termination of the contract by either party where the suspension has been in effect for an extended period of time.
It is important for a party to a contract to carefully consider the potential implications of a force majeure clause, and how the occurrence of an event covered by a force majeure provision may affect the parties’ right and obligations under the contract. The concept of force majeure only applies if there is a relevant force majeure clause included in the contract. Furthermore, the scope and effect of such a clause is entirely a matter of agreement between the parties to the contract in question as there is no “set way” in which a force majeure provision must be drafted.
For more information about the Doctrine of Frustration, see our Frustration of Contracts Page.
What is the purpose of Force Majeure clauses?
The purpose of force majeure clauses is to keep the contract alive, even where significant supervening events occur. Essentially, force majeure clauses provide excuses for what might otherwise be considered a breach of contract, and may be included in a particular contract for a number of different reasons; however, the most common purpose of including a force majeure clause is protect one or more parties to the contract in the event anextraordinary and unpredictable incidence occurs (e.g. natural disasters or acts of state prohibiting the parties from performing their respective obligations).
What are the requirements of a Force Majeure clause?
There is no strict formula or rule for drafting a force majeure clause; however, force majeure clauses generally include three main features:
- A definition of what qualifies as a ‘force majeure event’;
- The steps a party to the contract must take in the event that the force majeure clause is effected; and
- A statement of the rights and obligations of the parties to the contract in the event the force majeure clause is triggered, as well as any other general consequences of the provision coming into effect.
What is a ‘force majeure event’?
The events that may trigger the force majeure clause must be clearly defined in the contract. Given that the common law definition of the term ‘force majeure’ is not in itself particularised, it is in the interest of both parties to a contract that the events constituting a ‘force majeure event’ are clearly defined.
In drafting a force majeure clause, careful consideration must be given as to the wording of the provision to ensure that the circumstances to which the clause is meant to apply are clearly stated in order to avoid any uncertainty or ambiguity. In the event that a force majeure clause is found to be too ambiguous, a Court might determine that it should be set aside, which could severely impact the parties’ intended rights and obligations under the contract.
There are normally four essential elements that may constitute a ‘force majeure event’:
- It can occur with human intervention;
- It can occur without human intervention;
- It cannot have been reasonably foreseen by the parties involved in the contract; and
- It was completely beyond the parties’ control and they could not have prevented its consequences.
Depending on the particular wording of the force majeure provision, a ‘force majeure event’ could be:
- A discrete event – For example, the Brisbane River breaking its banks during a flood.
- A single event that continues over an extended period of time – For example, a health pandemic.
- A combination of a number of events – For example, during the 2019 Australian bushfires, parts of the country were inaccessible, preventing things such as the delivery of goods by road.
Whether a party to a contract will be able to rely on a force majeure clause by pointing to a particular event in time will depend on whether the clause was drafted in a specific manner to cover specified occurrences only, or whether the provision was intended to have a broader application.
If you are thinking of including a force majeure clause in your contract, it is important that you agree with the other party to the contract about the intended range of the clause, and you should make sure that the clause is as specific and particularised as possible.
Do Force Majeure clauses only cover severe or extreme events?
Traditionally, force majeure clauses referred to circumstances that were beyond the control of the parties. Essentially, these clauses were intended to deal with unforeseen acts of government, natural disasters, weather emergencies, or other unforeseen and unpreventable factors that might severely affect the intended outcome of a contract and hinder performance. However, in more recent times, force majeure clauses have been drafted with the intention of covering a wider range of circumstances that could potentially impact the commercial interest of the parties to the contract.
What constitutes ‘circumstances beyond the control of a person’?
The phrase ‘circumstances beyond the control of the parties concerned’ has not been subject to detailed examination or interpretation by the Courts. The Courts appear to simply have assumed that the phrase should be given its common and everyday meaning.
In the case of Caltex Oil v Howard Smith Industries Pty Ltd  2 NSWLR 89 at 96, the Courts stated that the phrase “other circumstances beyond the control of the parties“ should not only be limited to extreme events such as natural disasters, but should also be extended to include other major events, such as an industrial strike, as these types of events may also severely impact the performance of certain contractual obligations.
What is the test for determining the general scope of a Force Majeure clause?
The general test used for determining the scope of a force majeure provision in the event that the clause is not specific or particularised enough is whether the particular event in question was within the contemplation or intention of the parties when they entered into the contract. It is important to note that the particular ‘event’ will generally not be considered a ‘force majeure event’ unless the occurrence of the event was outside the control of the contracting parties, and the parties were unable to foresee or prevent it.
What is the impact of a Force Majeure Clause?
Typically, the factors to which a force majeure clause is meant to apply would, on their own, largely frustrate the performance of the contract. Such frustration might render the balance of the contract void.
A valid force majeure clause aims to avoid this frustration by extracting the portion of the contract that will be impaired by the supervening event, leaving the balance of the contract intact and enforceable. For example, in building contracts where the primary concern is delay, a force majeure clause may validly allow for an extension of time for one party to perform their obligations.
In other contexts, the impact of a force majeure clause may be to suspend performance of the contract overall, or even excuse non-performance altogether.
The Doctrine of Frustration and Force Majeure Clauses
Due to the strict application of the doctrine of frustration, some people may wish to rely solely on a force majeure clause in the event something occurs that prevents the performance of certain contractual obligations. However, just because a contract includes a force majeure clause does not necessarily mean that the doctrine of frustration is no longer applicable.
The doctrine of frustration is a statutory legal doctrine stipulating that contracts may be set aside in the event that performance under the contract is severely affected as a result of an unforeseen and unpreventable event outside the control of the parties to the contract, through no fault of the parties themselves.1 Subsequently, neither party can demand further performance of the contract by the other party.2
Accordingly, even where a contract includes a force majeure clause and an event occurs that is within the scope of a force majeure clause, the parties may be completely discharged from their contractual obligations under the contract if the event is found to be covered by the doctrine of frustration. Essentially, this means that where a contract is found to have been frustrated, neither party can require performance of the contract by the other, even if the contract included a force majeure clause that was intended to have a milder application.3
For more information about the Doctrine of Frustration, see our Frustration of Contracts Page.
For when you need Assistance
The legal implications of a force majeure clause can be complex. As such, it is important for a party wishing to enter into a contract that includes a force majeure clause to carefully consider the structure of the clause to ensure they are fully aware of the implications the provision may have on both parties’ right and obligations under the contract.
Whether you are seeking legal advice regarding the structure and intended implications of a force majeure clause in a contract before signing the contract, you wish to find out whether or not you should include a force majeure clause in a contract that you are entering into, or you find yourself affected by the potential enforcement of a force majeure clause, we are here to assist you.
Contact Gibbs Wright Litigation Lawyers today about your force majeure matter for a free and confidential initial consultation to explore your legal rights and options.
The content of this publication is intended as general commentary only and may not be suitable or applicable to your personal circumstances. It is not intended to replace independent legal advice. You can contact us at our Brisbane Office for a free consultation on a range of litigation matters on (07) 3088 6364.
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