Australia: Force Majeure - Notices, Consequences And Mitigation

Last Updated: 6 February 2011
Article by Steven Goodman and Lisa Vanderwal

A force majeure notice is designed to excuse performance where an event beyond the control of a party affects the ability of that party to perform its obligations under a contract. The devastating floods and weather in Queensland and northern New South Wales have reinforced the need to include appropriate force majeure clauses in contracts, and to undertake a careful review process following a force majeure event.

1. Review Effect

Companies affected by a force majeure event such as the recent floods or cyclone should promptly review the effect of the event on their business as a whole, and on their ability to perform all or part of a contract. This also applies to companies indirectly affected by the floods or cyclone – for example those whose suppliers have issued, or have indicated that they will issue, a force majeure notice. In such cases changes to timetables, supply arrangements and deliverables (physical and intangible) will need to be reassessed.

2. Force Majeure Notices

If the force majeure event has affected a company's ability to perform some or all of its contractual obligations, then it should promptly assess whether or not it has the right to issue a force majeure notice, and consider the consequences of issuing such a notice.

Any force majeure notice must comply with the contractual notice requirements - they are normally required to be in writing and sent in a specific manner (which may exclude email) to a specific address or fax number. Force majeure notices are also, in some instances, only able to be issued within a specified period of the force majeure event occurring. In most cases it will also be necessary to provide in the notice details of the effect of the force majeure event, how long the effect is expected to continue and what actions the company is taking to mitigate the effect of the event (see further below).

The longer term consequences of issuing a force majeure notice must also be considered - some contracts allow the other party to terminate if the force majeure continues for a certain period. The extent of this period (if any) will vary from contract to contract, but it is usually fairly substantial – 4 to 8 weeks in some instances, several months in others.

It is often the case that payment of monies is not excused by a force majeure event. Organisations required to make payments whose cash flow has been affected by the floods and recent weather should review their force majeure clauses carefully – a failure to pay may be a breach of the contract unless the parties have come to some type of alternative arrangement.

Care should also be taken not to issue a force majeure notice prematurely. While it may be entirely appropriate to advise other parties of the potential for a force majeure event, relying on a force majeure notice's effect of excusing non-performance may in fact result in a breach

of that company's contractual obligations if the force majeure notice is invalid. In such an instance, there may not be any excuse for non-performance.

The non-performance excused by a force majeure notice also only relates to the extent of the force majeure event. Organisations should ensure that any failure to perform their contractual obligations does not extend to obligations unaffected by the force majeure event, as this could otherwise be a breach of contract.

3. Property and Insurance

Affected companies should also review the effect of the event on real and moveable property. Relevant agreements should be reviewed to determine who has risk in the property, and what steps need to be taken to recover any losses. This is particularly relevant to construction contracts where there may be some uncertainty in this regard.

Where there has been loss of or damage to intangible property, such as databases or information stored on servers, companies affected should also look at any disaster recovery or documentation restoration options they may have. Suppliers of such services should be contacting their customers to assess what they can do jointly to reduce the potential impact of the floods and/or extreme weather on their businesses.

Affected companies should also review their insurance policies to determine the extent of cover and what steps need to be taken to claim on those policies.

4. Mitigation

Affected companies should consider what steps they need to take to mitigate, or reduce, the effects of the force majeure event on their business. This not only makes goods commercial sense, but it often is a requirement of force majeure clauses.

Any mitigation required will usually only relate to circumstances within the affected company's reasonable control – for example, a company is unlikely to have failed to mitigate the effects of the force majeure if services provided by third parties (telecommunications, rail) continue to be unavailable, or if employees are unable to come to work. However, it may be a failure to mitigate if the organisation does not take reasonable steps to find a work-around (outsourcing, for example), or provide a clean environment for its employees.

 5. Conclusion

We continue to be heartened by the spirit of good will and co-operation with which people have dealt with the floods and extreme weather. We are firmly of the view that if the inevitable legal issues arising from these events are dealt with through mutual support, common sense and a spirit of goodwill, then at least the legal effects of these events are likely to be reduced.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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