The effects of Cyclone Debbie have provided a timely reminder of the value of including a carefully considered force majeure clause in your contracts.
A force majeure clause is, in essence, an express agreement between the parties to a contract as to the way risk is to be allocated should a force majeure event occur.
This Alert provides some practical tips for drafting such clauses for maximum benefit.
Tip 1 – Define the force majeure events with precision
While it is possible to define a force majeure event in general terms (by focusing on an act beyond the reasonable control of the parties which is not able to be reasonably prevented or overcome), adding a list of specific events will enhance certainty, serve as a guide to the parties and the courts and also help to minimise the risk of dispute.
This can be done in an inclusive or exclusive way:
- An inclusive definition will provide a non-exhaustive list of examples of force majeure events and leave it open as to whether other non-listed events may constitute a force majeure event. This approach will be preferred by the party most likely to rely on the clause.
- An exclusive definition, by contrast, will provide an exhaustive list of force majeure events, thereby restricting the ability of the affected party to argue that other events may also be force majeure events. This approach will be preferred by the party that is less likely to need to rely on the clause.
Tip 2 – Be aware of the meaning of some common expressions
Certain common expressions used in force majeure provisions have particular meanings which you should be aware of.
For instance, an "act of God" is generally regarded as an event which is due to natural causes directly and exclusively, without human intervention, and that could not have been prevented by any amount of foresight, pains and care reasonably to be expected.
In Commissioner of Railways (WA) v Stewart (1936) 56 CLR 520, the High Court held that the most violent rainstorm experienced in a particular locality was not an "act of God" as it was not "such that it exceeded in amount that for which a reasonable man could have been expected to provide." For this reason, most force majeure clauses do not rely solely upon the phrase "act of God" but instead list the types of natural events intended to be covered – for instance storm, tempest, flood, fire and earthquake.
Tip 3 – Clearly identify the scope of relief
It is important to clearly specify the intended scope of relief, identifying both the relevant contractual obligation and the performance effect that relief will apply to.
In relation to the latter, consideration should be given as to whether the clause operates on events preventing, hindering or delaying performance (or a combination of those possibilities). Although often used conjunctively, each has a different consequence. For instance, the expression "prevents" will require evidence establishing that the further performance of the contract is a "legal and physical impossibility".
Tip 4 – Clearly set out the parties' obligations upon an event of force majeure occurring
A range of matters should be considered when specifying the parties' obligations upon an event of force majeure occurring. Depending on the context, these may include:
- The mechanism for bringing the clause into operation (for example a notices provision) and whether strict compliance with this mechanism is a condition precedent to relief.
- Whether there should be any adjustment to the other terms of the contract as a result of the force majeure event (see Tip 6).
- Whether additional obligations should be imposed on the affected party – for instance, procuring alternative supply and, if so, at whose cost?
- Determining who should bear responsibility for delay costs.
- Whether a contractor should be entitled to an extension of time if a force majeure event impacts on the ability to perform contracted works.
- Whether the recipient party should be entitled to source products/services from an alternative supplier during the period of force majeure.
- Whether a shortfall arising from a force majeure event can be allocated between multiple customers.
- Whether the force majeure event excuses performance of the contract entirely or only for a specified period of time, after which there is a right to terminate the contract.
Tip 5 – Clearly set out the parties' obligations once the force majeure event ceases
It is important not to focus solely on the parties' obligations while a force majeure event is occurring, but instead to also make provision for what happens once the force majeure event ceases. This may include, for instance, providing for "catch up" obligations or adjusting schedules/work programmes to minimise the effects of the force majeure event.
Tip 6 – Consider the interaction with other contractual provisions
Lastly, be aware that a force majeure clause will not necessarily impose an implied limit on other clauses of the contract which fail to deal with risk in the same way.
It is therefore important to consider the interaction of a force majeure clause with other provisions of the contract – for instance those dealing with timing, charges, quantities, schedules/work programmes, take or pay requirements, notices, termination rights and dispute resolution processes.
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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.