Issued: 31 March 2020
In the course of the COVID-19 pandemic, suppliers and other parties to commercial arrangements with government agencies may exercise rights under force majeure clauses. A force majeure clause is a contractual method by which parties seek to manage the impact of events beyond their reasonable control.
Key points
In managing commercial transactions during the COVID-19 pandemic, agencies should:
- in the context of existing commercial contracts, ascertain if those contracts include force majeure clauses and, if so, determine:
- whether the definition of "force majeure event" encompasses the COVID-19 pandemic
- the consequences of the force majeure regime applying and
- the relationship of the force majeure regime with other contractual rights, such as a right to terminate for convenience
- consider how best to manage COVID-19 related risks in new contractual arrangements. It may be preferable to draft specific provisions, tailored to deal with COVID-19 related risks, rather than rely on a force majeure regime.
A force majeure clause is a contractual risk allocation tool. It is a mechanism by which parties seek to manage the impact of events beyond their reasonable control. In general:
- Force majeure is not implied as a matter of law in Australia. Accordingly, the wording and scope of a force majeure clause is critical
- Force majeure clauses are interpreted strictly by reference to their particular wording and the specific facts. In the case of ambiguity, a force majeure clause is interpreted against the interests of the party seeking to rely on it.
As to whether the COVID-19 pandemic would constitute a force majeure event, the terms of the "force majeure event" definition will be key. However, the following general points can be made:
- if the definition refers to a pandemic or epidemic, it would capture the COVID-19 pandemic
- it is unclear whether an "act of God" would extend to the COVID-19 pandemic. According to the case of Nugent v Smith (1876) 1 CPD 423, 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" (James LJ at 441)
- even if the definition includes a general catch-all at the end (such as "any other event beyond the reasonable control of the parties"), the catch-all may be limited in scope by reference to the specific examples of events that precede it (see, for example, Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd [2006] FCA 1324, Kiefel J at [62]).
If the definition of "force majeure event" encompasses the COVID-19 pandemic, consideration must be given as to:
- whether it is the cause of a party's inability to perform as per the terms of the force majeure regime and
- the contractual rights and remedies that flow, including the regime's relationship with other risk allocation provisions.
Contact
Michael Granziera, Director
michael.granziera@cso.nsw.gov.au
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