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Benefits of Including a Force Majeure Clause in Your Commercial Contract

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Businesses have learnt countless lessons from the COVID-19 pandemic. For commercial contracts, one key lesson learnt was the benefits of force majeure clauses. A force majeure event is an unforeseeable event that prevents a contracting party from fulfilling its obligations. This can range from natural disasters to a global pandemic. If you are thinking about including a force majeure clause in your commercial contracts, this article outlines:

  • what a force majeure clause is;
  • the typical provisions within a force majeure clause; and
  • benefits of force majeure clauses in commercial contracts.

What Is a Force Majeure Clause?

An example is apt to illustrate what a force majeure clause is and how it works. 

Imagine that your supplier is unable to deliver your goods on time as a result of the pandemic. If this is the case, the supplier would likely be in breach of your supply agreement. However, imagine also that the supply agreement happens to include a force majeure clause, and that clause covers disruptions as a result of a pandemic. As a result, your supplier will not be strictly liable for their breach, like they would be if the contract did not have such a clause. Therefore, a force majeure clause can relieve a party from performing their contractual obligations as a result of an event outside their reasonable control.

Whilst the definition of a force majeure event can differ across commercial contracts, a force majeure event will generally:

  • not be reasonably foreseeable by either party;
  • be outside the reasonable control of either party; and
  • have consequences that fall outside both parties’ ability to prevent.

Ultimately, whether a pandemic or natural disaster fall under a force majeure event largely depends on the terms of your commercial contract.

Typical Provisions in a Force Majeure Clause

As mentioned above, the wording of a force majeure clause will determine whether you can rely on the clause. Therefore, it is important that both parties to an agreement are clear on what common terms used in force majeure clauses mean.

1. Force Majeure Event

A force majeure clause should clearly define what events will be counted as a force majeure event, whether that be:

  • changes in the weather;
  • threats and evacuations to premises; and
  • third party inputs, like a shipping company failing to deliver goods to your supplier on time.

Defining what is and is not a force majeure event outlines the parameters of a contractual breach. 

2. Termination

A force majeure clause can also provide that either party can terminate the contract if:

  • the specific event continues beyond the specified period; and
  • a party is incapable of remedying the event within the specified period.

It can be especially beneficial to provide for an ability to terminate the contract if a force majeure event arises when you have a long-term contractual arrangement. This is because it may be more commercially viable to terminate the agreement if the force majeure event is lengthy.

3. Notice Period

A notice period within a force majeure clause may require the affected party (i.e. the party who is incapable of performing their obligations) to notify the other party. 

For instance, if your supplier can no longer deliver your goods, and wishes to rely on a force majeure clause, the clause might require that they give you immediate notice. Therefore, the inclusion of a notice period ultimately facilitates communication between parties to ensure that no party is left in the dark.

4. Mitigation

Although force majeure events usually occur for reasons outside a party’s control, you might wish to include a mitigation provision in your commercial contract. 

Mitigation typically refers to the actions that a party is reasonably capable of fulfilling in order to mitigate the effects of a force majeure event. 

This can greatly benefit the commercial transaction even though the surrounding circumstances prevent the performance of the contract.

5. Ongoing Obligations

In a similar vein to mitigation, a force majeure clause may also include a provision that provides that both parties must still fulfil any obligations that are unaffected by the force majeure event. This ensures that even though an unforeseeable event has disrupted parts of your agreement, it will not derail the entirety of your agreement.

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How Does a Force Majeure Clause Allocate Risk?

Ultimately, a force majeure clause allocates the risk of either party suffering a loss if an unforeseeable event hinders the performance of a contract. This is because a force majeure clause can suspend your obligations in a contract and exclude you from being liable for circumstances that are likely outside of your control.

Additionally, when parties negotiate the inclusion of a force majeure clause in the contract, they can allocate who bears the risk imposed by an uncontrollable event. Whilst parties may not always have equal bargaining power when drafting a commercial contract, an unforeseeable event can affect either party in a commercial arrangement. For this reason, risk allocation is often balanced, depending on your circumstances.

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Key Takeaways

If an event such as a global pandemic occurs, having a well-drafted force majeure clause can benefit your business by relieving it from performing its contractual obligations. Indeed, if you wish to include a force majeure clause in your commercial contract, you should seek legal advice. This is because an experienced lawyer can carefully draft a clause that best suits your specific business context. Therefore, if you have a question about force majeure clauses or need help drafting one for your commercial contract, our LegalVision’s experienced contract lawyers can help. Call us on 1300 544 755 or complete the form on this page.

Frequently Asked Questions 

What is a force majeure clause?

A force majeure clause can relieve a party from performing their contractual obligations due to a force majeure event specified in the clause. Therefore, the benefits of force majeure clauses in commercial contracts include their ability to allocate risk between the parties, should a force majeure event occur.

If I choose to terminate a contract, do I have to provide written notice?

As a condition of a termination clause, you may find that you must provide written notice to the other party of your termination. However, in the absence of this condition, it would nevertheless be a good idea to provide written notice.

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