When dealing with commercial contracts, you may have seen or are familiar with force majeure clauses. This clause predetermines the rights and remedies available to you or another party when an event outside your control occurs, causing the affected party to be incapable of performing their obligations under the contract. Force majeure events often include ‘acts of God’ such as a fire, hurricane, typhoon or earthquake. It may also include other catastrophic events like riots or terrorism, war, nuclear contamination or widespread illness, government-sanctioned shutdown and a pandemic.
Force majeure can be an essential element of a contract, so it is vital to ensure you draft them correctly into your contract. When well-drafted, force majeure clauses can determine what remedies are open to parties when a force majeure event affects performance under a contract. This article will step through the importance of force majeure clauses and offer some handy tips in relation to best practice drafting.
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Why Are Force Majeure Clauses Important?
Including a force majeure clause is essential from a risk allocation perspective. For example, without a force majeure clause, a party might be in breach of a contract and potentially liable for a damages claim from the other side because of an event or circumstance beyond their reasonable control.
Force majeure typically operates to suspend a party’s obligations under a contract. Consequently, the occurrence of a force majeure event that leads one party to be unable to fulfil or perform their contractual obligations will not amount to a breach of contract. Ultimately, a well-drafted force majeure provision will excuse a party from delay or non-performance for events beyond their control. Likewise, it may allow either or sometimes both parties to terminate a contract.
How Should I Draft a Force Majeure Clause?
The way you draft a force majeure provision into your commercial contract is essential because:
- the precise wording of the clause will determine whether you can rely on it; and
- depending on its wording, the clause may or may not be helpful where an unforeseen event occurs.
Definition
Generally, a broader force majeure definition will be more beneficial when you are the supplier of goods or services. Alternatively, if you are a customer, you are less likely to be affected by a force majeure event. Accordingly, a narrower or more defined definition will better suit your needs.
Ensure the definition of ‘Force Majeure Event’ includes a neat and considered list of example events where, if the event were to occur, a party’s obligation to perform will be suspended.
The general principles of a force majeure event are:
- that the event was outside the party’s reasonable control; and
- that the party was not in a position to or was unable to prevent the event’s consequences.
Examples of Force Majeure Events
Additionally, your definition of a force majeure event should be clear so that the parties understand which events will trigger the provision.
| Event | Example Force Majeure Event |
| Weather | Flash flooding may mean that a planned event becomes cancelled or postponed. A force majeure clause may protect the organisers from being liable to customers. |
| Threats and Evacuation | A bomb threat causing evacuation would mean a retail premises could not operate during standard business hours. A force majeure clause may protect the tenant in a commercial lease from liability due to not operating within the contractually agreed hours. |
| Third-Party Inputs | Failures by a shipping company may mean that goods are delivered later than the agreed period despite a business’ guarantees. The business which sells these goods may find protection from liability arising from the delay of these goods. |
| Legislation | A business may sell goods to customers and later that good becomes illegal to sell. A force majeure clause may protect the business from its obligation to continue selling the goods to customers that have already purchased them. |
What Happens if a Force Majeure Event Occurs?
A force majeure provision must guide a party through the steps they must take if a force majeure event occurs. Below are principles you might consider.
| Notice | A balanced contract will require an affected party to notify the other party of the force majeure event as soon as practicable. So, as soon as you become aware that the force majeure event impacts your performance under the contract, you must notify the other party. Your notice should include:
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| Ongoing Obligations | You may include a provision requiring that both parties continue fulfilling obligations not affected by the force majeure event. This ensures that an event disrupting a nonessential part of the contract will not derail the whole agreement. |
| Mitigation | If the other party is more likely to be the party affected by a force majeure event, you may choose to include an obligation for the affected party to mitigate the effects of the event. |
| Suspension or Termination | The force majeure clause should generally only suspend the provision of goods or services for the period the event affects the supply. Consider whether the occurrence of a force majeure event shall enable a party or both parties to terminate the contract if the event is drawn out (for example, if it extends for weeks or months). |
| Engagement of Third-Parties | Can a third party be employed by the not affected party to carry out the services or deliver the goods if the affected party can no longer perform due to a force majeure event? This type of provision is not overly common, but it can be beneficial if you are the party less likely to be affected. |
Consider Whether a Force Majeure Clause is Relevant
The significance of a force majeure clause depends on the type of arrangement. If you only provide services online, for example, you draft construction plans but never physically attend a construction site, including a force majeure clause may not be pivotal. Whereas if you are a builder, it is more likely you will be critically affected by the occurrence of a force majeure event. In this second example, a force majeure clause is very important.
Key Takeaways
Force majeure clauses are often key terms in commercial contracts. The existence of a force majeure clause can save a party from being in breach of contract and exposed to damages if an event or circumstance occurs, which is outside of the party’s reasonable control. When reviewing or drafting a commercial contract, take care to ensure you:
- assess whether a force majeure clause is required, for example, consider what unforeseeable events your client might want to be protected from;
- consider how broad or narrow you want the definition of force majeure to be in defining the list of possible force majeure events; and
- set out the process that the parties must comply with following the occurrence of a force majeure event.
If you need help reviewing or drafting a force majeure clause, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Force majeure is a French term that translates to “superior strength”. Despite its foreign origins, force majeure clauses frequently show up in Australian contracts. They address what happens when events beyond the control of either party disrupt the contract.
The significance of a force majeure clause depends on the type of arrangement. If you only provide services online, for example, you draft construction plans but never physically attend a construction site, including a force majeure clause may not be pivotal.
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