Contracts

Force Majeure clauses are commonly included in contracts for service or construction, therefore it is important to be aware of how they should be drafted before entering into a contract. Force majeure clauses are necessary in contracts to protect parties from unexpected events that may lead to breach of contract in instances where the doctrine of frustration does not apply.

‘Force Majeure’ translates to ‘superior force’. It releases a party from their obligations under a contract after an identified circumstance occurs. Such circumstances can be defined in the contract as negotiated between the parties. However, case law grants an extensive meaning to the term force majeure in the context of commercial contracts. The term force majeure itself has been construed to cover acts of God, war, embargoes, refusals to grant licences, and abnormal weather conditions. Most clauses are constructed to be non-exhaustive, incorporating the phrase ‘other circumstances beyond the control of the parties’. In Caltex Oil v Howard Smith Industries Pty Ltd [1973] 2 NSWLR 9, Reynolds JA stated that the phrase ‘other circumstances beyond the control of the parties’ could include an industrial strike. Force majeure clauses are typically included in contracts with strict time stipulations, or contracts that rely on the services of sub-contractors.

The particular force majeure event must have been in the contemplation of the parties when the contracted was made. Furthermore, it must have been outside the control of the contracting party. Essentially, force majeure can occur with or without human intervention, however it cannot have been reasonably foreseen by the parties. It needs to have been beyond the parties’ control. It is necessary that they could not have prevented the consequences of the force majeure event in the circumstances. A force majeure clause will not cover an event that is caused by the negligence of one of the parties to a contract.

Significantly, commercial impracticality cannot be a force majeure event. Performance that becomes uneconomical is not a circumstance beyond the control of a party to a contract. This is reflected in the judgments of Spiegelman CJ in Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 who cited Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd (2006) 236 ALR 115. This is the case even though the commercial impracticality is beyond the control of the contracting party, and was not reasonably foreseen by the contracting parties.

Force majeure clauses are used in contracts as the doctrine of frustration can only be applied in limited situations. The doctrine of frustration applies where an event causes performance of a contract to be radically different from what was intended by the parties. Essentially, the parties must show that they never agreed to be bound under the contract in the fundamentally different situation emerging as a result of the intervening unexpected event. If an event could have been anticipated provided for by the parties in their contract, the court will not be understanding.

Therefore, it is always ideal to have a force majeure clause drafted into a contract to ensure parties are protected from unexpected events. Without a force majeure clause, there is an increased risk of needing to may damages if the intervening event causes you to breach the contract. Damages may be paid even though the intervening event was not caused by negligence, and was in fact out of your control. The implication of a duty of good faith could also be relevant in these situations.

If this article raises any legal issues for you please get in touch today using the form at the bottom of the page! If you need further information regarding commercial contractual terms check out our Resource Centre.

This article was authorised by Warwick Heeson.

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