By Scott Alden, Partner, Holding Redlich
From global supply chains to small town purchase orders - a huge number of contractual arrangements have been disrupted in 2020: ‘the year of disasters’.
As a result, force majeure, frustration and termination for convenience clauses have been brought into the spotlight, as entities consider what relief is available to them where they are unable to perform their contractual obligations due to the impacts of natural disasters, and most prominently in 2020, the global COVID-19 emergency.
A force majeure (literally ‘superior force’) clause allows one or both contractual parties to cease or suspend performance of a contract following the occurrence of a pre-defined event.
If successful, the party will not be liable for failing to perform its obligations under the contract. It may also give rise to termination right, usually where the force majeure event continues for an extended period.
In most cases, a force majeure event includes acts of God, war, riot or invasion, national emergency, government action including strikes, terrorism or the imposition of embargo, or extreme weather events – which could include bushfires or severe flooding. The clause may also specifically include epidemics or pandemics, which would now include COVID-19 as a WHO declared pandemic.
However, changes in economic circumstances are usually commonly excluded, meaning delays or stoppages due to disrupted global supply chains as a fallout of a natural event, rather than a direct cause, may be excluded.
Ultimately, it will depend on the drafting of the particular clause, and entities should be examining their suite of contracts to determine the scope of their force majeure clauses.
The common law doctrine of frustration may, in extreme cases, be able to be relied on where there is no force majeure clause, or where the crisis event does not fall within the definition of a force majeure under a particular contract.
Frustration requires the impossibility of a contract’s performance, or the obligations under the contract being so fundamentally changed, by an unforeseen event from what was originally contemplated by the parties.
However, frustration is not easy to establish, as it requires the parties to prove that they did not contemplate performing the contract in the radically altered circumstances.
Performance of a contract becoming more expensive or onerous, even through no fault of the parties, will generally not be enough to establish frustration.
Termination for convenience
A party may have a right to unilaterally vary a contract, suspend the performance of a contract in certain circumstances, or be able to rely on a termination for convenience clause.
Commonly included in government contracts, termination for convenience clauses allow the party with the benefit of the clause to terminate the agreement where there is no fault by the other party.
These clauses usually provide that the terminating party may, at any time by providing notice to the other party, terminate the agreement in whole or in part. If triggered, the terminating party will usually only be liable for direct costs incurred by the other party up to the date of termination, and not loss of profits.
In a government context, termination for convenience clauses are usually justified where the government can no longer fulfil its contractual obligations due to a significant or urgent change of government policy – as is being currently experienced with the ramifications of the COVID-19 emergency.
Finally, if the contract is international, with parties across jurisdictions, parties should also be looking to the governing law clause.
This is especially important where the contract does not have a force majeure clause, as certain jurisdictions imply force majeure into the contract where it lacks an express term.
Under Australian law, force majeure clauses will generally not be implied where there is no express clause, however this is not necessarily the case for other jurisdiction, such as China.
The crises in 2020 in Australia, and across the globe, have sparked concern for contracting parties regarding what they can do if they can no longer perform their obligations under the contract.
In most circumstances, this will depend on the wording of the contract itself, and whether the crisis in question satisfies a force majeure or suspension event, or whether a party has a right to terminate the contract for convenience.
Failing that, parties may seek to rely on the common law doctrine of frustration in extreme circumstances, although it is often difficult to establish the ‘impossibility’ required.