As the world fights to contain and mitigate the impact of COVID-19, the economic impacts are likely to be severe: consumer confidence dropping, supply lines thwarted, public equities in free fall. With Australia's economy being directly impacted by travel bans, obligatory quarantine periods and social distancing measures, many questions are being asked about ongoing contractual obligations which are becoming increasingly difficult to comply with.

In a prescient sign of things to come, it has been reported that by early March 2020, the China Council for the Promotion of International Trade issued at least 4,800 force majeure certificates due to the impact of the control measures1 implemented to contain and mitigate the coronavirus. As the effects of COVID-19 continue to spread across our economy, it is vital that businesses understand how to interpret and apply force majeure clauses and the doctrine of frustration to their own commercial affairs.

In this article, we break down the meaning of the legal principle force majeure. We will be separately writing shortly about a different legal pathway that parties may pursue, the doctrine of frustration, when significant disruption to contractual performance occurs by reason of COVID-19.

Force majeure

The term "force majeure" literally means "exceptionally strong force" and refers to an event or an imperative necessity that was not contemplated by the parties to a bargain when they entered the contract. A force majeure clause generally excuses "innocent parties" from performing contractual obligations or prevents them from enforcing a contractual right, because of a contractually defined event prohibits or thwarts contractual performance. The function of these clauses is to allocate risk when these supervening events occur.

Force majeure clauses are typically intended to provide a pathway for parties to keep the contract on foot during the disruption. Although the duration of force majeure event may be unknown, such clauses may also provide a regime in which to negotiate certain aspects of their commercial arrangements.

Force majeure clauses define, either exhaustively or not exhaustively, the "event" that intervenes contractual performance and the contractual consequences for this. Ordinary force majeure events that are expressly drafted in the contract include, "acts of God" (extreme natural occurrences such as floods, tsunamis, fires, lightening and earthquakes), strikes, riots, and acts of war.

A party will only be granted relief from the clause if it can be established that there is a causal connection between the event and its effect on performance of the contract. In Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235, Spigelman CJ warned of the dangers of relying on economic impracticability as a simplistic basis to argue a force majeure event [at 93]:

"… changes in economic conditions, which significantly alter the commercial aspects of an arrangement, even though in one sense they are "beyond the control" of a party to a commercial agreement, may not fall within a phrase in a Force Majeure clause. Mere commercial impracticability may not be sufficient."  

Importantly, force majeure is not a recognised common law doctrine, which means that if the "event" is not sufficiently defined in scope, content and consequence, the clause may have no legal effect by reason of it being void for uncertainty. For example, a supply of contract of steel with the provision "subject to force majeure conditions that the government restricted the export of the material at the time of the delivery" was held to be "vague and uncertain so as to have [no] precise meaning"; British Electrical & Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 All ER 94.

Can COVID-19 constitute a force majeure event?

In short, whether COVID-19 constitutes a force majeure event depends upon the interpretation of the relevant clause/s.

Looking at common events in force majeure clauses, we can see some potential avenues, provided the causative link might be established:

  • "Pandemic" – Perhaps the most obvious and cleanest force majeure event, given the WHO's classification of COVID-19 as "pandemic";
  • "Act of God" – An "act of God" is considered to be an event caused "due to natural causes directly and exclusively and without human intervention unable to be prevented by any degree of foresight and care reasonably to be expected"; Nugent v Smith (1876) 1 CPD 423, 444 (endorsed by Latham CJ in Commissioner of Railways (WA) v Stewart (1936) 56 CLR 520 at 528-259). Most modern force majeure clauses define the type of natural events that are intended to be captured by an "act of God";
  • "Acts of government" – With the Federal Government imposing indefinite 14-day quarantine period for individuals traveling to Australia and broader travel bans, it could be argued that an "act of government" has caused performance issues, particularly in the tourism sector.
  • "Hinder, delay or prevent" – These expressions are fairly broad and carry different meanings. For example, "hinder" suggests a reduced ability to perform, while "prevent" suggests impossibility. These words must be carefully construed as they may also carry conjunctive and less obvious meaning when interpreting the contract.

Practical tips

  • Review your contract for force majeure clauses with a view to seeking to understand how risk has been allocated under the contract and whether COVID-19 might fit within the definition of the clause.
  • Before seeking to rely on a force majeure clause, establish the causal connection between the COVID-19 and the inability to perform.
  • If you do have grounds to exercise the force majeure clause, comply with the contractual process, which typically involves issuing notice particularising the force majeure event, and how it has impacted your contractual obligations. Be as specific as facts would allow.
  • Force majeure does not necessarily mean that performance stops. Check to see whether the affected party has a contractual obligation to mitigate by performing certain obligations under the agreement.
  • A party who seeks to rely on a force majeure clause bears the onus of proving how that event has impacted the ability to fulfil contractual performance.
  • An improperly drafted clause which simplistically refers to 'force majeure', without specifying its scope in content and consequence, could be void for uncertainty and severed from the agreement.