Force majeure and covid 19

Issued: 31 March 2020

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In the course of the COVID-19 pandemic, suppliers and other parties to commercial arrangements with government agencies may exercise rights under force majeure clauses. A force majeure clause is a contractual method by which parties seek to manage the impact of events beyond their reasonable control.

Key points

In managing commercial transactions during the COVID-19 pandemic, agencies should:

  • in the context of existing commercial contracts, ascertain if those contracts include force majeure clauses and, if so, determine:
    • whether the definition of "force majeure event" encompasses the COVID-19 pandemic
    • the consequences of the force majeure regime applying and
    • the relationship of the force majeure regime with other contractual rights, such as a right to terminate for convenience
  • consider how best to manage COVID-19 related risks in new contractual arrangements. It may be preferable to draft specific provisions, tailored to deal with COVID-19 related risks, rather than rely on a force majeure regime.

A force majeure clause is a contractual risk allocation tool. It is a mechanism by which parties seek to manage the impact of events beyond their reasonable control. In general:

  • Force majeure is not implied as a matter of law in Australia. Accordingly, the wording and scope of a force majeure clause is critical
  • Force majeure clauses are interpreted strictly by reference to their particular wording and the specific facts. In the case of ambiguity, a force majeure clause is interpreted against the interests of the party seeking to rely on it.

As to whether the COVID-19 pandemic would constitute a force majeure event, the terms of the "force majeure event" definition will be key. However, the following general points can be made:

  • if the definition refers to a pandemic or epidemic, it would capture the COVID-19 pandemic
  • it is unclear whether an "act of God" would extend to the COVID-19 pandemic. According to the case of Nugent v Smith (1876) 1 CPD 423, an act of God is an event "due to natural causes directly and exclusively, without human intervention, and that … could not have been prevented by any amount of foresight and pains and care reasonably to be expected" (James LJ at 441)
  • even if the definition includes a general catch-all at the end (such as "any other event beyond the reasonable control of the parties"), the catch-all may be limited in scope by reference to the specific examples of events that precede it (see, for example, Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd [2006] FCA 1324, Kiefel J at [62]).

If the definition of "force majeure event" encompasses the COVID-19 pandemic, consideration must be given as to:

  • whether it is the cause of a party's inability to perform as per the terms of the force majeure regime and
  • the contractual rights and remedies that flow, including the regime's relationship with other risk allocation provisions. 

Contacts

Felicity Shaw, Assistant Crown Solicitor
felicity.shaw@cso.nsw.gov.au
02 9474 9442 
0466 480 286

Michael Granziera, Director
michael.granziera@cso.nsw.gov.au
02 9474 9321
0409 926 581

Amalia Stanizzo, Special Counsel
amalia.stanizzo@cso.nsw.gov.au
02 9474 9056
0435 964 226

Karen Ferris, Principal Solicitor
karen.ferris@cso.nsw.gov.au
02 9474 9265
0435 964 227

To subscribe to legal alerts, email the CSO Marketing and Communications team at: csomarketing@cso.nsw.gov.au.

Last updated:

16 Nov 2022

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