Planning for disaster: 6 practical tips for drafting force majeure clauses
The effects of Cyclone Debbie have provided a timely reminder of the value of including a carefully considered force majeure clause in your contracts.
A force majeure clause is, in essence, an express agreement between the parties to a contract as to the way risk is to be allocated should a force majeure event occur.
This Alert provides some practical tips for drafting such clauses for maximum benefit.
While it is possible to define a force majeure event in general terms (by focusing on an act beyond the reasonable control of the parties which is not able to be reasonably prevented or overcome), adding a list of specific events will enhance certainty, serve as a guide to the parties and the courts and also help to minimise the risk of dispute.
This can be done in an inclusive or exclusive way:
Certain common expressions used in force majeure provisions have particular meanings which you should be aware of.
For instance, an “act of God” is generally regarded as an event which is due to natural causes directly and exclusively, without human intervention, and that could not have been prevented by any amount of foresight, pains and care reasonably to be expected.
In Commissioner of Railways (WA) v Stewart (1936) 56 CLR 520, the High Court held that the most violent rainstorm experienced in a particular locality was not an “act of God” as it was not “such that it exceeded in amount that for which a reasonable man could have been expected to provide.” For this reason, most force majeure clauses do not rely solely upon the phrase “act of God” but instead list the types of natural events intended to be covered – for instance storm, tempest, flood, fire and earthquake.
It is important to clearly specify the intended scope of relief, identifying both the relevant contractual obligation and the performance effect that relief will apply to.
In relation to the latter, consideration should be given as to whether the clause operates on events preventing, hindering or delaying performance (or a combination of those possibilities). Although often used conjunctively, each has a different consequence. For instance, the expression “prevents” will require evidence establishing that the further performance of the contract is a “legal and physical impossibility".
A range of matters should be considered when specifying the parties’ obligations upon an event of force majeure occurring. Depending on the context, these may include:
It is important not to focus solely on the parties’ obligations while a force majeure event is occurring, but instead to also make provision for what happens once the force majeure event ceases. This may include, for instance, providing for “catch up” obligations or adjusting schedules/work programmes to minimise the effects of the force majeure event.
Lastly, be aware that a force majeure clause will not necessarily impose an implied limit on other clauses of the contract which fail to deal with risk in the same way.
It is therefore important to consider the interaction of a force majeure clause with other provisions of the contract – for instance those dealing with timing, charges, quantities, schedules/work programmes, take or pay requirements, notices, termination rights and dispute resolution processes.
For more information or discussion, please contact the HopgoodGanim Resources & Energy team.