Can A Force Majeure Clause Protect Businesses From Risk?

Summary

• A force majeure clause protects businesses from liability when unexpected events prevent them from fulfilling contractual obligations.
• Without such a clause, a party’s legal options are significantly limited and they may only be able to rely on the narrower doctrine of frustration.
• Clearly defining force majeure events in a contract reduces the risk of disputes and provides certainty on procedures to follow.
• This article is a plain-English guide to force majeure clauses in commercial contracts for Australian business owners.
• It has been produced by LegalVision, a commercial law firm that specialises in advising clients on commercial contracts and business risk.

Tips for Businesses

Review your commercial contracts to confirm they include a force majeure clause with clearly defined triggering events. Consider what risks are relevant to your industry and ensure the clause addresses them. Establish agreed procedures for notification and performance obligations so all parties understand their rights if an unexpected event occurs.

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On this page

• What is a Force Majeure Clause?
• How Can a Force Majeure Clause Protect Your Business?
• Key Takeaways
• Frequently Asked Questions

A force majeure clause shields your business when unexpected events make it impossible to meet your contractual obligations. Without one, you have little protection if circumstances beyond your control disrupt your ability to deliver. This article will explain how a force majeure clause can protect your business from risk.

What is a Force Majeure Clause?

A force majeure clause is a contractual provision that allows the parties to alter their obligations in a contract if something unexpected happens. Most commonly, a force majeure clause will seek to limit the liability of one or both parties if certain unexpected events occur, which make it difficult or impossible to meet the obligations under the contract. 

Depending on how the clause is drafted, the clause could have various consequences. For example, a force majeure clause can:

• excuse a party from performing their obligations under the contract; 
• excuse a party from a delay in the performance of their duties; 
• give a party an extension of time to perform their duties; or 
• give a party the right to end the contract. 

Usually, a force majeure event is beyond the reasonable control of a contractual party. Nevertheless, it is crucial that your contract clearly defines what constitutes a force majeure event. Some of the most common examples of these events include:

• wars;
• armed conflicts; 
• terrorist attacks; 
• natural disasters such as earthquakes, fires, floods or storms; 
• epidemic or pandemics; and 
• nuclear, chemical or biological contamination.  

How Can a Force Majeure Clause Protect Your Business?

There are various ways a force majeure clause can protect your business from risk. Some of the most significant ways are as follows:

1. Greater Contractual Rights 

A force majeure clause must be included in a commercial contract if you wish to rely upon one. That is to say, a court will not imply the existence of force majeure rights in a contract without it stating otherwise. 

If you do not have the clause in your contract, your rights will be much more limited if unexpected events impact your ability to perform your contract obligations. Instead, you may be able to rely upon the law of ‘frustration’. 

As such, including a robust clause will give you far greater protection and is more likely to protect you from the potential liabilities that could arise. 

2. Protection in Uncertain Times  

The COVID-19 pandemic demonstrated the importance of having contractual protection to protect a supplier when unexpected events occur. 

When entering into new commercial agreements, it is vital to consider the risks involved. By including a force majeure clause in your commercial contracts, you can mitigate against potential risks. Including the clause will give you comfort when trading, so you know you have contractual protection if unforeseen events impact the performance of your obligations. As a supplier dealing with several customers and a lack of control over external factors, this can help put your mind at ease. 

3. Minimise the Risk of a Business Dispute 

Including a force majeure clause rights will give you certainty about your legal rights and options if an unforeseen event occurs. When drafting the clause, you can decide on the appropriate procedures to follow and mitigate against the risks you could face. 

Without a force majeure clause, you could find yourself involved in arguments with customers if unexpected events occur that prevent or delay the performance of your obligations. Without the clause, your customer is not forgiving if you cannot perform your obligations due to unexpected events. By including a clear clause, you will have a contractual procedure to follow and will be less likely to encounter a dispute. 

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Key Takeaways

Although unexpected events may seem unlikely, it is essential to consider them as part of your contract risk management. Including a force majeure clause will give certainty on what procedures to follow if unexpected events occur that delay or restrict your ability to perform your contractual obligations. Significantly, the clause can also reduce your exposure to risk and liability if unforeseen events occur during your commercial agreements. 

If you need advice on a contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions