A force majeure clause has long been standard in contracts, but COVID may change the way risk is distributed.
Businesses that signed commercial contracts pre-2020 may have thought the inclusion of a force majeure clause a little far-fetched.
After all, few could have anticipated a once-in-a-century pandemic was imminent, that governments would halt travel across land, air and sea, and that global supply chains would remain strained for more than a year.
However, what has followed is a wave of litigation actions that hinge on the COVID-19 pandemic, the federal government’s border closures and the crippling labour shortages meeting the distinction of a force majeure event.
The French term, which means “a superior force”, is applied to safeguard businesses from liability in cases where an “act of god” has derailed its ability to fulfil contractual obligations.
Though not technically a general legal principle, the clause is often used as a get-out card in the case of a natural disaster or man-made catastrophe.
But recent attempts to rely on force majeure have unveiled its deficiencies and the importance of fairly distributing risk in the event of an unforeseen catastrophe, with new contracts now being negotiated with the challenges of a pandemic front of mind.
Local cases
In the weeks before receivers Deloitte took hold of Griffin Coal, the Collie-based miner launched an 11th-hour bid to stop power generator Bluewaters from installing its own controller.
At the centre of the dispute was a coal supply shortfall of 400,000 tonnes.
Griffin claimed the deficiency was a by-product of an ongoing industrial dispute and worker shortage, declaring an event of force majeure in early 2022.
In a writ obtained by Business News, Griffin argued its ability to deliver under the contract and replenish the stockpile had been hamstrung by the state government’s border closure, the pause in migration and COVID isolation requirements.
It notified Bluewaters in June, claiming it would be prevented from carrying out its obligations until at least September.
Nevertheless, Bluewaters issued a notice of default, refusing to accept the force majeure claim.
It wasn’t long before the matter reached the Supreme Court, with Griffin arguing it was not in default of its obligations and that the force majeure claim should be honoured.
The contest, however, was shortlived, with Deloitte’s appointment rendering Griffin’s plea for relief redundant.
Its dramatic end aside, the case mounted by Griffin shared striking parallels to an action that unfolded in the same court just three months earlier.
The lead contractor on Macquarie’s $700 million Kwinana waste-to-energy plant (WTE), Acciona, attempted to exit its engineering and construction contract over the state’s border rules.
Acciona’s industrial and construction arms, along with wholly-owned subsidiary John Beever Australia, requested a court declaration that the pandemic and WA’s border closures served as a “blockade or embargo” for its workforce and amounted to force majeure under the contract.
Acciona’s lawyers filed reams of documentary evidence, including the tender contract and sections of the state’s legislation affecting the passage of persons to WA.
Kwinana WTE Co’s lawyer, Tim Boyle, contended the directives in question were not practical obstacles to workers entering the state, providing evidence of the number of people who obtained permission and entered WA to prove the border was not a blockade.
A decision on that matter is yet to be reached.
Escalating cases
The beginning of the pandemic brought with it a host of force majeure actions under major liquefied natural gas export contracts and coal supply agreements.
The issue has become more widespread since, however, with Corrs Chambers Westgarth partner Nicholas Ellery confirming actions leaning on force majeure were increasing across the board.
However, quantifying that increase would be difficult, according to Mr Ellery, with most cases settled before formal steps are taken or dealt with by way of a confidential dispute process rather than in open court.
While refusing to be drawn on specific cases, Mr Ellery said the degree to which a force majeure clause could be relied upon largely hinged on the way the contractual clause was drafted.
The wording and its breadth differ from contract to contract and, historically, has not considered many of the logistical challenges experienced during COVID.
Additionally, its protection does not extend to a shift in the economy that affects the contract’s profitability or the time within which it can be delivered, and the general trend has involved allocating risk to the contractor over the principal.
Shifting most of the burden to contractors already operating on tight margins can make life particularly difficult for contractors in the current environment.
To further complicate matters, many of the clauses stipulate that the contractor is obligated to take steps to mitigate any impact or loss.
Those obligations, coupled with the time constraints, can make pursuing legal action based on force majeure difficult.
“Where there is a force majeure clause that the contractor can try and rely on, it’s usually pretty narrow and quite difficult for contractors to realise success in force majeure,” Mr Ellery said.
“It’s just hard, legally and factually, for a contractor to make out their claim in many of these cases, because the fact it is more expensive or takes them longer to do things isn’t generally a valid reason.
“Sometimes they’ve got to give a certain notice within a certain period of time from the event arising.
“There are all those hoops they’ve got to get through.
“Labour shortages were an issue because of border closures, partly because of border closures a while ago, which is not an issue now.
“There are other reasons [for] labor shortages, but it’s much harder now to make an argument of force majeure based on labour shortage, because it’s just the nature of the economy at the moment; it’s not the product of a change of law or an act of government.
“In those cases, it’s very hard for most contractors to make that out.”
Meanwhile, the pandemic had already changed the way clauses were formulated and handled by the business community, Mr Ellery said.
The potential ripple effects of a catastrophic event and the way risk is allocated and managed have fast become key considerations for those drafting contracts.
“The pandemic was not expected, but had major business impacts, and when people drafted contracts five years ago, most lawyers and clients involved in the drafting would have thought the clauses were a little bit far-fetched, that they were never going to have to rely on it,” he said.
“When people are looking at contracts, now they are turning their mind to the fact that there could be some catastrophic external event or government direction or decision or control, which massively impacts on our ability to do this contract.
“If that’s the risk, many are now focusing on how they would manage that risk, who the risk is going to be attributed to and who’s going to have responsibility for managing it and whether insurance can assist in some way.”