5 things to look out for in a force majeure clause

The COVID-19 pandemic served as a wake up call for businesses who were reminded of the importance of having a good force majeure clause in place, accounting for the unexpected cancellation, suspension and/or termination of a contract.

Nobody could have predicted COVID-19.  When the pandemic hit and restrictions of all kind soon followed, many people were forced to drag out old contracts and examine ‘force majeure’, cancellation, suspension and termination clauses to work out what would happen if they (or the other party) were unable to perform contractual obligations.

With everyone in the same boat, most people worked through, or are still working through, the challenges of the pandemic in good faith.  However, in the event that you are unable to perform your contractual obligations for whatever reason outside your control – it is important to have good force majeure, cancellation, suspension and/or termination clause in place to create certainty, rather than relying on the future goodwill of the other party to be reasonable.

What is ‘Force Majeure’?

‘Force Majeure’ is a French word meaning a superior, exceptional or overwhelming force.  In contracts, it is generally used to refer to an event or occurrence that is beyond the reasonable control of the parties and prevents one or both of them from performing their obligations under the agreement.  Common examples include extreme weather, terrorism and acts or orders of a public authority, but can be as broad as including sickness.

As there is no universal definition for what a ‘force majeure’ actually is or precisely what happens when a force majeure event occurs, to create certainty, it is important to have a good force majeure clause in place in your contracts.

Here’s 5 things you should look out for in a force majeure clause:

1. How is ‘Force Majeure’ defined?

The first item to look out for in a force majeure clause is how ‘force majeure’ has been defined.  You want to ensure it is broad enough to cover anything that might reasonably prevent you from performing your obligations, but not so broad as to give the other party a ‘way out’ of performing their side of the deal.

It is potentially also worth checking whether or not ‘force majeure’ has been defined differently for each party.  If this is the case, it is usually an indication that the party issuing the agreement has given themselves greater latitude to declare ‘force majeure’ than what has been afforded to you.

You may also need to consider whether terms within the ‘force majeure’ definition need to be further defined.  For example, what does adverse or inclement weather actually mean? Drizzle? Rain? Electrical storms? Floods?  What if the definition includes events that render a party’s performance of their obligations ‘impracticable’ or ‘infeasible’, rather than impossible?

2. What conditions must be met before declaring a Force Majeure event?

A good force majeure clause will set out the requirements that must be met before one party can declare force majeure.  For example, some clauses may require that the affected party notify the other in writing or by some other means as soon as practicable upon being affected by the force majeure.

Alternatively, a clause may set out what is required in order for a party to declare a certain type of force majeure.  If illness or injury forms part of your ‘force majeure’ definition, does the affected party have to present a medical certificate to the other party as evidence before they can declare a force majeure event has occurred?

3. What happens if a Force Majeure event occurs?

The entire purpose of a force majeure clause is to give the contracting parties the autonomy to determine exactly what will happen if certain events occur without further discussion.  It may seem to ‘go without saying’, but it is important that a force majeure clause clearly states what will happen in the event that either party is unable to perform their obligations.

For example, consider if any deposits or service fees have to be refunded?  Will the agreement simply be postponed?  If the suspension continues for a certain period of time, can the agreement then be terminated?  If expenses have been incurred, who is responsible for bearing those costs?  Are there different outcomes depending on what kind of ‘force majeure’ takes place?  Will the parties be required to re-negotiate a new agreement in good faith or will the existing contract be suspended?  Alternatively, will the parties be entitled to terminate the agreement altogether without liability?

4. Are there any exceptions?

Some force majeure clauses may carve out certain exceptions to benefit one party.  For example, many boiler plate force majeure clauses include an exception that if one party is ‘ready and willing to perform’, the other party must still pay for their goods/services regardless of whether or not they are actually delivered.

In respect of these kind of exceptions, it is wise to define precisely what ‘ready and willing to perform’ means.  If exceptions are worded in broad and undefined language, the party to whom the exception benefits may use it as a loophole to ensure they will still receive the benefit of the contract without having to fulfill their own obligations.  In short, if there are any exceptions in a force majeure clause – consider who benefits from the exception and whether or not this is fair and reasonable in the circumstances.

5. What are your obligations? Will you be able to meet them?

Some force majeure clauses may simply provide that in the event of force majeure, both parties will be released from their obligations without penalty.  However, other clauses may be worded such that one or both parties have ongoing obligations.  In this respect, it is vital to understand your obligations in the event of force majeure and ensure you will be able to meet them.  Consider whether you will have the resources and capital to meet those obligations or else have an appropriate insurance policy that will cover you for costs.  If in doubt, it is always best to get a lawyer to check this against your insurance policy and/or speak with your insurer.

Need help?

Force majeure clauses are often overlooked in contracts for what might be perceived as more important deal points.  But COVID-19 has certainly reminded us just how important it is to account for unforeseen circumstances and events, particularly in the Entertainment Industry!  At face value, the language of force majeure clauses can often seem straightforward, but if you dig deeper, there are often more serious implications to a force majeure clause than what meets the eye and they could be masquerading as unfavourable suspension, termination or cancellation provisions!

If you require assistance drafting, updating, reviewing or negotiating a force majeure clause, email us at info@creativelawyers.com.au or get in touch via the form below!

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