Playing God by understanding your force majeure clauses

The recent flood events in South Australia and other parts of the country have affected many businesses, whether by impacting on their ability to deliver produce or by having a supplier who cannot deliver on what they have promised. The impact of these situations will always be troublesome to the business, but before you pull out your hair, there are a couple of legal issues to consider first, which may give you some light at the end of the tunnel.

The first port of call when something is amiss in your commercial relationships is the contract. Almost all supply contracts will have a clause which deals with force majeure (‘superior force’) and it is vital to consider the impact of this clause to plan your next step.

The way that a force majeure clause usually works is to excuse both parties to the contract from performing some or all of their obligations if certain defined events occur. These events include war, act of God, riot and strike. If one of these events occurs, then there will be a period where the contract is effectively suspended. This period is usually 60 or 90 days, but could be longer in larger contracts. When that period is up, but the force majeure event continues then the parties can terminate the contract.

During that time, the parties will be under obligations to minimise the impact of the event on the contract and their business and should be in close contact to work out how they can best manage the situation.

Of course, none of this is much help if the contract is vital to your business and losing the production under a contract for three months will have a material impact on you. This highlights the importance of getting good advice when negotiating contracts. Often the force majeure clause will be included without any consideration to the circumstances of the arrangements.

As an example, recently we negotiated a contract where supply was vital to our client. In that situation, we changed the force majeure clause so that instead of the supplier being excused from fulfilling their obligations, they were required to continue supply from another site. This risk transfer affected the price, but our client was willing to pay for the certainty provided.

A final consideration in force majeure situations is whether or not you have insurance in place which will assist. Business interruption insurance (for example) may respond to these situations, so you should contact your broker to discuss your circumstances and whether you have any other options.

At Kain Lawyers, we help our clients understand their existing contractual arrangements and put in place arrangements which provide them with legal and commercial certainty in their business. If you would like to discuss how we can help you, please contact us, a director in our commercial team.