What is Force Majeure?
Force majeure is a contractual clause that releases parties from liability when unexpected and uncontrollable events prevent them from fulfilling their obligations. These events typically include natural disasters like hurricanes, floods, or earthquakes, as well as human-related actions such as war or disease outbreaks.
In practical terms, a force majeure clause can release one or both parties from their contractual obligations without penalties if an extraordinary event makes performance impossible or impracticable. These clauses are often negotiated in commercial contracts to allocate the risk of certain extreme events, ensuring that neither party is unfairly penalised when circumstances beyond their control arise.
Key points:
- A force majeure clause in contracts removes liability for unforeseeable, unavoidable events that prevent fulfilling obligations.
- These clauses typically cover natural or human-made disasters.
- In some areas, qualifying events must be unforeseeable, external, and unavoidable.
Key Considerations
Businesses need to approach force majeure with caution. The success of invoking a force majeure clause depends on several factors, such as:
Contract Language
Ensure that the force majeure clause is clear and comprehensive. It should specify what types of events qualify and how they will affect the contractual obligations.
Timely Notification
When a force majeure event occurs, the affected party must notify the other party promptly, often within a specific timeframe outlined in the contract.
Mitigation Efforts
Courts may expect businesses to take reasonable steps to minimise the impact of the force majeure event. Failing to do so could undermine a claim.
Documenting the Event
Businesses must keep detailed records of how the event impacted their ability to meet contractual obligations. Documentation is critical if the other party disputes the force majeure claim.
How is Force Majeure Treated Under Australian Law?
In Australia, force majeure is not a standalone legal principle under common law, meaning it must be explicitly included in a contract for parties to rely on it. Courts will strictly interpret force majeure clauses, based on the language of the contract. Therefore, it is crucial that businesses carefully draft these clauses to cover the relevant risks they foresee, such as natural disasters, health crises, or supply chain interruptions.
A force majeure clause typically includes:
- Definition of qualifying events – This specifies the events considered to be force majeure, such as natural disasters, war, labour strikes, or pandemics.
- Obligations during the event – The clause may require the affected party to notify the other party of the event and take steps to mitigate the impact.
- Consequences of the event – It outlines how the parties’ obligations will be affected, whether the contract will be suspended temporarily or terminated entirely.
Importantly, Australian courts have upheld that simply making a contract more difficult or expensive to perform is not enough to invoke force majeure. The event must make it genuinely impossible or impracticable to meet the terms of the agreement.
Common Force Majeure Incidents in Business
In the business world, force majeure situations can arise from several types of events, which include the following.
Natural Disasters
Floods, bushfires, and cyclones are common in Australia and have caused significant disruptions to industries such as mining, agriculture, and manufacturing.
Political or Regulatory Changes
A sudden change in government regulations, such as export bans, sanctions, or changes to health and safety laws, can also invoke a force majeure clause.
Pandemics
The COVID-19 pandemic was a classic example of an event that led to widespread claims of force majeure as businesses faced government lockdowns, travel bans, and health-related disruptions. The NSW Crown Solicitor’s Office, for example, stressed the importance of properly identifying the terms of a work contract to see if force majeure can be invoked, such as actual mentions of the words ‘pandemic’ or ‘epidemic.’ It also sought further development of mitigation measures to limit disruptions from the virus and how to address COVID-19-related risks in new work contracts drawn up during the lockdown.
Australian Firms Invoking Force Majeure
With the above in mind, let’s have a look at some cases in Australia where force majeure was declared.
Rio Tinto
Rio Tinto, one of the largest mining companies in the world, has faced several instances where it invoked force majeure due to natural disasters and other operational disruptions. The most recent circumstance was on 20 May 2024.
The mining firm was prompted to use force majeure when it came to third-party alumina shipments coming out of its refinery at Yarwun and another in Parsons Point, Queensland, under Queensland Alumina Ltd (QAL), a joint venture with Russia’s United Company Rusal. Officials said a fire accident at a section of a gas pipeline with Jemema restricted fuel supplies so much, production could not continue.
The last time QAL was part of a force majeure situation was in 2022, when Alumina and Bauxite Co Limited (ABC) sued QAL for stopping bauxite ore shipments to them. The work was under an arrangement where Rio Tinto entities were supposed to mine the bauxite and ship it to ABC, which it in turn will send to QAL’s Parsons Point refinery for processing as alumina. ABC and the Rio Tinto entities will be the final recipients of the alumina.
The problem was that Australian government sanctions imposed after the Russian invasion of Ukraine in February 2022 forced QAL and the Rio Tinto entities to stop working with ABC; QAL’s Russian partner Rusal was marked under the sanctions.
Thuraya
UAE tech vendor Thuraya offers satcomm services in remote and volatile areas. Pivotel was its Australian partner.
However, on 16 April 2024, Thuraya’s parent firm, Yahsat, reported a force majeure event that severely damaged the Thuraya-3 satellite, affecting Pivotel’s remote network. Thuraya-3’s coverage area includes the entirety of Australia, India, Southeast Asia, East Asia, most of the Western Pacific, and parts of the Russian Far East bordering Mongolia, China, and Japan.
Despite discussions with satellite maker Boeing on corrective action for the satellite, Thuraya admitted three weeks later that the Thuraya-3 was no longer functional, and its network contract with Pivotel was officially closed per force majeure provisions.
To compensate, Pivotel offered subscribers using the Thuraya handset a chance to trade-in those devices in exchange for discounted purchase of similar handsets from Inmarsat or Iridium. However, this was valid only to active Pivotel subscribers with working Thuraya handsets as of 16 April 2024 or subscribers who have logged in occasionally since 16 April 2022, with their combined membership period at least eight months. This offer is slated to expire on 31 October 2024.
Conclusion
Force majeure remains a crucial element of business contracts, particularly in industries where uncontrollable external events can severely disrupt operations. Under Australian law, businesses must ensure their contracts contain carefully worded force majeure clauses to mitigate risks and provide a legal foundation for managing the fallout from events beyond their control.
As the cases of Rio Tinto and Thuraya illustrate, invoking force majeure can shield businesses from liability when faced with unforeseeable disruptions. However, businesses must remain vigilant in how they draft and use these clauses, ensuring they meet all legal requirements and communicate effectively with their counterparties when such events arise. By doing so, they can navigate challenges while maintaining positive relationships with partners and clients in times of crisis.
DISCLAIMER: This article is for informational purposes only and does not replace established legal advice. BARTERCARD is not affiliated with any company mentioned. For the possibility of invoking force majeure in your workplace during a major event, please consult your company legal counsel.
