As more and more large events are cancelled as precautionary measures to the Coronavirus outbreak, businesses are finding themselves heavily invested in projects which are now no longer able to proceed.
From event management to supply of goods and services, commercial ventures are feeling the pinch of cancelled events, and looking to their contracts for some form of relief.
WHAT IS FORCE MAJEURE?
The literal translation of force majeure is “superior force”.
A force majeure clause will usually mean the party affected by a force majeure event will be relieved from having to perform a contractual obligation or have the timeframe for the performance of the relevant obligation extended. A force majeure clause will almost certainly have a list of specific triggering events, and usually will always contain a catch-all expression such as “and any causes beyond the reasonable control of the party”.
Essentially the force majeur will need to be shown to prevent one party from being able to carry out its contractual obligations.
It is important to remember that force majeure is not a common law doctrine but rather a commercial construct; your contract needs to specifically have a force majeure clause in order for you to rely on it.
IS YOUR FORCE MAJEURE CLAUSE ADEQUATE TO COVER AN EVENT SUCH AS THE CORONAVIRUS OUTBREAK?
The reality is that many contracts these days are simply populated templates and too often force majeure clauses have not been given the attention they deserve, despite the crucial role that they play when unforeseen events occur. Particularly in circumstances where the parties are reliant on third party factors, such as attendance of events by the general public or the supply of goods from overseas, the importance of a force majeure clause cannot be understated.
In our experience, most contracts will not have serious viral outbreaks, epidemics or pandemics listed as causes of force majeure events. As such, a party relying on a force majeure clause would most likely need to determine whether the coronavirus outbreak falls within a general descriptor used in the definition of force majeure event, such as an “act of God” or “natural disaster”, or alternatively, within a “catch-all” category of “anything beyond the reasonable control of a party”.
THE “CATCH-ALL” PHRASE
A “catch-all” phrase is general by nature, such as “anything beyond the reasonable control of a party”. Although clients often believe this covers any and all circumstances, in reality case law has shown that Courts at times can interpret those phrases as though they are a list, meaning if the phrase includes “such as earthquake or fire…” then the Courts may only consider events that are similar to earthquakes and fire, and certainly not a virus outbreak.
If, however, your catch-all phrase includes the words “viz” and “etc”, there may be room for interpretation. As always, review your contract with qualified lawyers to ensure you receive comprehensive, accurate advice.
WHAT DOES AN “ACT OF GOD” MEAN IN A FORCE MAJEURE CLAUSE, AND WOULD IT CAPTURE THE CORONAVIRUS OUTBREAK?
Force majeure clauses will normally include an “act of God” (or “natural disasters”) in the force majeure definition. According to the case of Nugent v Smith (1876) 1 CPD 423, an act of God is regarded as an event ‘that it is due to natural causes, without human intervention, and that could not have been prevented by any amount of reasonable foresight or care‘.
This argument has been introduced in the United States, and our North American clients are being advised this is a valid and strong position in renegotiating terms.
WHEN WILL A PARTY BE RELIEVED FROM ITS OBLIGATIONS?
A force majeure clause will ordinarily state that a party will be relieved from its obligations under a contract to the extent that its performance of those obligations is “prevented” or “hindered” as a result of a force majeure event, however some terms may simply allow for a delay in meeting obligations.
A recent 2015 example is that of a company who was able to source an item from another vendor in order to satisfy its obligations, albeit at a much higher cost price. They relied on their force majeure clause to attempt to cancel the contract, however the Courts held that the meeting of obligations was the primary concern, not the profit margin of the parties.
In relation to employment contracts, employers may take advantage of force majeur provisions, especially relevant in the US as the NBA, NHL and MLB seasons have been cancelled, and of course in Australia now that the F1 in Melbourne has been cancelled.
In the NBA, players’ contracts are fully guaranteed, however the collectibe bargaining agreement between the league and its players could potentially allow owners to withhold players’ pay:
Article XXXIX, Section 5, of the CBA—the heading “Termination by the NBA/Force Majeure”—covers an event or condition that makes it impossible or “economically impracticable” for the NBA to perform its obligations, including but not limited to war, terrorism, catastrophic weather events and natural disasters … and “epidemics.” If such an event or condition occurred, preventing teams from playing games, and those games were not rescheduled or replayed, then “the Compensation payable to each player who was on the roster of a Team that was unable to play one or more games during the Force Majeure Period shall be reduced by 1/92.6th of the player’s Compensation for the Season(s) covering the Force Majeure Period.”
Similar provisions may exist in Australian athlete contracts; seek guidance on your contracts sooner rather than later.
The drafting of your force majeure clause is crucial to its interpretation, and a serious consideration for the creation of new contracts from here on in.