Do force majeure clauses apply to the coronavirus pandemic?
Force majeure, also known as an “Act of God”, is an unforeseeable event beyond the control of either party to a contract, that prevents or hinders either side from meeting its contractual obligations. Translated from French as “superior force”, it can relate to lightning, earthquakes, war, tsunamis, riots or any natural disaster.
A contract citing force majeure usually outlines a full list of possible events that could prevent a contract being carried out, including an Act of God.
So, does coronavirus (COVID-19) fall under a force majeure clause? It’s a powerful and destructive force that’s having a tragic impact across the world, forcing businesses to close down and smashing entire economies.
Can coronavirus be classified as a force majeure?
Whether coronavirus was an unforeseeable event beyond anyone’s control is yet to be determined. However, the pandemic does raise several legal questions concerning how it may affect a force majeure clause.
Was COVID-19 truly unforeseeable? It could be argued it was foreseeable, as it took some months to spread from Wuhan to the rest of the world.
Is coronavirus an Act of God? The legal standpoint on an Act of God stems from the 1876 British case of Nugent v Smith, which held that an Act of God was loss or damage “due to natural causes directly and exclusively, without human intervention, and that… could not have been prevented by any amount of foresight and pains and care reasonably to be expected”.
It could be debated that coronavirus was caused by humans, having been traced to people in Wuhan catching the virus from eating wild animals such as bats and pangolins.
It might also be argued that the spread of the virus could have been contained with the swift shutdown of communities, forced self-isolation and widespread testing.
Does coronavirus automatically invoke the force majeure clause in a contract?
Whether a force majeure clause can be invoked due to the coronavirus pandemic depends on how the contract has been drawn up. For instance, a company struggling to meet its contractual obligations due to the impact of COVID-19 may invoke the clause to protect itself from breach of contract claims. However, a force majeure clause must be expressly stated in the contract.
If a force majeure clause does already exist, contractual obligations are usually put on hold for the duration of the force majeure event. The contract resumes once the event is over. However, this could be challenged if global pandemics are not specifically mentioned within the force majeure clause.
Are force majeure clauses included in all contracts?
Generally, force majeure clauses are not implied into Australian contracts. However, in unusual circumstances such as the coronavirus pandemic, if an outcome cannot be negotiated between parties, it may be worthwhile testing it before the courts.
For contracts affected by unforeseen events that don’t have a force majeure clause, there is a possibility they could be discharged under the NSW Frustrated Contracts Act 1978. While this doesn’t apply to insurance contracts, it’s wise to seek legal advice on the Product Disclosure Statement for your specific insurance product.
How can you ensure your contracts will protect your business during a force majeure?
When drawing up your business contracts, it’s important to obtain expert guidance from a lawyer who is experienced in contract law. This will ensure your contracts are watertight, even during a pandemic.