Force majeure clauses are gaining prominence in Australian construction contracts as parties grapple with increasing disruptions, from extreme weather and pandemics to geopolitical instability and supply chain shocks. A well-drafted force majeure clause helps allocate risk for such unforeseen events, excusing performance where an extraordinary circumstance beyond a party’s control prevents contract obligations from being met.
Importantly, force majeure clauses are not implied by law in Australia. If parties want this protection, it must be clearly written into the contract.
What Is a Force Majeure Clause?
A force majeure clause excuses one or both parties from performing contractual obligations when an extraordinary event (outside their control) prevents or hinders performance. Examples include natural disasters, pandemics, acts of war, government orders, or industrial action.
In contrast to the legal doctrine of frustration (which results in contract termination when performance becomes impossible), a force majeure clause can provide a roadmap for suspension of obligations and allow for the contract to continue.
Defining Force Majeure Events
Because “force majeure” has no standard legal meaning in Australia, a clear definition in the contract is essential. Parties should consider:
- Geography: Is the project in a flood-prone or cyclone-prone area?
- Supply Chain: Are materials sourced internationally and exposed to geopolitical risk?
- Project Specifics: Are there known seasonal risks that can be planned for?
Principals typically prefer a narrow “closed list” of defined events (e.g. “pandemic,” “natural disaster”) and conditions such as the event being beyond reasonable control and not preventable by diligence. This limits when the clause can be triggered.
Contractors usually seek a broader “open list” approach, including a wide range of events and often a catch-all phrase like “any event beyond the contractor’s control.”
Avoid vague expressions like “act of God.” Courts have found terms like this ambiguous and prone to dispute. Specificity is key – for example, explicitly listing “cyclone,” “flood,” or “bushfire.”
Risk Allocation
Negotiating a force majeure clause is fundamentally about allocating risk for the unforeseeable.
- Known risks: If a project is in a known flood zone, the clause could distinguish between expected seasonal flooding (which the contractor must plan for) and extraordinary flooding (which qualifies as force majeure).
- Shared risk: Some contracts provide time relief (extension of time) but not cost relief—striking a middle ground.
- Tailored clauses: In projects reliant on foreign supply, sanctions or export bans may be included as specific force majeure events, as seen in a recent case where Australian sanctions on Russia allowed a party to suspend obligations under a contract.
Notification and Mitigation Obligations
To rely on a force majeure clause, a party must usually:
- Notify promptly once the event occurs, typically within a set number of days.
- Confirm when the event ends, so obligations can resume.
- Take reasonable steps to mitigate the effects of the event.
For instance, in the case of South32 Aluminium (RAA) Pty Ltd v Alinta Sales Pty Ltd [2015] WASC 450, the Supreme Court of Western Australia held that the seller could not rely on the force majeure clause because it failed to demonstrate that it was prevented from supplying gas from alternative sources not affected by the explosion. This case underscores the importance of the duty to mitigate and the necessity of exploring alternative means to fulfil contractual obligations.
Consequences of Force Majeure
Force majeure clauses should be clear about their effects. Key issues include:
- Suspension of obligations: The affected party is temporarily excused from performance for the duration of the event.
- Time relief: Most clauses provide entitlement to an extension of time (EOT).
- Cost relief: Some clauses include entitlement to delay costs or loss, but this varies. If cost relief is excluded, the contractor absorbs the financial impact.
- Termination rights: If a force majeure event lasts beyond a set threshold (e.g. 90 days), either party may have the right to terminate the contract without fault.
- Consequences of termination: The clause should outline payment for work done to date, return of security, and handover of materials and documentation.
Interaction with Other Contract Clauses
Force majeure clauses should work in harmony with the rest of the contract. Consider overlaps with:
- EOT provisions: Force majeure should be clearly included or excluded as a qualifying delay event.
- Suspension clauses: If the principal can suspend work, the financial consequences for the contractor may differ from those under force majeure.
- Change in law clauses: These may provide alternative relief in cases like pandemic-related shutdowns.
- Excepted risks: These typically allocate costs to the principal but do not excuse performance.
- Insurance: Check whether events listed as force majeure are covered by project insurance.
Clarity is crucial. Poorly integrated clauses can result in unintended duplication or gaps in relief.
Practical Takeaways
- Tailor the definition: Base it on geographic, supply chain, and project-specific risks.
- Balance risk allocation: Principals may prefer a closed list; contractors, a broader approach. Negotiate based on who can better manage each risk.
- Specify relief: Be clear on time and cost entitlements, mitigation duties, and termination rights.
- Review related clauses: Ensure force majeure provisions align with EOT, suspension, change in law, and insurance clauses.
Force majeure clauses are no longer boilerplate. They require close attention during contract negotiation. By clearly defining what qualifies, setting expectations for relief, and aligning with the broader risk profile of the project, parties can better navigate the unpredictable while preserving project viability.
