Force majeure is a legal term that many Australian businesses use in supplier contracts to limit their liability in extreme events. A force majeure clause frees a supplier from certain responsibilities if there is a serious natural disaster, such as fire or flood. The extent of the limitation depends on the wording of the contract, but it’s important to understand what the clause may mean as part of any procurement process. If you’re a small business owner, find out why you would include a force majeure clause in a business contract, and what you need to think about when specifying this clause.
Reasons to include a force majeure clause
Small business leaders want to offer robust, reliable and useful service to their customers, but it’s important to remember that you cannot control every variable in the market. While you can directly influence most aspects of your day-to-day operation, you can’t control rare or extreme natural events that can completely disrupt your business. As such, a force majeure clause stops your clients from holding you to any contractual obligations if a natural disaster affects your business.
If you don’t include a force majeure clause, all your contractual obligations continue, irrespective of what has happened to your business. For example, if your factory burns down in a bushfire, you’ll still have to meet your manufacturing commitments, which could lead to extra costs. In many cases, a small business couldn’t afford to pay these expenses.
According to the Australian Bureau of Statistics, natural hazards cost the Australian economy $1.14 billion annually, but some events cost far more than this. An earthquake in New South Wales in 1989 cost $4.5 billion. Events of this scale could cripple a small business that doesn’t have the contractual protection of force majeure.
Extent of force majeure
Some business owners spend limited time discussing force majeure clauses because they don’t expect to invoke an associated event. In fact, it’s important to carefully consider and document the extent of a clause like this within a contract. In Australia, the common law definition of this term is not clear, which could quickly lead to legal wrangling.
Things to consider include:
- The type of events covered
- The severity of these events
- The duration of these events
You’ll also need to define the extent to which your company is responsible for work to remedy damage before activity can recommence. For example, a construction company may need to carry out work to repair damage from a force majeure. As part of the procurement process, you should agree which party is liable for these costs within the contract.
Invoking force majeure
A force majeure clause should carefully outline what you have to do to if a catastrophic event occurs. In most cases, you will need to invoke the clause according to set guidelines (generally known as the operative clause). For example, you can normally only invoke the clause for a fixed period after a serious event takes place. You’ll normally also need to explain the effect of the event, how long you expect the event to continue and what you plan to do to mitigate the issue. Procurement teams often specify detailed reporting requirements for force majeure events.
It’s important to remember that, even with a force majeure clause, your business must take all reasonable precautions to protect against damage and loss. If you later invoke the clause, you may need to prove that you have met your obligations around reasonable care and duty. Many procurement teams will also make it clear that force majeure does not allow you to stop paying for something because a catastrophic event shouldn’t necessarily limit your cash flow.
Other implications to consider
It’s important to consider the long-term implications of force majeure. For example, some natural disasters could completely wipe out your business, meaning that the clause would be largely worthless. In most cases, you will need to agree to a set period after which the other party can legally end the contract. As such, you should think about how you could recover from a force majeure event.
You may also need to document the steps you will take to mitigate the effects of a force majeure event. This should normally only relate to matters you can control, but if you don’t fulfil your obligations to deal with the effects of a force majeure event, you could find yourself in breach of contract.
Force majeure is more than an obscure contractual term that procurement teams worry about. This type of clause can protect your small business during a natural disaster, so it’s vital that you include the right details in every new contract. Procurement software can make including this clause in the contract easy for both parties—learn more about such software here.