K3 Insights

Navigating the unforeseen in business contracts can be very tricky, particularly during challenging economic climates. The question often arises: can I suspend my obligations or cancel my contracts during unforeseen events? Force majeure clauses can help. Understanding their scope and limitations is crucial and should be considered at the commencement of every business relationship.

What is a Force Majeure Event?

Force majeure events are those which are unexpected and occur outside of a party’s control.

Contracts often contain force majeure clauses, which allow parties to "pause" their obligations or free them entirely from liability or obligation, when such events prevent them from fulfilling their contractual duties. Typical events include natural disasters, war, terrorism, and pandemics.

A force majeure clause will only be relevant if you have specifically agreed to its inclusion in your business contract—it does not apply as a matter of law. You should therefore carefully consider the wording of your particular contract(s) to ensure you have appropriate ‘fall backs’, should you ever need them.

What About Financial Hardship?

Force majeure clauses do not typically cover financial difficulties or price increases. This is because such difficulties are usually viewed as foreseeable risks, which businesses should manage through proper planning and risk mitigation strategies. (This can, however, be a matter of negotiation.)

Are There any Steps I can Take to Better Protect my Business?

Making sure you have robust force majeure provisions in place is a good start. However, force majeure clauses are not a catch-all, and typically don’t cover financial problems or price increases.

To prepare your business for unforeseen events, you should:

• Review your contracts carefully: The specific language of force majeure clauses, and contracts as a whole, should be well understood.

• Negotiate clearly: It pays to understand what events your business will likely require protection from, and what should happen when such events arise. For example, when impacted by a force majeure event, should the contract be terminable following the passage of a specified period of time, or should each party’s rights and obligations only be paused while the event is ongoing?

• Mitigate risks in other ways: Mitigations should be introduced into contracts to address other, foreseeable risks. Such mitigations might include clauses that:

1. Address how prices are fixed and/or increase over time;
2. Permit the suspension and/or termination of contracts, either for "no cause" or in certain  circumstances (e.g., where the counterparty you are dealing with is facing insolvency);
3. Create & permit security interests to be registered on the PPSR, to secure creditor position.

If you’d like further information or help with reviewing your contracts, get in touch with a member of our team for expert legal advice.

This article is part of our Business Toolkit series, where we explore key legal issues affecting businesses and offer practical insights aimed at strengthening businesses' foundations.