As a business owner, you may run into unforeseen events beyond the control of your business or the party you are contracting with. This can disrupt the performance of the contractual obligations set out in your contract. In these situations, force majeure clauses play a crucial role in addressing the impact of these unexpected events. This article explores how force majeure clauses work in commercial contracts, drafting considerations and practical implications for New Zealand businesses.
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What is a Force Majeure Clause?
A force majeure clause is a contractual provision that addresses unforeseeable events or circumstances out of parties’ control that prevent a party from fulfilling its contractual obligations.
The primary purpose of a force majeure clause is to allocate risks associated with unforeseen events between the parties and provide a mechanism for addressing disruptions to contractual performance. Including this clause within your contract can protect your business from facing costly penalties or legal liabilities due to circumstances beyond your control.
However, for a force majeure clause to be effective, it must be clear and certain in its application to the present circumstances. For instance, rent payable in “almost any conceivable circumstances” may constitute a strong enough clause to contract out of due to events like the COVID-19 pandemic.
Elements of Force Majeure Clauses
| Identification of force majeure events | The clause defines specific events or circumstances that qualify as force majeure, such as earthquakes, floods, pandemics, or acts of terrorism. |
| Notice requirements | The clause may specify the procedure for invoking force majeure, including the notification requirements and timelines for providing notice to the other party. |
| Effects of force majeure | The clause outlines the consequences of a force majeure event, such as the suspension of contractual obligations, extension of deadlines, or contract termination. |
| Mitigation obligations | Parties may be required to take reasonable steps to mitigate the impact of a force majeure event on contractual performance. |
Effect of Force Majeure Clauses on Contractual Obligations
When a force majeure event occurs, the affected party may rely on the clause to suspend or excuse its contractual obligations. However, the party relying on force majeure must demonstrate that the event meets the criteria specified in the clause. Likewise, the event must prevent or hinder the party’s ability to perform their contractual obligations.
| During a force majeure event | Contractual obligations can be affected. A force majeure clause serves as a framework for handling unforeseen situations. It may detail actions like excusing, suspending, or modifying obligations. Understanding these obligations is important for assessing rights and responsibilities and determining the appropriate action. |
| Terminating a contract | A force majeure event happens when unforeseen circumstances make fulfilling the contract impossible or impracticable. The clause might specify conditions and criteria for termination, as well as notice requirements and procedures. Considerations for termination include contractual provisions and applicable legal principles. |
| Suspending contractual obligations | A force majeure event can mean temporarily halting duties or obligations. The clause could outline circumstances for suspension and procedures for implementation. During suspension, parties may be relieved from obligations, but impact mitigation might be necessary. |
Drafting Considerations
Drafting a force majeure clause in a commercial contract requires careful consideration of several key factors:
- when identifying the force majeure events, it is essential to ensure that the clause covers all possible events that could impact contractual performance;
- clearly outline the notice requirements to ensure the affected party provides the required notice within the specified timeframe;
- the clause should specify the effects of the force majeure event on contractual obligations, including whether the obligations are suspended or terminated; and
- include mitigation obligations so the parties take reasonable steps to minimise the impact of the force majeure event on contractual performance. By addressing these factors, businesses can draft a comprehensive and effective force majeure clause that protects their interests in unforeseen circumstances.
Enforceability in New Zealand
Sometimes, parties might be in a dispute over the enforceability of force majeure clauses. Generally, New Zealand courts will interpret the clause’s language and consider the parties’ intentions when contracting. Courts will assess whether the force majeure event falls within the scope of the clause and whether the party invoking the clause has met any procedural requirements specified in the contract.
Key Takeaways
Force majeure clauses are an essential element of commercial contracts. They provide businesses with a means of addressing unforeseeable events that may disrupt the performance of contractual obligations. When contracting, you should understand the scope of this type of clause and its implications.
If you need help drafting or understanding the terms and conditions in your agreement, out experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
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