The use of force majeure clauses and frustration of contracts

Following the recent storms and power blackouts across South Australia, we thought it might be useful to consider the use of force majeure clauses in contracts and frustration of contracts. In this article, we’ll explain both of these terms and look at when they might apply.

Case study

What happens when Farmer A has entered into a contract with a major supermarket to supply vegetables over a period of time but as a result of severe weather conditions and flooding, Farmer A’s crops are destroyed and Farmer A has no vegetables to supply?

Is Farmer A required to purchase the vegetables from another supplier to meet their contractual obligations? This may depend on an interpretation of the contract and whether or not the contract includes a clause that deals with these events. These clauses are referred to as force majeure clauses.

What is a force majeure clause?

A force majeure clause is a provision in a contract that allows the parties to suspend or terminate a contract when certain circumstances outside of their control make performance of the contract impossible or impractical to perform.

What is included in a force majeure clause is dependent on the contract  between the parties, however, force majeure clauses will typically include events such as flooding, earthquakes, lightning, prolonged power outages, changes in legislation or terrorist attacks.

What happens when there is no force majeure clause?

Not all contracts will include a force majeure clause or the clause may not be wide enough to include all situations outside of the parties’ control. In those instances, contracting parties such as Farmer A, must prove that a contract was frustrated as a result of a major unforeseen event.  

What is frustration of a contract?

A frustrated contract arises when without fault of either party and as a result of an unforseen event that is outside a party’s control, a party’s contractual obligations become impossible to perform or where the frustrating event causes the terms of the contract to become drastically different than those initially contemplated.

When relying on frustration, parties should bear in mind that where a contract expressly deals with the occurrence of certain events or where the courts consider that the event was contemplated by the parties, they will not be able to rely on frustration.

Where frustration is established the parties may be released from their contractual obligations immediately, however, parties will only be released from their duties from the date of the frustrating event and may still liable for performance of their contractual obligations prior to the frustrating event. 

Proving frustration of a contract is extremely difficult which is why including a force majeure clause in a contract can be an effective mechanism to ensure contracting parties like Farmer A are protected from a potential breach of contract for non-performance when situations arise that are out of their control.

Practice Area: Farm Law , Corporate, Commercial & Business

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