During Covid-19, contract reviews for construction contracts are more recommended than ever. Here is everything you need to know about the Force Majeure clause and its implications during the pandemic.
What is the “Force Majeure” clause on a contract?
The “Force Majeure” clause is often included in contracts to remove liability for natural and unavoidable events that interrupt the contract. It translates from French to “superior or irresistible force.”
Not every commercial or construction contract has a force majeure clause, but those that do often concern “acts of God,” strikes, lockouts, and are generally defined by the contract.
Does COVID-19 constitute a force majeure (FM) event?
Yes, the COVID-19 pandemic does constitute as an FM event, as it fits the definition of the following legal elements that determine one:
- Occurs by human or natural event
- Cannot be reasonably foreseen by the contracting parties
- Outside of the control of the contracting parties (they could not prevent it from happening)
A pandemic is an “act of God,” whereas government measures such as self-isolation and the travel ban are “acts of Government.” How do we interpret the FM clause here?
In the circumstance of this pandemic, an “act of Government” can fit the definition for an FM clause. The “acts of Governments” are occurring as a result of the “acts of God.”
For example, with some interstate borders being closed and no exact confirmation of a re-opening date, many construction contracts and material supplies are being interrupted. There is no possible way that these travel bans could have been foreseen by either contracting parties.
If you’re a small business, that has been affected by the COVID-19 pandemic, click here for our guide on grants.
What is “frustration” in Australian law and how would this trigger an FM clause? What does this mean in contractual rights and/or obligations of either party?
Generally, an FM event will delay the performance of a segment of a contract, whereas “frustration” relates to the overall performance of a contract.
It’s important to remember that in contractual relationships, the court considers what’s in the mind of the parties at the time that they entered into the contract. ”Frustration” refers to circumstances where the contract is radically different from what was foreseen by the parties at the time that they entered into the contract.
Depending on the circumstance, when something radically changes, it could either be a case of “frustration” or force majeure.
What happens when the deadline has not been met and:
- Your contract does not mention an FM clause?
Each particular circumstance must be taken on its own merits. If your contract does not include an FM clause, it is recommended that you enter into negotiation with the other party.
It’s important to be flexible and open-minded and to consider that no party will solely benefit from a contracted legal dispute during unprecedented times like these.
You should also keep in mind how the other party may respond to such circumstances. For example, a principal may have pressing financial obligations and may push to move forward.
- The terms of the FM clause under those agreements may not be triggered under the same event?
Most construction contracts allow for a party (usually the builder) to claim extensions of time for causes which delay the date of completion – including weather or supply delays.
A force majeure clause deals with issues of a higher level and generally allows for extensions for delays that are beyond their control for a particular part of a project.
For example, if a component of a construction project needs to be moved from Western Australia to South Australia, but cannot due to the travel bans, a force majeure clause will allow for an extension of that part of the project – there is no point taking it to court.
Can you extend the contract deadline?
Most of you in the building industry will have heard the term “on budget, on time.” It’s expected that you finish the work within the budget and at the time you’re supposed to.
In some cases, the builder or contractor cannot be held responsible if the principal causes delay. In these circumstances, parties can agree on an extension of time.
It’s important that all parties understand what their rights and obligations are under a contract. If you need your commercial or construction contract reviewed, choose a trusted building and construction lawyer with over 25 years of building experience.