Middle East conflict triggers force majeure clauses

Could your contractual obligations be affected by the war in the Middle East? Do you need to act now to protect yourself from possible default?

Many contracts involving the performance of services, the supply of goods or the performance of construction works will include a “force majeure” clause. These clauses address how the parties are to manage the occurrence of an extraordinary event or circumstance that cannot be reasonably anticipated or controlled and that prevents a party from being able to fulfil some or all of their obligations under a contract.

The conflict in the Middle East looks likely to impact the movement of goods by sea; the global manufacturing sector as fuel and other oil-derivatives become constrained, and the function of personnel and businesses in the affected regions. This is likely to impact on a wide range of Australian contracts.

It is important to be aware of exposure to these risks, how you will be affected, and whether your contracts require you to act immediately to secure force majeure protections against any potential default.

The usual operation of force majeure clauses requires an affected party to formally notify the other party of the start of a force majeure event that will have a material impact on their contractual performance. A timeframe for this notification is usually provided and can be very short. The affected party will often have to specify the magnitude of the impact, including days of delay. While this can be hard to quantify when the duration and scale of the event remains uncertain, it is important to attempt to provide all the information required by the clause and to continue to provide transparent updates at the specified frequency until the event, or the effects of the event, has ceased.

Both parties affected by a force majeure event should also determine whether a termination right attaches to the activation of the clause, crystallising when the event has persisted for a defined period. Parties should plan for this possibility, considering payment obligations, whether there are deliverables or materials to secure and how to mitigate costs.

Parties should also consider whether their contracts allow for compensation or additional costs to be payable due to the occurrence of a force majeure event. Typically, force majeure events are not “compensable causes” of delay and contracts will usually only allow for extensions of time in the performance of services, the delivery of goods or performance of works.

Next Steps?

We recommend that you assess whether any of your contracts may be impacted by force majeure risks arising from the conflict in the Middle East. If affected, it is important to check your contracts to determine the timeframes for force majeure notifications, how formal notices should be communicated and how frequently updates must be sent. Determine if termination rights are present, whether they are mutual or unilateral, how you intend to manage that possibility, what your responsibilities are in terms of mitigating costs or, conversely, what you have paid for and may need to recover from the other party.

Force majeure clauses have to be expressly included in contracts, so if you are impacted by an event of force majeure, but your contract does not include a force majeure clause, it is important to seek legal advice before a serious default occurs.

Page Seager can provide advice regarding the impact of force majeure events and the interpretation of force majeure clauses.