Is it Force Majeure? Contract Risks for Australian Businesses from the Escalating Middle East Conflict

The current conflict in the Middle East continues to send shockwaves throughout global markets. The conflict has led to significant disruptions to air and ocean trade routes. With the security threat posed to shipping in the Strait of Hormuz – of which 20% of international oil and LNG pass through – less than 10% of daily volume of tankers are passing through this crucial waterway. This has resulted in plummeting transit volumes and surging energy prices, which are having significant impacts on international markets.

What is a force majeure and when is it triggered?

Force majeure clauses in commercial contracts typically provide relief to a contract party where an event beyond that party’s reasonable control prevents, hinders, or delays that party’s performance. However, force majeure is not a standalone doctrine under Australian law. Its application depends entirely on the specific wording within the contract.

Typical force majeure events include war, natural disasters, pandemics, and other unforeseeable or uncontrollable events. Even so, an event will generally only qualify as a force majeure event where it directly prevents, hinders, or delays performance of the relevant contractual obligations, rather than merely rendering performance more expensive or less profitable.

For example, a farmer in New South Wales may have agreed to supply produce to a retailer at a fixed price. But, if diesel prices increase to well over $3 per litre, such that operating the necessary farm machinery becomes materially more expensive, that alone would be unlikely to constitute a force majeure event. In that scenario, whilst profit margin has clearly been eroded, unless the underlying contract contained a broad force majeure clause, the farmer would have to rely upon the contract’s price review mechanisms (if any).

To rely upon a force majeure clause in these circumstances, the Middle East conflict would need to disrupt diesel supply to such an extent that fuel could not physically be obtained or delivered, and no alternative fuel supply could be sourced, despite reasonable efforts, and no alternate machinery is available. In those circumstances, a remedy may be found within the scope of a broadly worded force majeure clause, subject always to the wording of the contract. The key point here is the causal link between the event and the contractual obligation. The force majeure event must directly hinder performance and there is no reasonable alternative available.

Another important point is that force majeure clauses do not automatically excuse performance. In particular, if a contract states that notice is required within a certain period of time to invoke the protection of the force majeure provision, then unless that notice provision is complied with, the force majeure clause may not be valid and there may be a question as to when the force majeure event took place (and what the actual force majeure event was). If notice isn’t given, or the event doesn’t fit within the wording of the contract, then the only other available remedy may be the doctrine of frustration. However, the parties may wish to avoid this as frustration means the contract will automatically come to an end (regardless of whether the parties just wish to suspend their obligations and / or preserve their relationship).

Considerations for Australian businesses

Many small and medium enterprises businesses in Australia have been impacted by the fallout from the conflict. Oil and LNG prices have spiked, shipping insurance premiums have surged. Agricultural produce and exports to the Middle East are particularly exposed and vulnerable. In this volatile environment, many SMEs are looking to force majeure clauses in their contracts for potential relief.

A clear example of the current Middle Eastern conflict triggering force majeure provisions is the declaration by QatarEnergy, the state-owned operator of all oil and gas production in Qatar, of force majeure on the delivery of LNG shortly after key facilities were struck and damaged by Iranian munitions.[1] [2]

Under Australian law:

• There is no implied or automatic force majeure right. Relief is only available if a contract contains a properly drafted force majeure clause
• Courts construe force majeure clauses strictly and narrowly

A well drafted force majeure clause would typically contain:

• A clear list of triggering events
• Requirements to notify the counterparty and mitigate the effects of the disruption (where possible)
• Specifics as to the consequences of the force majeure clause being enlivened (such as suspension of obligations, extension of time or termination)

It is important to note that it is never advisable to terminate a contract without valid cause and without complying with the contractual procedures governing termination. If that were to happen, then the termination itself, or any resulting non-performance, may constitute a breach of contract or repudiatory breach and expose the terminating party, regardless of the legitimacy of their underlying cause, to a claim for damages.

Key Takeaway

With the Middle East conflict causing major disruptions to international supply chains, force majeure clauses are likely to come under increasing scrutiny. For Australian businesses, particularly SMEs exposed by disruptions to international shipping, energy markets and Middle East trade routes, the legal and commercial consequences of disruption can be significant. Whether relief from the squeeze caused by such a major international disruption is available will depend on the terms of the contract, the nature of the triggering event, and the affected party’s compliance with any notice and mitigation requirements. In this environment, businesses should consider:

• reviewing existing contracts promptly to assess the obligations (and rights) and the strength of any force majeure provisions;
• documenting the impacts of any force majeure events and the steps taken to mitigate;
• where appropriate, issue protective notices to preserve their position;
• for any new contracts, include a provision dealing with fuel supply constraints and cost escalation (to the extent commercially achievable);
• being proactive with counterparties and, where appropriate, discussing possible waivers, amendments and time extensions; and
• seeking specialist legal advice before taking steps to halt performance or vary how obligations are to be performed, as that could lead to disputes.

Queries

For further information on the above please get in touch with an author or any member of our Corporate & Commercial team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.

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[1] https://investingnews.com/force-majeure-spreads-global-commodities/

[2] https://www.qatarenergy.qa/en/MediaCenter/Pages/newsdetails.aspx?ItemId=3894