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Australia – When ‘Force Majeure’ Partially Restricts Performance.

14 November, 2013

 

 

The term ‘Force Majeure’ (FM), from the French words meaning ‘major strength’, is used to describe the legal concept in which a party is excused from performing a contract due to circumstances beyond their control. 

 

It is a concept originally foreign to the common law, and remains reliant upon the words used in the contract between the parties to define both the nature of the events agreed to be beyond their control, and the consequences that follow using FM as an excuse for non-performance. For example, clauses that permit FM to be called where an event ‘hinders’ supply have been found to be more easily applied than those that require supply to have been ‘prevented’.

 

Where natural disasters wholly prevent performance of a short term contract, there is usually no controversy over whether valid FM has been claimed. But the position can be less clear where supply is only partially restricted, or only restricted for a part of the period over which a long term contract may be performed?

 

Take for example an explosion of a gas pipeline, or flooding of a coal mine. Assume the gas or coal is sold under annual contracts to five customers which each take 20% of the annual production. If the event reduces annual production by 40%, the supplier can either supply three selected customers with 100% of their contracted volumes OR reduce every customers’ volume by 40%. Under either option, there are customers who could claim that the event did not prevent the supplier from performing 100% of their contract. The fact is that the supplier has made a choice about which contracts to perform and which not perform. So regardless of the option it takes, the supplier is at risk of being in breach of contract and traditional FM clauses may not provide a defence to this risk.

 

Unfortunately, Australian courts have had little interaction with this issue. In Bowring & Walker Pty Ltd v Jacksons Corio Meat Packing (1965) Pty Ltd1 the court considered a similar situation, where the supplier of meat had given preference to one buyer over another. The case dealt specifically with a clause that made the contract “subject to export quota permits being issued by the Australian Department of Primary Industry”. As it happened, the quota set by the industry prevented the supplier from performing both contracts, and so it chose to only perform one. The second buyer sued, but Macfarlane J was of the opinion that because the second buyer knew of the first contract prior to its agreement, and that the supplier was justified in giving preference to the contract made earlier in time.

 

While English authority has supported the allocation of a pro-rata share2 finding that ‘no party is entitled to more than its pro rata share’ other authority suggests that ‘the buyer cannot complain if the seller allocated the whole of his limited supply to an earlier buyer’, adding weight to the Macfarlane J judgement.

 

Nevertheless, English case law also relevantly provides that the supplier may allocate remaining goods in any manner it likes, so long as it is reasonable. Donaldson J stated in Intertradex SA v Lesieur-Tourteaux SARL3, that:

 

‘My own view is that if the seller appropriates the goods in a way which the trade would consider to be proper and reasonable – whether the basis of appropriation is pro-rata, chronological order of contracts or some other basis – the effective cause is not the seller’s appropriation, but whatever caused the shortage.’

 

The reasonableness of a supplier’s allocation will invariably depend on the circumstances of that particular case and may be dependent on standard industry practice, knowledge of the buyer, prior dealings, etc. As a result, where there has been a partial or temporary impairment to the supplier’s performance, the supplier is left with no certainty as to their legal position or risk.

 

Given the purpose of an FM clause is to provide some level of contractual certainty in the aftermath of an unforeseeable event, it is prudent practice to consider the potential implications of FM events on the long term performance obligations under contracts, and to specifically provide within the FM clause an entitlement and mechanism for pro-rata allocation of reduced periodic supply.

 

Endnotes

 

  1. [1972] NSWLR 227
  2. Bremer Handelsgesellschaft mbH v. Vanden-Avenne Izegem PVBA [1978] 2 Lloyd’s Rep 109
  3. [1978] 2 Lloyd’s Rep 509

 

herbert smith Freehills

 

For further information, please contact:

 

Mark Darwin, Partner, Herbert Smith Freehills
[email protected]

 

Herbert Smith Freehills Corporate/M&A Practice Profile in Australia

 

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