Force majeure clauses in supply and other food business agreements: Legal protections in the COVID-19 pandemic?

Force majeure clauses in supply and other food business agreements: Legal protections in the COVID-19 pandemic?

Force majeure clauses in supply and other food business agreements: Legal protections in the COVID-19 pandemic?

By Joe Lederman (FoodLegal Co-Principal) and John Thisgaard (FoodLegal Senior Associate)

© Lawmedia Pty Ltd, April 2020

COVID-19 has created unforeseen challenges for many businesses around the globe. In some instances, it has impacted the ability of food businesses to perform their contractual obligations, whether in the supply chain or whether with retailers or landlords. This article addresses the potential avenues for dealing with unexpected situations under a contract, such as the use of a force majeure clause, as well as other relevant legislation in Australia.

Events impacting contract performance in the food industry

Contracts create a binding, legally enforceable agreement between two private parties. Courts and lawmakers broadly recognise that parties are free to negotiate and enter into agreements with whatever terms they see fit. Other than legislative and case law protection for vulnerable parties and Australian Consumer Law protection mechanisms, Australian law generally permits parties to negotiate their own terms for what may or may not be included in their contract.

Like many other industries, food suppliers or buyers have adopted contractual provisions that are widespread, such as:

·         Supply agreements between an ingredient supplier and a manufacturer;

·         Supply agreements between a manufacturer and a retailer; and

·         Leases between a food business tenant and a landlord.

Parties to a contract will usually attempt to pre-empt any issues that could affect performance of the contract, and include terms that specify the consequences of each event. However, an inability of one party to perform its obligations under a contract would normally result in a breach of that contract, and entitle the other party to terminate the contract, demand liquidated damages or take court action for a remedy of the situation and appropriate compensation.

However, if an event that prevents a party from performing its obligations is entirely unforeseen, that party might have a legal defence to avoid breaching its contract. The remainder of this article explores potential avenues food businesses might consider if their ability to carry out contractual obligations has been negatively impacted by a pandemic event.

Are you able to negotiate with the other party?

The first step is to consider whether negotiation with the other party is an available avenue. As a worldwide pandemic, the effects of the COVID-19 pandemic and the social distancing and shutdown or workplaces can impact in any step of the supply chain. It is possible that the other party to a contract (be that a supplier, retailer or landlord) is also encountering difficulties. Indeed, in many instances it would be a better commercial outcome for the contract to remain on foot under a variation of terms than, for example, for a supplier to find a new customer or for a retailer to find a new supplier.

By way of example, parties are still able to negotiate to reach a workable outcome on any issues such as:

·         Payment terms

·         Minimum order volume

·         Lead times

·         Order frequency

·         Timing of rent increases

Is there a force majeure clause in your contract?

If it is not possible to renegotiate a contract, the existence of a force majeure clause might allow a food business that is struggling to meet its obligations to avoid or delay performance, or bring the contract to an end, without being in breach.

What is a force majeure clause?

Translated literally, ‘force majeure’ means “superior force”. A force majeure clause is one that can relieve a party from performance of its contractual obligations where performance has been made impossible due to events outside of its control. A force majeure clause cannot be implied into a contract and must be expressly included in the contract to have any effect.

Reliance on a force majeure clause typically requires meeting two criteria:

·         The classification of the event as a force majeure event(s) (for example, if the word "pandemic" is not expressly mentioned in the contract, but it may under a description such as “natural disasters” or “acts of God”)

·         The contract addresses the consequences of such events (for example, in some cases the contract comes to an end, or the affected party might be relieved of its obligations under the contract for a set amount of time)

Would the COVID-19 pandemic be an event that triggers a force majeure clause?

Whether a force majeure clause would capture a pandemic event such as COVID-19 depends on how the clause defines a force majeure event.

The best approach in most cases is to have an inclusive definition, which lists the events that the parties envisage will be covered by the force majeure clause, but then includes a "catch all" provision to ensure that the definition does not preclude the application of the clause to other similar events (e.g. acts of war, terrorism, disease, natural disasters or any other act of God).

COVID-19 would fit the definition of “disease” for the purposes of a force majeure clause. There is also a good argument that a global health pandemic could be construed as an “act of God”. However, it is important to keep in mind that the proper interpretation of a force majeure clause may differ in individual circumstances. For example, if a clause were to list only “Earthquakes, floods, lightning strikes, tsunamis or any other act of God” then there would be an argument that “act of God” is limited to natural disasters, given the other events listed. It might be more difficult to argue that a pandemic is a natural disaster because it might not be the event itself but surrounding events that cause the contract to be incapable of performance.

It is therefore important to consider professional advice when interpreting commercial agreement.

It is also necessary to consider the jurisdiction in which a contract is operating. If a food businesses is contracting with an overseas supplier, for example, the jurisdiction under which the contract is governed will impact the effectiveness of any force majeure clause. For example, in some jurisdictions a certificate that is issued by an official government body might be sufficient to establish a force majeure event. However, in common law jurisdictions (such as Australia, New Zealand, England and the United States), certain government language or certification can establish a force majeure event. In some countries, for example, the declaration of a state of emergency will trigger the operation of many force majeure clauses.

Is the contract frustrated?

If a food business is not able to rely on a force majeure clause (either because there is not a force majeure clause in the contract, or because the force majeure clause is not wide enough to cover a pandemic), it might be possible to rely on the Frustrated Contracts Doctrine.

The doctrine of frustration was developed at common law and therefore may apply even if not expressly mentioned in a contract. A contract will be “frustrated” where a disrupting event outside the control of the parties results in contract performance being impossible, illegal or radically different from that agreed. It is not enough that it is simply more costly to fulfil a contractual obligation. For example, an increase in manufacturing, transport or cost of goods that results in an unprofitable supply will not generally excuse a supplier from its obligations.

The effect of frustration is that the contract is immediately discharged and no further performance is required. This brings the contract to an end. If the parties wish to keep dealing with one another, they must enter into a new contract.

The Australian States of Victoria, New South Wales and South Australia each have legislation in place that slightly modifies how the doctrine of frustration works in their jurisdictions. The key difference affects the distribution of losses under a frustrated contract. At common law, losses “lie where they fall”, meaning that there is no further obligation of payment once a contract is frustrated. For example, if a food business paid a supplier a deposit for ingredients to be delivered but the contract was frustrated before the ingredients could be supplied, the supplier would be under no obligation to repay the deposit.

However, under the Frustrated Contracts Act (New South Wales and South Australia) and the Australian Consumer Law and Fair Trading Act (Victoria) the deposit would likely need to be repaid.

Special relief for tenants

On 29 March 2020 the Australian federal government announced that it would work with State and Territory governments to introduce a six-month moratorium on evictions of tenants facing financial distress. The Australian government is also overseeing the introduction of a code of practice to add into the regulatory framework between landlords and tenants.

The moratorium would apply to residential and commercial leases, and is therefore relevant to food business tenants. As at 7 April 2020, this moratorium has not yet been formalised in fine detail in each Australian State and Territory. It is likely that questions may arise as to the impact of any moratorium on the operation of a force majeure clause in a commercial lease. FoodLegal is advising in relation to each particular client circumstance.

 

 

This is general information rather than legal advice and is current as of 30 Oct 2021. We recommend you seek legal advice for your specific circumstances before making any commercial decisions.