Force majeure in Belt and Road jurisdictions affected by the epidemic: Australia

Australia

- Authors -

Shen Mo (member of the Belt and Road Business Research Committee of the Shanghai Bar Association; director of Shanghai Minton Law Firm)

Wang Yan (member of the Belt and Road Business Research Committee of the Shanghai Bar Association; partner at Shanghai Aifuo Law Firm)

01 Rules on force majeure

Australia is a Commonwealth country and follows the English legal system. Australian federal law has no direct provision on force majeure, and in practice the parties set out what will count as force majeure in a force majeure clause in their contract.

The common law systems have no direct statutory regulation of force majeure; what is commonly found is the doctrine of frustration of purpose. Only the Frustrated Contracts Act 1978 of New South Wales, the Frustrated Contracts Act 1988 of South Australia and the Australian Consumer Law and Fair Trading Act 2012 of Victoria have amended the doctrine, giving it an effect broadly equivalent to force majeure. For this study several senior Australian lawyers were consulted, and they said that a force majeure clause is generally a standard term of a commercial contract and that contracting parties ordinarily make provision for it. Chinese enterprises affected by COVID-19 are therefore advised, before discussing the matter with Australian counterparts, to confirm exactly what their commercial contract provides on force majeure, so as to be in a stronger position. Other domestic enterprises that trade with Australian businesses are likewise advised, before formally signing a commercial contract, to confirm whether it contains a force majeure clause and what that clause says.

02 The test for force majeure

The test for force majeure is primarily a matter of what the contract provides. Events commonly treated as force majeure in ordinary contracts include war, natural disaster and government prohibition, and the concept rests on three basic principles:

first, the triggering event may arise from natural causes or from human action;

second, the parties could not reasonably have foreseen the triggering event when they signed;

third, the triggering event was entirely beyond the parties' control, so that they could not avoid its consequences.

03 The test for frustration

In Taylor v Caldwell (1863) 122 ER 309, an Australian court held that where neither party is at fault and the purpose of the contract is "radically different" from that contemplated, in the sense that the common purpose of the parties has been destroyed, the contract is automatically discharged on both sides once performance becomes impossible. This is the doctrine of frustration.

The events generally accepted as giving rise to frustration are war, government prohibition, change of law, accidental destruction of the subject matter of the contract, and other events that the parties could not foresee or control and for which neither can be blamed.

04 Legal consequences

Where a commercial contract contains an express force majeure clause, the party affected by a force majeure event, being the party unable to perform, may invoke the clause and claim exemption from all or part of its liability under the contract, and may rely on the clause to establish whether performance may be postponed or the contract discharged, and whether any restitutionary liability arises, generally the return of a deposit or advance payment. Under Australian federal law, whether the clause can be invoked to claim exemption from all or part of the liability under the contract therefore depends on its precise terms. As a general rule, where the event described in the contract as force majeure has indeed occurred, the affected party has a reasonably strong prospect of obtaining that exemption.

Where, however, the contract contains no force majeure clause, or where an enterprise has shipped goods merely against a purchase order, the enterprise concerned is advised to rely on the common law doctrine of frustration, whose legal consequences differ markedly from those of an express force majeure clause.

First, once frustration is established it will usually discharge the contract. Second, frustration operates by reference to the time of the frustrating event: the rights and obligations of the parties end at that point, which may well mean that advance payments, deposits or security already paid cannot be recovered. Australian courts have indeed given judgment for the return of advance payments, but they have done so on the principle of restitution and to prevent unjust enrichment.

Whether an enterprise can rely on the COVID-19 outbreak as a frustrating event so as to claim discharge is still open to argument and is uncertain: it depends not only on the objective facts of the epidemic but also on whether the purpose of the contract has become wholly impossible to achieve. Contracts differ widely, and professional review and assistance are needed. Where a contract already signed contains no force majeure clause, or contains one whose terms are unclear, domestic enterprises are advised to consult a lawyer as soon as possible and to analyse the position carefully, so as to keep losses to a minimum. In the light of this outbreak, Chinese enterprises are also advised to include a force majeure clause in their commercial contracts and to identify the outbreak expressly as a triggering event.

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[This article was prepared with the assistance of Mark Darras of Ashurst Law Firm and Andrew Jia of JT Lawyers, Australia.]

The views expressed above are those of the authors alone and do not represent any form of legal opinion or advice given by the Belt and Road Business Research Committee of the Shanghai Bar Association.