In the resources sector, parties’ efforts are commonly focused on ‘foreseeable’ events when it comes to negotiating a force majeure provision (cyclones and industrial actions are typical inclusions). It’s likely that many parties did not give much consideration to the distinction between an epidemic and a pandemic in their contracts before the outbreak of COVID-19! The structuring of force majeure clauses in particular, and the allocation of risks in contracts more generally, will no-doubt be given a great deal more thought in the future as lessons are learned from COVID-19. Immediate concerns however, should be around how the virus will impact upon your supply chain and whether the force majeure provision in your contract is capable of being enforced.
Impact on supply chains
COVID-19’s impact on supply chains is obviously being felt in a range of industries. Apple has suffered component shortages for iPhones because of a temporary manufacturing plant closure in China and car manufacturer, Hyundai Motors, has closed seven factories in South Korea because of supply shortages from its China-based suppliers.
In the Australian mining sector, production is continuing for the moment, although this could change as Federal and State governments further tighten restrictions on movement of people. Several ASX listed mining companies have already cautioned the market regarding production guidance and are carefully monitoring supply chain impacts.
Other than the obvious workforce availability risks to mining operations, a key supply risk will be the availability of goods. The focus over the last 20 or 30 years has been on reducing inventories and supply chain optimisation, and this drive for efficiency has reduced the ability of companies to cope with global shocks to supply chains such as COVID-19. Key supply risks include having only one supplier or a small supply base, supplier disruption and supplier insolvency. Disruption to transportation also impacts supply chains. Delays at major shipping ports will cause supply chains to bottleneck.
Satisfying the elements of a force majeure claim
We are already seeing force majeure claims occurring in relation new mining project developments in the wake of the COVID-19 outbreak. These claims are primarily based upon an inability to source people, services, goods and parts, including for construction. As companies look at their options to rely upon force majeure provisions to relieve them from performance, we set out some key issues for consideration. Mining companies which are already in production should also consider force majeure clauses both in their customer contracts and their supply contracts.
- Does your contract even have a force majeure clause? There is no doctrine of ‘force majeure’ under Australian contract law and Australian courts will not imply force majeure in the absence of express terms. Australian contract law does recognise a doctrine of ‘frustration’, but frustration is usually very difficult for a party to prove.
- Is COVID-19 a type of event which is expressly referred to as a force-majeure event, for instance does the clause expressly cover epidemics, pandemics or viral outbreaks or will an argument need to be formulated that the event falls within a broader category (e.g. a natural disaster or act of God) - which could be more difficult to satisfy?
- Can the requirement of causation be made out – i.e. can it be shown that COVID-19 is actually the cause of the disruption? This element may be easier to satisfy if actions of government qualify as a force majeure event under the contract, as the measures taken by governments to restrict the movement of people are clearly having a direct impact on supply chains (in addition to the physical impacts of the virus on the population).
- Can the party claiming force majeure demonstrate that it is satisfying its duty to mitigate? For instance, can parts be sourced elsewhere (perhaps from a different country not yet heavily impacted by COVID-19), even if this means that greater costs will be incurred? A related consideration may be whether there are exclusivity arrangements that prevent a customer switching suppliers.
- Does the force majeure clause only entitle the parties to suspend performance or also to terminate? Have the other elements of the force majeure clause been satisfied? The notice provisions of the contract may oblige the party seeking to rely upon the clause to provide notices and information about the steps it is taking to avoid or mitigate the force majeure event within strict time periods. Gilbert + Tobin have considered this issue in more detail in our article COVID-19: are you affected by force majeure? You may need to act promptly or risk losing relief.
It is obviously difficult to make generalizations about the effects of COVID-19 for individual companies, given the evolving nature of the pandemic and the measures being taken by governments to combat it. Companies in the resources sector will likely be impacted at multiple tiers of their supply chains, especially given the close trading links with China. Companies looking to get on the ‘front foot’ would be well advised to ‘dust off’ their contracts, analyse the force majeure provisions and be ready to act as the situation unfolds. If you are not sure whether the force majeure clause has been triggered, it may be better to err on the side of giving notice earlier rather than later – and, if one party is better able to manage the risks and implications of COVID-19 than the other party, it may be preferable for the parties to re-negotiate or vary the existing arrangements to reflect that reality.