By Pinar Acay
Geopolitical events such as war, invasion, terrorism, or the imposition of international sanctions can have immediate and severe impacts on contractual performance. For Australian businesses, well-drafted contracts are essential to manage these risks. This article outlines how force majeure, sanctions compliance, material adverse change, and delay management clauses operate in practice, and what the parties should consider when drafting or negotiating these provisions.
Force Majeure Clauses
A force majeure clause allocates risk where unforeseen events beyond a party’s control prevent or hinder performance. In the context of war, invasion, terrorism, or government-imposed sanctions, these clauses are often critical.
To be effective, the clause should:
- Clearly define triggering events, expressly including war, armed conflict, terrorism, and sanctions.
- Specify the threshold of impact, such as whether performance must be “prevented,” “hindered,” or merely “delayed.”
- Require notice obligations, ensuring the affected party promptly informs the other party of the event and its consequences.
In Australia, force majeure is not implied at common law and must be expressly included in the contract. Courts will interpret the clause strictly, so precise drafting is essential. A clause that only covers “acts of God” may not extend to geopolitical events unless explicitly stated.
Sanctions Compliance Clauses
Sanctions regimes can make performance unlawful or commercially impractical. Sanctions compliance clauses are designed to address this risk by allowing parties to suspend or terminate obligations where compliance would breach applicable laws.
Key considerations include:
- Scope of sanctions: The clause should capture Australian sanctions as well as relevant foreign regimes (e.g. where international trade or financing is involved).
- Suspension rights: Temporary suspension may be appropriate where sanctions are expected to be short-lived or subject to change.
- Termination rights: Where sanctions fundamentally undermine the contract, a right to terminate may be necessary.
Care should be taken to distinguish between illegality (where performance is prohibited), and increased risk or cost (which may not justify termination unless expressly provided).
A well-drafted clause will also address payment obligations, accrued rights, and the allocation of losses upon suspension or termination.
Material Adverse Change (MAC) Clauses
MAC clauses provide a mechanism for parties to respond to significant negative changes affecting the commercial basis of a contract. War or sanctions may trigger a MAC where they materially impact a party’s financial position, supply chain, or ability to perform.
These clauses typically:
- Define what constitutes a “material adverse change”, which may include geopolitical instability or economic disruption.
- Allow for renegotiation, enabling parties to adjust pricing, timelines, or other key terms.
- Provide termination rights, where the impact is sufficiently severe.
However, MAC clauses can be contentious. Courts generally interpret them narrowly, and the party invoking the clause bears the burden of proving that the change is both material and within the scope of the clause.
Managing Delays
War-related events often cause delays rather than complete prevention of performance. Contracts should therefore include clear mechanisms for managing delays.
Key drafting points include:
- Extension of time provisions: Specify when delays caused by war or sanctions justify an extension, and how this is calculated.
- Suspension rights: Allow performance to be paused where continuation is impractical or unsafe.
- Termination thresholds: Provide for termination where delays exceed a defined period or fundamentally alter the contract’s purpose.
It is also important to link delay provisions with force majeure clauses, ensuring consistency, and address cost consequences, including whether additional costs are borne by one party or shared.
Practical Takeaways for Australian Businesses
- Draft with specificity: General clauses may not capture modern geopolitical risks.
- Align clauses: Ensure force majeure, sanctions, MAC, and delay provisions operate coherently.
- Review regularly: Contracts should be updated to reflect evolving global risks and regulatory frameworks.
- Seek legal advice early: Proactive drafting can prevent costly disputes in the future.
Need Advice?
If your business is entering into contracts that may be affected by geopolitical instability, or if you are currently facing disruption due to war, terrorism, or sanctions, obtaining timely legal advice is critical. Our team advises Australian businesses on drafting, reviewing, and enforcing commercial contracts in complex and rapidly changing environments. Please contact Pinar Acay or Richard Mackenzie at either of our Melbourne or Essendon offices to discuss your specific circumstances and how we can assist in protecting your commercial position.
