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Force majeure and COVID-19 – is the pandemic enough?

04 November 2020

#Dispute Resolution & Litigation, #COVID-19

Published by:

John Connolly

Force majeure and COVID-19 – is the pandemic enough?

As discussed in our previous article here, the question as to whether COVID-19 is an event that will enliven a contractual force majeure clause will depend on the specific drafting of the clause. Further, the contracting network to which you are a party in your particular sector may define whether you are seeking to invoke or challenge a declaration of force majeure, as discussed in our subsequent article here.

Although arising pre-COVID-19, the recent decision in Meetfresh Franchising Pt Ltd v Ivanman Pty Ltd [2020] NSWCA 234 emphasises that in addition to establishing the applicability of a force majeure clause to the relevant circumstances, the party seeking to rely on the clause must adduce cogent evidence to provide proof that the force majeure event was the cause of the party’s inability to perform its obligations.

Background

Ivanman Pty Ltd (Franchisee) contracted to purchase a ‘Meet Fresh’ franchise business selling traditional Taiwanese desserts, beverages, and snacks.

A Taiwanese company, ‘Easy Way’ (Third Party), was the owner of the ‘Meet Fresh’ intellectual property and granted Meetfresh Australia Pty Ltd (Intermediary) the right to grant franchises to carry on that business in Australia using the intellectual property. The Intermediary granted those rights to Meetfresh Franchising Pty Ltd (Franchisor) which in turn granted a franchise to the Franchisee.

The Franchisee entered into consecutive franchise agreements and licenses for premises with the Franchisor, including a fit-out of the premises at the Franchisee’s own expense.

Both franchise agreements contained the following force majeure clause under section 39 ‘Events Beyond Meetfresh’s Control’:

“Meetfresh [Franchisor] shall not be liable to the Franchisee for any loss sustained by the Franchisee caused by Meetfresh’s failure to honour the terms of this Franchise Agreement where such failure has occurred because of an event which is beyond Meetfresh’s reasonable control including but not limited to strikes, war, fire, flooding, earthquakes and other natural disasters.”

The Franchisee received a written notice from the Third Party (with whom it did not have any direct contractual relationship) stating that the Intermediary was no longer entitled to use the ‘Meet Fresh’ intellectual property, with the consequence that sub-franchisees of the Intermediary (including the Franchisee) were similarly disentitled.

Shortly after the licence for the premises expired, the Franchisor served a notice of termination of the franchise agreement and any existing ‘holding over’ licence. 

The Franchisee then brought proceedings against the Franchisor in the District Court claiming damages for breach of contract and unconscionable conduct in the amount of $113,171 representing the fit-out expenses it incurred in reliance of the continuation of the franchising agreement.

Primary judgment

The primary judge found that the first franchise agreement impliedly contained a warranty to the Franchisee that throughout the term, the Franchisor would be authorised by the Third Party to conduct the franchise.

When considering the force majeure clause, the primary judge found that, when it came to considering events beyond the Franchisor’s control, there was, to a large extent, a lack of evidence about its books and records and what the Franchisor could and could not control. In light of the evidence available, the primary judge found that, by its officeholders:

“[the Franchisor] was in a considerable position of control and power, and I consider that a reasonable and rational inference to draw from the evidence overall was that it was entirely within the power and control of the [Franchisor] to address any particular problems it was confronted with, but at the end of the day there was really no further evidence about that.”

The primary judge held that the Franchisee was entitled to recover the amount it spent on the fit-out of the premises on the basis that it was wasted expenditure made in the expectation that the Franchisee would obtain the benefit of the second franchise agreement for its full term, which did not occur.

Appeal

On appeal, the Franchisor contended that the primary judge erred in finding that the force majeure clause did not apply and that he should have found that the Franchisor could not have taken any “relevant and reasonable steps” to avoid that loss occurring.

McFarlan JA (with whom Bell P and Meagher JA agreed) upheld the primary judge’s findings on the basis that:

  • the Franchisor bore the onus of establishing the applicability of the force majeure clause;
  • there was a lack of evidence about the cause of the force majeure event and the Franchisor’s inability to prevent its occurrence, notwithstanding its presumed ability to lead evidence of those matters; and
  • in light of the above, the primary judge was justified to draw a positive inference that the loss of the Franchisor’s right to use the Third Party’s intellectual property was entirely within its control.

Conclusion

Meetfresh v Ivanman illustrates that it is simply not enough for a party to point to a supervening event and expect to be discharged of its contractual obligations by relying on a force majeure clause. 

The Court suggested that the Third Party’s withdrawal of intellectual property rights may well have been an event “beyond [the Franchisor’s] reasonable control”, but in the absence of cogent evidence to support what the Intermediary and Franchisor could or couldn’t control, the Court would not draw such a conclusion in the Franchisor’s favour. This illustrates the contra proferentem rule discussed in our previous article here whereby contractual clauses are construed strictly, and, in the event of any ambiguity, will be interpreted against the interests of the party who seeks to rely on that clause.

The decision also accords with the rationale applied by other State appellate Courts in respect of force majeure clauses whereby a party will not be excused from performance unless they can prove that they have exhausted all other means of performance, regardless of whether the alternative performance comes at greater cost.[1]

Takeaway

As businesses re-emerge from and learn to live with COVID-19, contractual force majeure clauses will be put to the test. It will not be enough for a party to simply point to the pandemic as a complete basis for failing to meet their contractual obligations.

While COVID-19 will almost certainly be an event that is ‘beyond a party’s reasonable control’, it is worth considering the following questions when thinking about its application to force majeure clauses:

  1. Was the party’s inability to perform obligations under the contract caused solely by COVID-19, or a combination of factors?
  2. Did alternative means exist for a party to fulfil its obligations under the contract notwithstanding COVID-19?
  3. What evidence is available which supports that COVID-19 was the cause of the inability to perform under the contract?

Authors: Toby Boys & John Connolly

[1] Yara Nipro Pty Ltd v Interfert Australia Pty Ltd [2010] QCA 128

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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

John Connolly

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