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Invoking force majeure under your transport contract: Are you protected when things go off the rails?

11 May 2021

#Transport, Shipping & Logistics

Published by:

Joshua Clarke

Invoking force majeure under your transport contract: Are you protected when things go off the rails?

If task allocation (e.g. “I will provide you with goods/services; you will pay me for those goods/services”) is the primary function of a commercial contract, risk allocation (who is liable for what if the task allocation fails) is probably a close second.

Despite these simple principles, it is surprising how often commercial contracts fail to discharge these functions due to poor or overly complex drafting.

A force majeure clause is a common feature of risk allocation in contracts. Commercial parties include them to suspend or alter their contractual obligations if performance is prevented, hindered or delayed because of something outside their control.

For example, a carrier of goods may be generally required to compensate the owner of the goods for transit damage and for any other losses incurred by the owner caused by the carrier’s delay or failure to perform other obligations. A well-drafted force majeure clause may relieve the carrier from some or all of this liability to pay if certain defined circumstances impede performance. Strikes, government action, storms, fires, earthquakes and other “acts of God” frequently appear in a long list of “force majeure events”.

However, not all force majeure clauses are created equal. The effect of one such clause was at the centre of a recent decision of the Supreme Court of NSW.

In Woolworths Group Ltd v Twentieth Super Pace Nominees Pty Ltd atf the Byrns Smith Unit Trust t/as SCT Logistics [2021] NSWSC 344, Justice Henry sought to determine whether a carrier had agreed to indemnify the owner of goods for damage caused to them when a train derailed during heavy rain and flash flooding. Below, we examine her Honour’s decision and extract some lessons for drafting and relying on force majeure clauses.

Against the backdrop of the ongoing COVID-19 pandemic, increasingly frequent extreme weather events and disruption to global trade due to governments’ actions, this Supreme Court decision is a timely reminder to Australian businesses to ensure their transport contracts protect them if things unexpectedly go off the rails.

Background

In the early hours of 10 April 2014, a train derailed along the rail corridor between Tarcoola and Malbooma, South Australia. The incident occurred during extreme weather involving heavy rain and flash flooding. On board this train were 258 pallets of goods owned by Woolworths Group Ltd (Woolworths). Because of the derailment, Woolworths suffered loss and damage to the goods to the value of $893,399.25.

Twentieth Super Pace Nominees Pty Ltd trading as SCT Logistics (SCT) was operating the train when it derailed. Australian Rail Track Corporation Ltd (ARTC) owned and operated the railway corridor upon which it derailed.

Woolworths sued both SCT and ARTC and claimed losses from SCT under an indemnity contained in the parties’ transport contract. Woolworths also made a claim against ARTC in negligence.

Issue

SCT denied it was liable for the damage to the goods. It contended that the goods were damaged due to a force majeure event, which engaged a contractual exception to its liability and obligation to indemnify Woolworths.

This raised a question of the proper construction of the transport contract. If SCT was wrong and it was in fact liable to indemnify Woolworths, as Woolworths maintained, the parties agreed there would be no need for a lengthy hearing involving factual disputes about the cause of the derailment and ARTC’s liability in negligence.

Accordingly, the Court agreed to determine the force majeure question as a ‘stand-alone’ or preliminary issue.

Transport contract

The transport contract between Woolworths and SCT comprised of two documents — the “Transport Terms and Conditions” (Terms) and the “Prescribed Procedures” (Procedures) (together, Agreement).

The Court considered the Agreement as a whole, referring to numerous clauses in the Terms and Procedures to which the parties had referred, in accordance with established principles guiding the construction of commercial contracts. Several clauses, in particular, were central to the Court’s analysis and ultimate decision.

Clause 12.2 of the Terms, headed “Risk”, provided:

“The Carrier is liable for Goods in its possession from collection at the Load Point until Acceptance occurs at the Delivery Point.”

Clause 13 contained the indemnity provision on which Woolworths sued SCT. In particular, Clause 13.1 (“Indemnity”) relevantly provided:

“Subject to clauses 13.2, 13.3 and 13.4, the Carrier indemnifies Woolworths on demand against all Losses incurred by Woolworths arising from or in connection with: (a) the Carrier's breach of these Terms or the Procedures; (b) any loss, theft, destruction or damage to the Goods”.

Clause 13.2 (“Direct Losses”) stated:

“The indemnity set out in clause 13.1 does not apply to Direct Losses incurred by Woolworths during a Force Majeure Event or Industrial Action.”

Clause 14 related to insurance and relevantly provided:

“(a) While these Terms are operative, the Carrier must effect and maintain the following insurance cover on such terms as those commercially available in the marketplace: (i) insurance, for its full replacement value, of the Goods against damage, theft, destruction or loss in transit; …”

The force majeure clause was contained within clause 7 (“Disruptions to Operation”) of the Terms, where clause 7.2 (“Force majeure events”) relevantly provided:

“…If a Force Majeure Event occurs, neither party is liable to the other for any delay or failure to fulfil its obligations under these Terms or the Procedures that is owing to the Force Majeure Event.”

Though “Force Majeure Event” was capitalised and referred to in the glossary of the Procedures, the term was not ultimately defined in the Agreement.

Arguments on construction

Woolworths contended that SCT’s obligation to indemnify under clause 13.1(b) for loss and damage sustained to the goods arose irrespective of any “Force Majeure Event” or failure to perform. It referred to the provisions for risk allocation and insurance in clauses 12.2 and 14(a) of the Terms in support of this contention.

Woolworths also argued that clause 7.2 provided only a limited carve-out of liabilities, applying to SCT’s liability for “any delay or failure to fulfil its obligations”. It said this did not effect any change to the allocation of risk between the parties and was no answer to their claim for indemnity under clause 13.1(b), which did not require any fault or failure on SCT’s part to be enlivened.

SCT responded that clause 7.2 did relieve it of any obligation to indemnify Woolworths under clause 13.1(b) if a force majeure event caused the loss and damage. In SCT’s case, clause 7.2 had a broad effect. When the force majeure event occurred, the clause suspended the commercial allocation of risk under the Agreement and put into abeyance SCT’s liabilities and obligations (including its obligation to indemnify Woolworths for the damage). SCT claimed that Woolworths’ construction of the clause rested on an unduly narrow interpretation of what was meant by failure on SCT’s part to “fulfil its obligations”.

SCT also contended that Woolworths was seeking to draw an artificial distinction between a liability for SCT’s failure to fulfil its obligations under the Agreement and its obligation to indemnify for losses — ignoring also that SCT’s risk in respect of the goods was described as a liability in clause 12.2.

Various other clauses in the Agreement were said to support SCT’s broader construction. SCT further argued that the commercial purpose and intent of force majeure clauses like clause 7.2 recognise that neither party should be liable for damage caused by an event that is beyond both parties’ control. While SCT had initially also relied on clause 13.2 of the Terms as an aspect of its defence, it ultimately conceded at the hearing that the provision did not apply.

Decision

The Court concluded that Woolworths’ construction of the Agreement was correct — the indemnity did extend to loss or damage to the goods irrespective of whether that loss or damage was caused by a force majeure event. A close analysis of the Agreement supported this ultimate finding.

The Court accepted that clause 12.2 made SCT liable for the goods irrespective of how they might be damaged. The clause thereby modified the general common law position that SCT, as a private carrier and bailee for reward, could avoid liability for damage caused to the goods while in its possession if it demonstrated that the damage occurred without any neglect or default on its part.

Similarly, SCT’s obligation under clause 13.1(b) to indemnify Woolworths for any loss, theft, damage or destruction to the goods did not depend on any fault, failure or breach by SCT (unlike clause 13.1(a)). The Court agreed with Woolworths that the insurance requirement in clause 14 reinforced that SCT was “on risk” for any loss or damage to the goods.

The Court then asked what impact, if any, clause 7.2 had on SCT’s liability to indemnify Woolworths for loss or damage to the goods.

The Court first dealt with the lack of a definition for “Force Majeure Event” as used in the clause. This, the Court observed, was unlike most force majeure clauses. Generally, they list specific categories of events falling within the meaning of the term. The Court nevertheless considered that clause 7.2 was directed at events beyond the parties’ control (excluding industrial action, which was dealt with in another clause) that affect the liability of, in this case, SCT to perform services under the Agreement.

The Court then interpreted clause 7.2 to determine when it would apply. For the clause to be effective, there needed to be:

1. an obligation under the Agreement in respect of which:

  • SCT was delayed in fulfilling or had failed to fulfil owing to a force majeure event
  • some corresponding liability could have arisen, and

2. a causal link between the alleged force majeure event and SCT’s failure to perform the obligation for which it seeks relief.

The Court held that these conditions were not met. The liability for which SCT sought relief was the liability to indemnify Woolworths for losses incurred in connection with the damage and destruction of the goods. This liability did not correspond with any relevant failure on SCT’s part to fulfil an obligation under the agreement, nor was the alleged force majeure event causally connected with SCT being unable to fulfil the obligation for which it sought relief. In other words, the extreme weather event did not make it difficult, impossible, illegal or impracticable for SCT to indemnify Woolworths for its losses under clause 13.1(b). As the Court stated, “SCT may incur a cost in doing so, but its ability to perform that obligation is not hindered or prevented owing to the alleged Force Majeure Event."

Further, the Court noted that SCT’s construction of clause 7.2 would put Woolworths on risk for damage to the goods sustained during the alleged force majeure event. This would be inconsistent with the commercial allocation of risk reflected in other clauses in the Agreement and gives clause 13.2 no work to do. The construction advanced by Woolworths was not based on an unduly narrow interpretation of the clause. Rather, the Court held that Woolworths’ construction was correct because:

“[Clause] 7.2 is directed to relieving SCT of liability for delays or failures in fulfilling its obligations in performance of the Services to the extent that the delays or failures are due to a Force Majeure Event but it does not absolve SCT of the risk and liability in respect of the Goods. The primary obligation and liability of SCT as an indemnifier to Woolworths under cl 13.1(b) for damage to the Goods is distinct from SCT’s liabilities as a contracting party in the performance of its obligations to transport the Goods in respect of which a delay or failure may give rise to breach of the Agreement.”

This construction, the Court stated, did not fail to recognise the purpose of force majeure clauses in contracts. Rather, it recognised that clause 7.2 operated as “a mechanism to reallocate liability in respect of performance of an obligation that is delayed or prevented due to factors outside the control of the parties and avoids any such delay or failure from becoming a breach of the Agreement for which SCT is liable.” As such, the clause would prevent Woolworths from making a claim against SCT for losses arising from “any delay or failure to deliver the Goods on time or not at all”, including a claim for:

  • loss of profits from not being able to sell the goods from a particular day
  • losses incurred due to a breach by Woolworths of an obligation to supply a third party
  • wasted warehouse and staff-related costs.

Accordingly, the Court answered the separate question, “Yes” — Woolworths was entitled under the transport contract to be indemnified for its loss and damage to the goods, irrespective of whether that loss or damage was owing to a force majeure event.

Lessons

The Court’s decision drew a fine distinction between SCT’s contractual obligations (such as an obligation to deliver the goods in sound condition) and its allocated risk in the goods. One must conclude that the unqualified allocation of risk in goods to a carrier does not, in and of itself, necessarily impose any obligation upon the carrier (e.g. to keep the goods in an undamaged state), which might be relieved if a force majeure event occurs. As this decision shows, it all depends on the contract itself.

On a practical note, contracting parties should pay attention to the following:

  • check the force majeure clause in your contracts. If a force majeure event arises, from which obligations can the parties seek relief? Perhaps you will not be liable for losses caused by a failure to perform a contractual obligation (e.g. a failure to deliver goods in sound condition) if that failure is due to a force majeure event. Nevertheless, you may still be “on risk” for the goods and liable to pay for damage to them caused during the event. A clause that allocates risk in the goods without any qualification can override the common law that could otherwise protect a commercial carrier if damage to the goods occurred without any neglect or default on its part
  • “Force majeure” is a term with no fixed meaning in Australian common law (it derives from French law, as you might have guessed). Accordingly, transport contracts should define the term, including the specific circumstances that the parties agree will constitute “force majeure events”. If this has not been done, courts will attempt to give the term meaning by applying the principles of contractual construction. However, the result of this exercise may not be in your favour
  • transport contracts often specify that situations that a party could reasonably have avoided by taking reasonable precautions will not qualify as force majeure events. Also, a party may need to give notice to the other party and mitigate the negative consequences of an event before relying on a force majeure clause for relief from an obligation. If things do go south and you find your business is unable to deliver on a contractual promise, remember to check first what is required of you before you invoke force majeure.

Authors: Geoff Farnsworth & Joshua Clarke

Disclaimer
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 article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Joshua Clarke

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