As fuel prices continue to rise, the impact on local businesses is beginning to sharpen. Many are finding that increased costs or supply disruption are making it difficult to meet contractual obligations, while others are encountering counterparties that are missing commitments, proposing price increases or seeking to exit contracts.

In this article we look at the application of force majeure clauses in this context, and highlight the need for businesses to carefully consider pricing mechanics and other potentially impacted commitments as they enter into new contractual arrangements.

Applicability of Force Majeure

In the context of steeply rising prices for fuel and other related inputs, it is important to remember that the often overlooked boilerplate ‘force majeure’ provisions of most commercial contracts may be relevant. 
 
In general terms, these clauses may excuse a party’s non performance where it is caused by events outside that party’s reasonable control, and in some cases provide termination rights if the relevant event continues for a specified period. 
 
Force majeure clauses will typically only apply where performance is prevented, rather than where performance has simply become more expensive. The force majeure concept also only applies if it is expressly provided for in a contract.  For example, under New Zealand’s standard form of construction contract (NZS3910) there are no force majeure clauses, but there are other relief mechanisms for matters that are not reasonably foreseeable by an experienced contractor at the time of tendering (such as an extension of time to complete the works).  See our previous articles on the impact of the Iran crisis on NZS3910 here.

If the current fuel crisis is having a material impact on your business, we recommend reviewing the force majeure provisions in affected contracts and assessing whether relief may be available.

Entry into new contracts

The current uncertainty also makes entry into new contracts, particularly where fixed pricing commitments are proposed or transportation is a key component, challenging. With the Iran conflict now a known risk, parties entering into forward looking contracts will generally be expected to have expressly addressed these risks in their contractual arrangements. 
 
Alternative mechanisms that provide for flexibility if circumstances change materially should therefore be considered, rather than relying on force majeure alone.

Get in touch

We have teams able to advise on all related contractual issues, including assessing the availability of force majeure relief and assisting with the negotiation of contracts in the current environment.
 
If you have any questions about the implications of the Iran conflict on your business, please feel free to get in touch with one of our experts.

Special thanks to Evan Jones for his help in preparing this article.