Force majeure and China import restrictions

The Chinese Government has reportedly issued verbal advice to state-owned enterprises and private coal customers to not buy certain categories of Australian exports, including coal and copper ore, ‘until further notice’.

Reports indicate that the decision has resulted in the cancellation of several cargoes of exports over the last few weeks. It is anticipated that the ban may substantially impact the price of coal and impact coal royalties, regardless of destination.

This may well have significant impacts for performance of contractual obligations under supply agreements.

Force majeure clauses are intended to address circumstances in which a supervening event has prevented or delayed the performance of a contract. As such, parties across the supply chain may look to force majeure clauses as an avenue for relief in the wake of the ban. Equally, there may be an attempt to invoke frustration, independent of any contractual provision. This may be invoked where performance of a contract has become impossible or the circumstances of performance are radically different.

In broad terms and subject always to the actual wording used, force majeure provisions will typically excuse a party from performing its contractual obligations if an event beyond the party’s reasonable control that falls within the term ‘force majeure’ in the contract has affected the party's ability to perform the contract.  The term is often defined by reference to a list of categories of events, which may include a change of law or regulation, an act of government, or government intervention.

It will be important to consider the availability of force majeure and frustration carefully in the context of the reported ban. In particular, one key question will be whether the reported ban by the Chinese Government has the necessary character of a law, regulation or act of government (however defined in the force majeure clause). Although the ban has been referred to by Chinese state media and other sources, it has not yet been confirmed by the Chinese Government, and its legal status, source and terms remain uncertain. A critical question will be whether the government direction or policy has the effect of preventing performance of contractual obligations e.g. because performance would result in a breach of the law by the relevant Chinese company, or whether companies are voluntarily choosing to follow the Government direction or policy even though not legally compelled to do so. Ordinarily, force majeure will not arise where the party is able to fulfil its contractual obligations, but chooses not to do so because commercial or other reasons make it unattractive to do so.

Parties should also bear in mind that relief may only be temporary for the period in which performance is impacted. Often there will be express obligations on parties to take reasonable steps to mitigate the impact of the force majeure event (eg by resequencing work, implementing business continuity plans, making adjustments within the supply chain, etc).