The supply disruptions and price spikes from the Middle East conflict continue to create chaos for many Australian businesses. Diverse companies, from small retailers to large fertilizer manufacturers, are still dealing with higher costs or unavailable inputs. That chaos may be exacerbated by mooted petrol rationing.
Businesses affected by this shock are, no doubt, considering the consequences for their own contractual obligations and those of their counterparties. Those consequences are guided by the following key principles.
‘Material adverse change’ and similar risk allocation clauses
The first step for any business affected by the Middle East conflict and its consequences is to determine if a contract contains an applicable ‘material adverse change’ or ‘material adverse event’ clause. Such clauses generally allow one party to avoid, suspend or renegotiate its obligations if there is, for example, ‘any event, circumstance, or change that has had a material adverse effect on the business’. Many such clauses include exceptions for oil or gas price increases. Conversely, other clauses, such as in typical gas supply contracts, will trigger renegotiation when there has been a material change in the price. For those contracts that do not expressly allocate the risk of, for example, an oil or gas price spike, careful contractual interpretation will be critical.
Force majeure
Businesses should also consider if their contract contains an applicable force majeure clause. Such clauses address the consequences of, translated literally, a ‘superior force’, that is, an event outside the control of the parties that prevents performance. In this event, performance can be legally delayed or avoided, depending on the wording of the clause and the period of the event.
However, while war is often listed as an event of force majeure, it generally will not be an excuse unless it prevents performance. Such clauses also typically do not apply simply because the price of an input has increased such that supply becomes unprofitable. This was reinforced by the Australian Federal Court in Hyundai, which found that a force majeure clause could not be relied on to avoid a commitment to rent a boat to ship coal simply because the buyer of the coal declined to purchase it. The clause operated only when the force majeure event ‘prevented’ performance and, while shipping the coal ‘may not have been to their advantage, … there was nevertheless a choice open’.[1] Hence, a force majeure clause is more likely to apply where performance is impossible, because, for example, a contractual party is unable to obtain a key input. This application of the clause may become critical if petrol is rationed, as recently mooted by the Federal Government.
Force majeure clauses also, generally, will not excuse the failure to perform a contractual obligation if a party did not take reasonable steps to perform, even if that is not expressly required by the clause. This was highlighted recently by the UK High Court in Seadrill Ghana. The defendant tried to escape its obligations to hire an oil drilling rig from Seadrill when a drilling moratorium was imposed off the coast of Ghana during its dispute with Côte d’Ivoire. The Court refused because the defendant had not used ‘reasonable endeavours’ to circumvent the force majeure event, as required by the clause, by drilling elsewhere.[2]
However, the obligation of a party to take reasonable steps to prevent the failure of performance does not require it to substitute a different performance than that required by the contract. The English Supreme Court recently found that a party to a contract that required payment in US dollars could rely on a force majeure clause when US sanctions arising from the Ukraine conflict prevented payment in that currency. The court rejected an argument that the clause did not apply since the party elected not to pay in Euros, as that was not what was provided for in the contract.[3]
Finally, businesses should be wary that just because a force majeure clause may apply does not mean that it will. Parties still need to follow the contractual process for invoking the clause. This was highlighted recently by the Queensland Supreme Court, who prevented QNI Resources from avoiding its obligation to transport gas when its JV partner failed to obtain licences to operate a refinery because, among other reasons, QNI did not specify in its notice the obligations affected, as required by the clause.[4]
Contract frustration
Even without an applicable clause in their contract, businesses may not be obliged to perform contractual obligations if an event frustrates that contract. The common law in Australia and England, for example, remains that a contract will be frustrated if performance of a contract becomes radically different from that originally contemplated through no fault of the parties.[5] In this event, the contract ends and future obligations are discharged.
However, businesses affected by the Middle East conflict, the resulting oil shock, or pending petrol rationing should be wary that courts have continually reinforced the difficulty of satisfying the common law test for contractual frustration. In The Eugenia,[6] the English Court of Appeal famously concluded that a contract for use of a ship to supply wheat was not frustrated by Egypt blocking the Suez Canal during its 1956 war with the UK, France and Israel because the ship could have travelled around the Cape of Good Hope, even though that was much slower and more expensive. More recently, the English High Court held that the COVID-19 pandemic did not frustrate a contract for the leasing of a cinema because lockdowns were expected to be lifted before the lease expired.[7]
Insurance
Businesses unable to obtain relief under the contractual clauses or common law described above may turn to their insurance coverage. However, policies typically do not cover cost increases and, in any event, often exclude the consequences of war unless special coverage has been purchased. For example, in Kuwait Airways Corp v Kuwait Insurance Co,[8] aircraft seized during Iraq’s 1990 invasion of Kuwait were held to fall within the policy’s war risk exclusion.
Summary
Australian businesses should be aware that relief from the consequences of the Middle East conflict and the resulting supply disruptions and price spikes may be limited. The bad news for those seeking to avoid contractual obligations but good news for those seeking to enforce is that:
Nevertheless, as always, careful contractual, common law and statutory interpretation is critical and may reveal relief that is not apparent.
[1] Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd (2006) 236 ALR 115 at [61]-[62].
[2] Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm) at [89]-[90].
[3] MUR Shipping BV v RTI Ltd [2025] AC 675 at [37].
[4] North Queensland Pipeline No 1 Pty Ltd v QNI Resources Pty Ltd [2021] QSC 190 at 39-40.
[5] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 360.
[6] [1964] 2 QB 226.
[7] Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013 (QB).
[8] [1996] 1 Lloyd’s Rep 664.
