View from Asia: Force majeure and the power of business relationships

What we observed through the Australia-China trade disruptions was that businesses with trusted relationships were often able to find practical solutions far more quickly than those relying solely on contractual rights. – David Olsson AM, International Partner, Mallesons

Listen to these moments

Geopolitical events do not automatically trigger force majeure | 2:25
Whether a business can rely on a force majeure clause depends on the precise contractual wording, including the events covered, the threshold for disruption, the causal link to non-performance and any notice or mitigation requirements.

When supply chains are disrupted, what happens next? | 6:29
When a supplier can no longer deliver, the answer may not simply be to invoke force majeure. LNG and sulphur illustrate the challenge – for example, while a producer whose facilities have been damaged may have a relatively clear force majeure case, a business whose usual sulphur supplier can no longer supply may need to find more expensive alternatives.

The same vulnerability can exist further down the supply chain. Concentration among a small number of suppliers of basic chemicals used to manufacture semiconductors is a reminder of the critical dependencies businesses need to identify before disruption occurs.

Prolonged disruption can change the contractual position | 6:29
The longer a disruption continues, the more complicated the contractual position can become. Some contracts allow termination after an extended period of force majeure, but even then, businesses may not always want to invoke it. During the pandemic, some parties chose not to declare force majeure because prolonged disruption could ultimately give the other party a right to terminate the contract, usually without damages being payable.

Events that were once unforeseeable may also no longer meet that threshold. The Strait of Hormuz disruption illustrates the point – after months of disruption, it may no longer meet the unforeseeability threshold. New contracts therefore need to address these circumstances expressly, rather than assuming a generic force majeure clause will provide sufficient protection.

Force majeure is not the only contractual protection | 10:42
Long-term, cross-border and high-value contracts, particularly those dependent on global supply chains, should include force majeure. But force majeure is not the only tool available - hardship provisions, price renegotiation mechanisms and material adverse change clauses can also provide ways to manage significant changes in circumstances.

The focus should be on how the contract can help the parties respond when circumstances change, including whether there are mechanisms to adjust commercially and how long the business can operate if a critical dependency is disrupted.

Trusted relationships can help solve issues | 13:05
Not every disruption ends in a dispute. Strong relationships between counterparties can create the trust needed to renegotiate and find practical solutions when contractual positions diverge.

In Asia, investing in those relationships before a crisis can make a significant difference when conditions become difficult. The ability to pick up the phone, understand the other party's position and work through a problem can be as important as the contractual rights available to each side.

Investors are favouring ‘safe’ markets | 15:00
Businesses should avoid treating Asia as a single market. Local knowledge, relationships and an understanding of different jurisdictions can be critical when conditions become difficult.

Singapore’s position as a regional investment hub reflects the value investors place on stability, investor protection and local expertise. As investors become more cautious about where they deploy capital, markets perceived as ‘safe’ – including Singapore, Japan and Australia – may have an advantage. Other markets can still attract investment, but may require greater confidence in the jurisdiction, local environment and counterparties.

Local knowledge is a strategic capability | 19:43
Boards should understand where the critical vulnerabilities sit across their supply chains and whether alternative suppliers, stockpiles or other contingencies are available. For businesses investing in Asia, this also means asking whether they have the people, relationships and local knowledge needed to understand and manage jurisdiction-specific risks. There is no single response to challenges – different markets have different risk profiles, political environments and commercial priorities.

What's next?

For businesses operating across the region, this means:

• Regularly assessing exposed contracts and supply chains
• Identifying critical dependencies
• Ensuring there are alternatives if conditions deteriorate
• Treating Asia capability as an ongoing risk management priority – building relationships, developing local knowledge and spending time in-market before those capabilities are tested.

The question is not simply whether a business has a presence in Asia, but whether it has the relationships, understanding and capability to respond when conditions change.

View from Asia is a podcast series from Mallesons exploring the key developments shaping business across the region. Listen to all View from Asia podcast episodes here.