The knock on effects of COVID-19: Business contracts
On Wednesday, 11 March 2020 the World Health Organisation (WHO) declared the COVID-19 (commonly called ‘coronavirus’), a pandemic. This recognises that coronavirus is a new disease that has spread around the world and against which we do not have immunity. We recognise both the human toll it will take but also recognise that business continuity is imperative. Two questions for many businesses are:
- How will this crisis affect my commercial contracts?
- Does my ’force majeure’ clause help me?
What does ‘force majeure’ mean?
Force majeure is a French term literally meaning ‘greater force’ or ‘superior strength’. It is understood to mean something that is unexpected and beyond control. When we see a force majeure clause in a contract, its purpose is to provide relief from liability for the parties from having to perform their contractual obligations or to provide a timeframe allowing extension of time to perform in light of the force majeure event. At the core of the applicability of the clause is that there must be a link between the event and the impact on performance ability under the contract.
How effective is your force majeure clause?
This will depend on how it is worded. Often the clause will contain a list of events deemed to be force majeure events, which either arise from some form of human intervention or not. Examples include of such specific events may include earthquakes, hurricanes, war, strikes, death, acts of God and actions by government agencies. There may then also be catch-all phrases encompassing all other events beyond the control of both parties. What the catch all phrase will include will be interpreted by a Court in the context of the list of events given and the overall intent of the clause.
Is Coronavirus contemplated by your force majeure clause?
If ‘pandemic’ is specifically listed, then it is easier to say yes. However, if it is not listed, will ‘act of God’ cover it? An ‘act of God’ has been discussed in terms of being:
" due to natural causes directly and exclusively, without human intervention, and that it could not have been prevented by any amount of foresight and pains and care reasonably to be expected."
COVID-19 is a new disease that we are still grappling with in terms of its symptoms and effects. In the context of the indication above it may arguably fall within this category.
Further, the government’s response to COVID-19 may also cause or result in non-performance under your contract. For example, consider the cultural and musical events which have been cancelled due to restrictions on the number of patrons that can attend. You should seek advice in relation to the terms of your agreement and the breadth of the force majeure clause. We expect the Government’s response to COVID-19 is likely to cause further disruptions to businesses and their ability to perform under their contracts.
Relief at hand?
Usually a force majeure clause will set out the obligations of the party seeking relief including notice and timeframes. It will also set out what kind of relief may be open to a party. However, these clauses can be tricky business and it all comes down to how it is worded. If not considered or followed carefully, it could expose a party to a breach of agreement claim.
What if there is no force majeure clause in my contract?
Every case will depend on its circumstances, however, while a more challenging argument to raise, it may be possible to raise an argument based on the common law principal of ‘frustration’. This can arise where the parties are unable to perform their obligations through no fault of their own and through an unforeseen event. This is a difficult argument to mount because it will need to be demonstrated that the contract as a result of the unforeseen event is significantly different to that entered into originally. At common law if a contract is found to be frustrated it may mean future obligations being discharged. In New South Wales this position is amended to some extent by the Frustrated Contracts Act 1978 (where this Act applies as it does not apply to all contract types for example, insurance contracts and contracts for carriage of goods by sea). If frustration is found it may discharge from performance a promise due to be performed but not yet performed, except to the extent necessary to support a claim for damages for breach of the promise prior to the frustration.
- Review your contract terms.
- What obligations are you obliged to perform that may be affected by coronavirus or the Government’s response to it.
- Do you have a force majeure clause and what does this cover?
- If no force majeure clause is in the contract, is there scope for variation of the contract?
- Are there grounds to argue frustration of contract?
There are a number of possibilities that arise out of this unique pandemic. Before you take any steps in relation to the contract and need assistance with a review of your position, please do not hesitate to contact a lawyer in Coleman Greig’s Commercial Advice team, who would be more than happy to assist you.