The global spread and impact of COVID-19, also known as the novel coronavirus, has been far-reaching and affected industries worldwide.

COVID-19 has caused unforeseeable disruptions to businesses and created difficulties in parties to contracts fulfilling their contractual obligations.

As a result, we are finding more and more commercial clients are concerned about their contractual and common law rights considering the impact COVID-19 has had, or will likely have, on their contracts.

Contractual Rights – Force Majeure

Force majeure clauses can, in some circumstances, excuse a party from meeting their contractual obligations in circumstances outside the control of, and unforeseen to, the contracting parties.

A force majeure clause is used to limit the liability of a contracting party and provide relief for events which delay, hinder or prevent performance of the contract. The events common to force majeure clauses include acts of God (for example fire, flooding, and natural disasters), strikes, riots, government action, and civil commotion. Epidemics or pandemics are also events that can be included in force majeure clauses, which is particularly relevant now that, as of 11 March 2020, the World Health Organisation has declared COVID-19 a pandemic.

Contracts Already on Foot

If a contract that parties had entered into prior to the emergence of COVID-19, contains a force majeure clause and that clause contains a reference to a pandemic, a party to that contract who has had their ability to perform the contract impacted by COVID-19, will likely be able to rely on the clause to excuse them from the strict performance of the contract.

Courts strictly interpret force majeure clauses and as such, if a pandemic (or other related events such as an epidemic or quarantine) is not specified in the force majeure clause, it is unlikely a party will be able to rely on the clause if they are failing to meet their contractual obligations as a result of COVID-19. This will likely mean that the impacted party is in breach of the contract.

However, in circumstances where the reason behind a contracting party’s failure to perform is that the government has forced the closure of a business, or orders a method of transport be temporarily suspended (for example international airline travel), and the force majeure clause provides ‘government orders’ as a defined event, the impacted party may be able to rely on the clause to be excused from strict performance of their contractual obligations.

Future Contracts

When drafting commercial contracts in this uncertain period, clear wording should be used if a party is trying to limit their liability for any failings in the performance of a contract due to unforeseen impacts of COVID-19.

As at this stage many of the potential impacts that COVID-19 may have on a contracting party’s future ability to perform are known to the parties (that is, they are not unforeseen to the parties), when entering into new contracts parties should consider how the risks associated with COVID-19 may be mitigated, and how those risks might be allocated between the parties to the contract. For example, in terms of mitigating the risks, parties may wish to extend standard the time frames in a contract to ensure a party can perform in accordance with the contract; and for instance, in allocating risks, a party may consider drafting an indemnity to hold the other party liable for losses arising from a third party failure to supply products necessary for that party to complete the contract.

On a practical level, parties should also consider whether contracts at this time are financially viable, as the economic impact of COVID-19 has already affected global trade and commerce and there is a high level of uncertainty that continues in relation to the state of the economy in this difficult time.

When drafting any force majeure clause, as far as practicable, a high level of specificity should be used. As a general rule, force majeure clauses will not be implied into contracts and as such parties intending to rely upon a force majeure clause should ensure it is enumerated clearly in their contract.

If a Force Majeure clause is enlivened

A well-drafted force majeure clause will usually suspend performance under the contract and have the parties manage future performance through an agreed process. In some circumstances, a force majeure clause may also provide a process for termination when relying upon the clause.

To rely on the force majeure clause a party will have to demonstrate that a force majeure event has occurred; that event was outside the control of the party; the event prevented, hindered or delayed their performance of the contract; and they have taken all reasonable steps to mitigate or avoid the event and its consequences.

There must have been a causal connection between the event and the inability of the party to perform their contractual obligations. The event must have also caused a substitute means of performance to be impossible, that is, there is no alternative method available that is simply more expensive than the method provided for in the contract.

It is important to remember that a court will interpret a force majeure clause strictly, and in cases of ambiguous terms will interpret them against the party who seeks to rely upon the clause.

Common Law Rights – Frustration

In the absence of a force majeure clause that gives rise to contractual rights, the common law doctrine of frustration may still apply where contractual obligations are unable to be met as a result of COVID-19.

The doctrine of frustration will mean that a contract is discharged in circumstances where an event, through no fault of any party, intervenes and causes either:

a. The contract to be impossible to perform; or

b. The contract to be fundamentally different from what was originally contemplated by the parties when entering into the contract.

Similarly to a party trying to rely on a force majeure provision, a party cannot rely on the doctrine of frustration whereby the event merely causes performance to be more expensive or burdensome. A party will also not be able to claim there has been a ‘frustrating event’ where the impossibility of performance is due to a fault of a party.

By operation of law, if the doctrine of frustration applies, the contract is terminated from the time that the frustrating event occurred, and no party can claim damages as the non-performance of the contract in these circumstances is not the fault of any party.

The Next Step

If you are affected by the pandemic and are suffering losses and would like to discuss the above remedies, we would be pleased to hear from you.

We look forward to working with you to achieve your aims and protect your interests.

Please call 1300 000 770 or email admin@glaser.net.au to make your appointment.