By Alexandra Shaw (Lawyer), Bridget Hobbs (Senior Associate) and Andrew Walker (Director)
As COVID-19 continues to spread, the impact on businesses becomes inevitable. We have already started to receive questions from our clients as to how the impact of COVID-19 could affect their contractual obligations. Whilst the extent of the impact of COVID-19 remains uncertain, businesses should look to their commercial contracts to ensure they are covered for the worst and identify any vulnerabilities in their supply chain.
This article contemplates how force majeure provisions can be interpreted as a result of this viral outbreak.
Force majeure provisions
Force majeure provisions are designed to provide for situations where a party is unable to perform its contractual obligations. Force majeure is not a ubiquitous term – it differs across jurisdictions and from contract to contract. Therefore, the questions are:
- Does your contract contain a force majeure clause?
- Does COVID-19 fall under the definition of a force majeure event in your contract?
- Has the force majeure clause been triggered?
Does COVID-19 fall under the definition of force majeure event in your contract?
The fact that your contract contains a force majeure clause does not on its own mean you have the right to invoke relief in the event that COVID-19 affects your business. The question is whether a force majeure event, as defined in your contract, has occurred.
Generally, commercial contracts define a force majeure event as an event beyond the reasonable control of a party or by reference to a list of events. Favourable force majeure clauses may specify an event that affects delay in supply, increases in costs and product shortages. In the same vein, some contracts may expressly exclude events that have such an affect.
The broader the definition, the more likely that an effect of COVID-19 on your business will qualify as a force majeure event. If your contract does provide a specific list of events, the obvious terms to look out for are ‘epidemics’, ‘pandemics’ and other such health-related events. However, it is also arguable that terms like ‘government action’ or ‘act of God’ would capture COVID-19.
As circumstances are changing daily (if not hourly), even if your contract does not provide for you to invoke the force majeure provisions today, another day may bring a different answer.
Has the force majeure clause been triggered?
The next factor to consider is whether the force majeure event has triggered your ability to enforce your rights. Again, this will depend on the interpretation of your contract.
Many force majeure clauses will provide that a party will be relieved of its obligations to the extent that a force majeure event prevents them from performing those obligations. The word, prevent, may be up for interpretation:
- Would this only refer to a physical inability to perform or where performing would constitute a breach at law? OR
- Would this extend to an increased cost to perform?
The answer to these questions will depend in each case on the terms of the contract, the situation at hand and the parties’ interpretations.
Invoking your force majeure clause
If your contract permits you to trigger the force majeure provision as a result of an effect of COVID-19, it is important that you comply with the requirements set out in your contract before invoking your rights. Most contracts will require the party seeking relief to:
- Give notice to the other party of the impending event, the details of the situation and the consequences (including the length of delay).
- Provide evidence of the event and its impact on your ability to perform.
- Mitigate the impact of the event on your obligations.
What is the result of invoking the force majeure clause?
Most commonly, force majeure provisions will provide a contractual right to:
- Avoid liability for the non-performance or delay in performance of relevant obligations.
- Suspend the obligations affected by the force majeure event.
- Terminate the contract if the force majeure event continues for a defined period.
What options do you have if your force majeure clause does not cover COVID-19?
Where there is no force majeure provision in your contract, or the definition does not extend to the effects of COVID-19, parties may be able to rely on the common law of frustration. A contract is frustrated where the obligations or nature of the contract have become impossible to perform.
There is a high threshold for establishing frustration:
- The situation must have been reasonably unforeseeable; and
- The situation must prevent performance (i.e. rather than cause delays).
It is important to note that if parties rely on frustration, where this is successful, the only remedy is termination, rather than suspension as under a force majeure clause (at least initially). This may be less of a concern for short term contracts but for parties who have long-standing agreements with a lengthy term, complete termination may not be the best decision.
What next?
It is impossible to predict what will happen next, but it is likely that there will continue to be a disruption to businesses for a period of time to come. If you are considering declaring a force majeure event, it is important to first seek legal advice to understand your rights and responsibilities and the impact that invoking your force majeure clause may have on your contractual obligations.
Even if COVID-19 is not affecting your ability to perform your obligations, you may want to take this opportunity as a reminder of the importance of force majeure provisions and consider whether your force majeure clauses are broad enough to cover you when you need.
At KHQ, we are dedicated to helping businesses through this uncertain and stressful period. If you have any questions please reach out to your usual KHQ contact, or otherwise email us at contact@khq.com.au or call us on (03) 9663 9877.
