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We have included an extract from a lawyer in our network, James Harb, who has thought about some of the difficulties many organizations will face in the coming months, once the urgency of the health crisis is over and the grim economic realities start to bite.
These are just some of the terms you will probably come to hear more about and the suggestion that legal advice will be needed is unfortunately going to be true for many of us.
COVID-19 Application to Contracts
Whilst the course of the COVID-19 pandemic and the ultimate effect on our lives is nearly impossible to predict, we can already begin to see the disruption that the government’s mitigation measures will have on businesses and the Australian economy as a whole. The COVID-19 pandemic, and its associated impacts, have prompted Australian and international businesses to carefully consider their obligations to perform contractual obligations, and whether force majeure provisions in their commercial contracts may apply.
What is “force majeure”?
In broad terms, force majeure refers to the risk that performance of a contractual obligation may be delayed or prevented by an event or circumstance beyond a party’s control, typically, a natural disaster. A force majeure clause is usually included in a commercial contract to excuse one or both parties from performance of the contract in some way if defined “force majeure” events occur.
What issues can arise when trying to rely on a force majeure clause?
Parties may argue about which events are within, or beyond, the reasonable control of a party, that is, whether certain events fall within the scope of a force majeure clause. Express inclusion or exclusion of certain events may be necessary when drafting and negotiating the clause, particularly if there is any doubt about whether specific events of particular importance in the context of the proposed transaction are included or excluded. Many contracts contain provisions or definitions that will make the issue simple to resolve because, for instance, they specifically provide for events such as epidemics, quarantine, biological contamination or government-imposed restrictions. However, other force majeure clauses may only refer to generic terms such as ‘natural disaster’. That said, it is certainly arguable that COVID-19 could fall under the definition of a natural disaster. You should also know that the coronavirus pandemic doesn’t need to cause the event in question directly. For example, COVID-19 may result in borders being closed to certain ships or aircraft, resulting in the inability of a company to obtain vital components for its products, thereby causing a force majeure.
As the burden of proof is on the party seeking to rely on the force majeure clause, that party must be able to prove:
That it has complied with any notice requirements
The event or circumstance could not have reasonably been avoided
That it has taken steps to mitigate the effect of the event or circumstance
As a general rule, if the performance of a contract becomes more difficult or expensive, the party who fails to perform is in breach and must pay damages. An exception to this is the doctrine of frustration. This (unlike force majeure) automatically brings the contract to an end when, without fault of either party:
performance becomes legally or physically impossible; or
turns an obligation under that contract into a fundamentally different obligation.
That said, frustration is not easy to establish and has a narrow scope; it will not generally occur where:
there is a force majeure clause dealing with the applicable issue
performance of a party’s obligations has only become more onerous or expensive; or
the change is temporary or transient.
The common law position (applicable in Queensland, Western Australian, Northern Territory, Australian Capital Territory and Tasmania) in the event that frustration occurs is that all the obligations from the point of frustration cease, each party’s losses lie where they fall and no party can claim damages. The other three jurisdictions (Victoria, New South Wales and South Australia) each have a legislation that regulates how frustration operates in an attempt to provide a more balanced result to the parties.
James Harb, Principal Adviser
Phone: 0416 084 629