How will the coronavirus impact your commercial contracts? In this article, we look at commercial contracts, and in particular force majeure clauses in light of what you need to be focussing on in your supply contracts, where supply is now or might in the future be an issue. We also look at proactive steps you can be taking right now to get on the front foot and take steps to protect your organisation.
On 11 March 2020, the World Health Organisation (WHO) officially declared the COVID-19 coronavirus a pandemic following the worrying levels of global spread and severity of the outbreak. In anticipation of this declaration, Australia has been on high alert and had already begun treating the virus as a pandemic prior to the official decision of the WHO. However, whilst the Australian government has taken, and continues to take, significant steps to attempt to curb the spread of the virus in Australia, the public health emergency that is COVID-19 certainly has widespread and varied implications that extend well outside the strain on the health care system and the obvious detrimental effect on the tourism industry.
Since COVID-19 was first reported in Wuhan, China and notified to the WHO in December 2019, the profound impact on international trade and commerce continues, with large corporations and small to mid-size commercial businesses alike seeing substantial operational disruptions resulting from a myriad factor including closures of workplaces and ports, interruptions to supply and distribution channels and labour shortages to name but a few.
Consideration must now also be given to the legal consequences of COVID-19, in particular, the effect that the pandemic virus has had, and continues to have, on whether parties are able to meet their contractual obligations. In this respect, many organisations are considering whether they are able to rely on force majeure clauses in contracts in order to excuse non-performance.
Generally speaking, a force majeure clause in a contract is aimed at excusing parties from performing their contractual obligations in circumstances where those parties are prevented from performing such obligations (either in whole or in part) by reason of circumstances (that are usually defined in the contract) which are outside of a party’s reasonable control. If one of the circumstances listed in the force majeure clause occurs, then that clause will usually detail what is to happen next (i.e. whether a party may suspend or terminate the contract, or whether a party must mitigate the effect of the event, etc.).
However, it will not always be immediately clear whether force majeure clauses will provide a contracting party relief in circumstances where they have been prevented from carrying out their obligations as a result of the COVID-19 pandemic. Whilst some contracts may include force majeure clauses that specifically address events such as epidemics and actions by government, many other contracts will simply contain generic force majeure clauses that refer to events such as ‘natural disasters’, ‘Acts of God’ or other events ‘beyond a party’s contemplation or control’. In these circumstances, it is less clear whether parties will be able to rely on those force majeure clauses to excuse their contractual non-performance.
For parties that are currently undertaking contract negotiations, careful consideration should be given to the terms of proposed force majeure clauses. In particular, parties should consider whether the proposed clause will protect them from the consequences of being unable to perform their contractual obligations due to COVID-19. In this respect, force majeure clauses should specifically reference events including pandemics and epidemics, infectious diseases and viral outbreaks, periods of quarantine, biological contaminations, territory entry and exit restrictions, work stoppages and actions by government agencies.
Organisations and individuals who are already in contractual relationships with other third parties should now take steps to assess their existing contractual arrangements and, in particular, review force majeure clauses to determine whether such clauses potentially allow for relief for non-performance. Where appropriate and possible, parties should also consider amending their existing contracts in this respect. This will largely vary on a case by case basis and will require careful analysis of the actual relevant circumstance that has led (or could potentially lead) to the non-performance, together with the precise wording of the force majeure clause in question.
Additionally, parties should also take this opportunity to check their insurance arrangements (especially in relation to circumstances where goods are delivered to a port or other transit destination) and undertake risk assessment activities to determine impacts that COVID-19 could potentially have on ongoing operations if supply chains are disrupted for months on end.
In the event that a contract does not contain a force majeure clause (or where the force majeure clause is not adequately worded to address impacts of the COVID-19 pandemic), parties may wish to consider seeking legal advice as to whether they can rely on the doctrine of frustration. Broadly speaking, frustration operates to allow a contract to be terminated in circumstances where an event has occurred (through no fault of the parties) that renders it impossible for the contract to be performed. Frustration is typically difficult to establish and tends to have limited application and whether or not it can be successfully relied upon will largely depend on the nature of the contract, the performance obligations in question and the scenario that has led to the contract being ‘frustrated’.
There are also other ways that you can be on the front foot in dealing with uncertainties in your contracts around force majeure clauses. But it is important that this is done as early as possible in order to sure up your rights.
Reliance on force majeure clauses in contracts, or on the doctrine of frustration, can potentially have significant and costly effects on parties and their business operations and accordingly careful assessment of contracts in question should take place before a party seeks to exercise either of these rights.
Our legal eagles at Aspect Legal are well placed to provide advice in relation to the impact that the COVID-19 outbreak is having on commercial contracts, and how to get on the front foot to deal with force majeure clauses. Simply use our contact button to organise a free initial discussion about how we can assist.
Special Counsel – Aspect Legal
Other relevant articles:
- COVID19 and Hurdles to Stand Downs
- Coronavirus Employment Law Update – Leave and Stand Downs – Aspect Legal
- Coronavirus: Workplace Health and Safety Considerations
- Coronavirus: Working From Home Considerations
For more information on this topic, we urge you to listen to our most recent episode of Talking Law Corona Virus Implications on Commercial Contracts and Force Majeure Clauses in which Joanna Oakey discusses the implications of the coronavirus outbreak on commercial contracts and in particular Force Majeure clauses with Aspect Legal’s very own, Robyn Purdy. Are you worried about the legal impact of coronavirus in their business? Book in for a complimentary chat with us here.
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