On 21 March 2020 we published an article entitled “Coronavirus – protecting your business” on our website which provided an overview of the concerns businesses face as a result of the international spread of the coronavirus (COVID-19) and briefly touched on the impact of COVID-19 on contracts.
Since publishing that article, the Prime Minister, the Hon. Scott Morrison MP, on 22 March 2020, announced new measures to protect Australians from coronavirus (COVID-19).
With the recent imposition of widespread restrictions on social gatherings including limitations on the operation of pubs, clubs, gyms, cinemas, casinos, restaurants, cafes and religious gatherings (which Australians can expect to be in place for at least 6 months) there will be a drastic change not only in the way we live, but also in how businesses are able to operate.
In particular, many business owners will be impacted by COVID-19 (and the associated measures to protect Australians) as their supply and service contracts will be significantly affected. For instance, the impact of COVID-19 may mean that a party is prevented from performing or complying with its obligations under a contract as performance may become considerably more expensive, if not, impossible.
This article seeks to supplement the information contained in our previous article and explain, in further detail, the ways in which contracts can be affected by COVID-19.
Many contracts contain “force majeure”’ provisions. Force majeure provisions:
To successfully invoke a force majeure clause, performance of the contract must be impossible. It is not sufficient that performance may simply become inconvenient or too expensive.
Contracts which include a force majeure clause will generally define the events that will trigger the operation of the clause. In this regard, the contract may contain references to defined events such as, for example, natural disasters, Government intervention, quarantine, acts of God, epidemics and even pandemics. Therefore, the starting point when considering the impact of COVID-19 on the performance of a contract, is to examine the terms of the contract to determine what is needed for COVID-19 to trigger the relief contained in any force majeure related clause.
Alternatively, if the contract does not define the events that trigger the operation of the force majeure clause, then the scope to rely on the clause is potentially far broader.
If you intend to rely on a force majeure clause in seeking to terminate a contract, the onus of proving that COVID-19 has rendered your contract impossible to perform will lie with you. This is significant as prematurely or incorrectly relying on a force majeure clause in terminating a contract could have unfortunate consequences under the contract including, in certain circumstances, amounting to a repudiation. This could have significant consequences for both you and your business.
Accordingly, before seeking to rely on a force majeure clause, you should;
Termination, Frustration and Variation
Alternatively, if your contract does not contain a force majeure clause or your contracts force majeure clause is not triggered by the impact of COVID-19, you should:
Having regard to the above, we recommend that businesses review their contracts to assess whether they contain:
As each contract will contain different terms, each contract and the potential course of action will need to be considered on a case-by-case basis taking into account the potential operational, financial, and reputational impacts on the business.
Accordingly, if you are considering relying on a force majeure or termination clause in your contract as a result of a COVID-19 related default, you should seek specialised legal advice prior to doing so to ensure that your interests are adequately protected.
If your business needs help understanding the effect of COVID-19 on the performance of contractual obligations or any other contractual matters, contact our experts today.
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