Contracting Coronavirus (COVID-19): How your Contract can Protect you

24 MAR 2020

 

During this global pandemic and testing times, now more than ever is the time to ensure your business and you are protected.

Commercial contracts contemplated to last over a period of time usually provide for disruptive events. In contracts, parties may include a provision known as a force majeure clause.

Force majeure clauses can be found in most contracts. Parties recognise that sometimes they will not be able to perform their obligations under contracts as a result of circumstances beyond their control, i.e., as a result of force majeure.

A force majeure clause will list a large range of categories of otherwise potentially frustrating events, ranging from earthquakes, floods, an act of government, pandemics, epidemic, quarantines to war and terrorism.

Should one of those events occur, force majeure clauses frequently suspend performance by providing that the contract is not to come to an end unless the event has continued for a specified period of time and/or is incapable of remedy by one of the parties within a specified time.

A force majeure clause provides comfort that, in these circumstances, the parties will not be held to be in breach of contract where they are unable to perform their obligations as a result of force majeure.

What to do moving forward?

(1)   Review any commercial contracts you have that may be affected by Coronavirus and consider whether the service and/or your rights may be affected.

(2)   If a force majeure clause applies to your contract, consider whether the clause can be activated and seek advice.

Does your Contract cover Coronavirus?

The fact that a clause specifies the consequences of a broad class of potentially disruptive events does not necessarily prevent the contract from being frustrated by an event apparently within that class – it turns on the contract and the construction of the clause.

Since the virus is new, it is unlikely that any force majeure clauses would expressly refer to the event of a Coronavirus outbreak.  Accordingly, in order to rely on the clause, parties will need to consider other disruptive events such as epidemics, actions by government agencies, or work stoppages – the clause will need to be carefully considered.

Further, force majeure clauses that are not specific and can be widely interpreted will not necessarily capture events such as the Coronavirus outbreak.

In this event, the party relying on the clause would need to prove that the force majeure event was not reasonably foreseeable by the parties when making the contract, and that the event is beyond the control of the party seeking relief.

What if your Contract has no force majeure clause?

As stated above, the effect of a force majeure clause is usually to provide an outlet to suspend performance or terminate.

If there is no force majeure clause, or the contract does not provide for disruptive events, the parties may need to consider whether the contract can be terminated through another avenue such as upon acceptance of a renunciation or frustration.

The doctrine of frustration is a concept recognised by the common law (and in many states in Australia by statute).

Frustration is typically not easy to establish and has a narrow scope, so it is important that you seek advice in that regard.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

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