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COVID-19, Contractual Obligations, and Force Majeure Clauses

Lee Mitchell, Principal, Nicholsn Ryan Lawyers

Considering the recent global outbreak of the Coronavirus (COVID – 19), Nicholson Ryan Lawyers (NRL) has been providing advice to many of our clients in terms of the threat posed by COVID – 19 to business continuity, contractual and financing arrangements and corporate governance obligations.

Below, we have outlined our insights to answer some of our clients’ most pressing questions in relation to the impact of COVID-19 on the performance of contractual obligations, with a particular focus on the use of force majeure clauses.

What is a force majeure clause?

  • Force majeure is a legal construct, codified in a contract, which alters parties’ rights and responsibilities when an extraordinary event or circumstance prevents a party from performing their obligations under a contract.
  • Therefore, in the context of COVID -19, if a party is unable to perform its contractual obligations, it may be able to rely on a force majeure clause and seek relief, for example, to excuse performance of obligations, obtain extension of time or even to terminate the contract.

When does a force majeure clause apply?

  • Whether a relevant event constitutes a ‘force majeure’ will depend entirely on the language of the relevant contract.
  • Certain kinds of contracts will generally list a range of events which will enliven a force majeure clause. However, these clauses are not ubiquitous and so must be considered on a case by case basis.

Is COVID -19 a force majeure event?

  • As force majeure clauses are a creature of contract, this will entirely depend on the wording of the relevant contract. Some contracts will have specific clauses in relation to pandemics, which now likely apply to COVID -19, while many others will not. In those cases, the position will depend on the interpretation of the clause based on established legal principles.
  • Additionally, a provision in relation to the exercise of governmental powers is commonly contained within a contract as a force majeure event. As Australia and other jurisdictions take further measures to contain the public health crisis, these are becoming increasingly relevant.

What if a contracting entity is overseas?

  • Your ability to invoke or contest a force majeure provision is not restricted to Australia.
  • As this is a global issue affecting global supply chains, it is important to consider the governing jurisdiction of the contractual arrangement you are a party to.
  • For example, the China Council for The Promotion of International Trade issued a record number of force majeure certificates due to the impact of COVID -19.[1]
  • Whether a contracting party can rely on these certificates as an example of force majeure remains to be seen. A careful analysis of the relevant contractual arrangement will still be required.

What if I don’t have a force majeure clause in my contract?

  • Force majeure is a creature of contract and, thus, there is no implied force majeure concept in Australian law.
  • Unlike force majeure, frustration is a concept recognised by both common law and statute (in certain Australian jurisdictions, including Victoria).
  • A contract may become frustrated when an event outside the control of the contracting parties makes an obligation incapable of being performed.
  • An event causing performance of the contractual obligation more difficult or costly will generally not render a contract frustrated, even if severe.
  • An analysis of both the contract and the ‘frustrating event’, in this case, COVID -19, will be required.

What else should my business consider in relation to force majeure and contractual arrangements?

  • Notice requirements
    • Often force majeure provisions contain notice requirements as conditions precedent for an entitlement to invoke. In this regard, rights of relief may be time-barred.
  • Mitigation requirements
    • A party invoking a force majeure provision is generally expected to use its reasonable endeavours to mitigate the effect of the event.
  • Remedies and relief
    • Review your contractual arrangements to assess risks, reliefs and remedies.
  • Exclusivity provisions
    • If seeking to engage new suppliers, it is important to be wary of any exclusivity provisions existing in your current contracts.
  • Repudiation
    • Care should be taken before invoking a force majeure clause as doing so may amount to repudiation of the contract and result in a liability for damages.

Conclusion

COVID – 19’s global disruption is uncertain and is continuing to provide business implications every day. Businesses should carefully consider their current contractual arrangements before performing or refusing to perform a contract.

[1] CNBC, CNBC World Economy, (6 March 2020) < https://www.cnbc.com/2020/03/06/coronavirus-impact-china-invokes-force-majeure-to-protect-businesses.html>

Nicholson Ryan delivers expert advice across all areas of corporate and commercial law and is assisting clients on a broad spectrum of legal issues in relation to COVID – 19. If you have any queries as to the matters addressed in this article, please contact us at (03) 9640 0400 or email us at admin@nrlawyers.com.au

This memorandum is intended as general information only. It does not purport to be comprehensive legal advice. Readers must seek professional advice before acting in relation to the aforementioned matters.