With the widespread threat of COVID-19 mutating into a public health catastrophe globally, we’ve seen the government take steps to restrict our freedom of movement and our capacity to engage in trade and commerce, as well implementing directives that have inhibited our ability to offer our goods and services in the usual way.
These new restrictions are undoubtedly challenging and may fundamentally impact how you can fulfil your obligations under business contracts. While some businesses will be able to adapt, others will need to find a way out. In this article, we examine some common legal concepts parties can use to alter, change or even stop their obligations under a contract when unforeseen circumstances such as Covid-19 arise.
What is a Force Majeure clause?
‘Force Majeure’ clauses outline the circumstances which will trigger a change to obligations under a contract because of an event outside of the parties’ control. Often it works to temporarily suspend the performance of terms but can also alter it in other ways, such as termination. ‘Force Majeure’ means ‘Superior Force’ and examples of events which may trigger the clause include:
- Natural disasters
- War or terrorism
- ‘Acts of God’
Does my contract have a Force Majeure clause?
A Force Majeure clause does not automatically become part of a contract, it must be written in by the parties, so your first step should be to check if your contract has one. You can look for clauses that refer to ‘force majeure’, ‘acts of God’ or ‘events outside of the parties’ control’. You’ll then need to consider whether Covid-19 is covered by the clause.
Is Covid-19 a Force Majeure event?
Understanding whether the virus is a event triggering a Force Majeure clause will depend on the wording of the clause in your contract. It is unlikely that your clause will specifically reference Covid-19, unless it is a new contract. You should look for words like ‘pandemic’, ‘infectious disease’, ‘epidemic’, or other words that indicate a health crisis. If not, consider the way the virus has impacted on your business as a whole. Perhaps it is the restrictions imposed by the government, rather than the virus itself that make it impossible to perform the contract? Here, you could look for words such as ‘government action’ or ‘national emergency’.
How will my obligations change?
You need to consider how it will affect your business if you or the other party triggers the clause. In doing so, you should look to the wording as to how your obligations will change and ask yourself:
- What is the effect of the clause?
- Does the triggering event affect all my obligations, or just some of them?
- Does the clause say that the parties should have taken steps to reduce their risk in these circumstances?
- Do I need to give the other party notice of my intention to rely on this clause?
Some examples of how your obligations may change include:
- Suspending terms (temporarily stopping an obligation)
- Ending the contract
- Being granted an extension of time to get something done
- Being forced to renegotiate parts of your contract
Even if you can’t see a requirement for notice in your contract, you should try and communicate with the other party before simply stopping performance, and if you’re unsure, get legal advice.
Does a force majeure clause automatically apply to my contract?
Businesses should be careful in hastily relying on these clauses as a shield in situations where they haven’t been able to honour their end of the bargain. Never assume that you will be covered by a Force Majeure clause. If you incorrectly believe that you no longer have to do something because of Covid-19, a court may later find that you willingly repudiated or breached the contract. If this happens, you may be liable to pay compensation to the other party.
What happens if I don’t have a Force Majeure clause?
If your contract does not have a force majeure clause, or you can’t rely on it, you should consider whether your contract may have been frustrated.
When is a contract frustrated?
A contract will be frustrated if the performance of the terms will result in something that is radically different to what was agreed on when the contract was formed. It’s also necessary to show that neither of the parties caused the event or knew that something like Covid-19 would occur. An example of this might be where an event planner can no longer provide their services because it has become illegal to gather in groups of more than two people and for non-essential reasons.
It’s not enough that performance of the terms of the contract become more difficult or expensive to perform as a result of Covid-19. For example, a contract may not be frustrated just because a breakdown in supply chain results in delay.
Has Covid-19 frustrated contracts?
In many ways, the new public health laws have changed our ability to perform the terms of a contract to the same effect that we agreed to when we signed them. As a result, there may be a variety of grounds that could give rise to a claim for frustration in light of the Covid-19 pandemic.
Some of these grounds include:
- where a person who is essential to the performance of the contract is unavailable
- where it’s not possible to complete the terms in the time frame
- indefinite delay
- goods cannot be supplied because it is impossible for the supplier to deliver those goods or services
- the way in which the terms were to be performed becomes impossible
- the performance of the terms becomes illegal (for example, due to restrictions on gathering).
Should I rely on frustration?
The doctrine of frustration has the practical effect of ending your entire contract. In practice this means that if you had worked hard to negotiate a long term contract with a supplier or with a valuable client, the impact of relying on frustration would be to end the entirely of that contract and not just to relieve you from performing the terms of the contract at that time. This will probably mean that you will need to renegotiate a new contract with that party. It might be costly, or you may not be in as favourable position as you were when you negotiated the contract in the first place.
It’s also important to check if the application or effect of frustration has been varied in your state or territory by legislation (for example, the Frustrated Contracts Act 1978 (NSW) sets out the effect of frustration and adjustments to be made where a contract has been frustrated).
Can I rely on the doctrine of frustration in new contracts?
It’s necessary to show that neither of the parties knew that something like Covid-19 would occur. That means that if you contract with somebody now, you might not be able to rely on the doctrine of frustration because you were aware that the virus could lead to further changes in circumstances. If either party could have reasonably foreseen that their business was going to be disrupted by Covid-19 and didn’t take any steps to account for this in the contract (like adding in a Force Majeure clause), courts may be likely to find that the parties accepted this risk you may not be able to rely on frustration.
What are the risks and what can I learn?
Businesses should review and update their contracts with a lawyer to ensure that they include a robust and effective Force Majeure clause for their agreements into the future. Doing so can give your business a greater sense of control over what happens when external forces impact your operations and means that you are far less likely to need to rely on the doctrine of frustration.
Some important takeaways are:
- You should seek legal advice and consider the pros and cons before deciding to trigger a Force Majeure contract or rely on frustration
- Relying on frustration may not be appropriate in your circumstances
- If you incorrectly rely on frustration or force majeure you may be breaching your contract and be liable to pay compensation
If you’re unsure as to whether you’re covered by a Force Majeure clause or if you can rely on the doctrine of frustration, and how these can affect your obligations as a business, you should seek legal advice.