As businesses shut down or reduce their operations due to the spread of COVID-19, parties to commercial contracts may be seeking to resile from their contractual obligations. One way a party to a commercial contract may be excused from performing all or some of its obligations is through reliance on a force majeure clause. This article outlines how the outbreak of the Coronavirus and force majeure clauses may allow parties to be relieved of their obligations.
The outbreak of the COVID-19 novel Coronavirus in December 2019 has already caused over 45,000 deaths around the world with almost a million people testing positive for the virus by the beginning of April 2020. The global recession that is likely to follow is already being predicted to be ‘the mother of all financial crises’, which may involve long-lasting restrictions on business and the use of public space.
In the meantime, short- and medium-term restrictions on commercial activity are making compliance with pre-existing contractual obligations impossible for some parties.
Force majeure clauses
A force majeure clause is a clause that allows parties to a contract to be excused from their contractual obligations when circumstances beyond their control prevent them from performing them. Many commercial contracts include a force majeure clause. A force majeure clause may be activated when circumstances prevent parties from performing all or part of their contractual duties.
A force majeure clause may also provide a right to terminate the contract if the force majeure event continues for a stipulated period of time. In such a case, the clause would state which of the parties is entitled to retain the benefits of the money paid or work performed should the agreement be terminated.
The scope and effect of a force majeure clause will depend on the wording of the clause and the facts of the case. However, the following general principles are likely to be relevant to the activation of a force majeure clause by a pandemic:
- The party seeking to activate the force majeure clause bears the burden of proving the force majeure event;
- The force majeure event must be beyond the control of the parties;
- A force majeure event cannot alter unfulfilled contractual obligations if performance was due prior to the force majeure events.
Invoking a force majeure clause
To successfully invoke a force majeure clause, a party must demonstrate that is it impossible for it to perform some or all of its obligations under the contract. It is not sufficient to show that performance would simply be more difficult, costly or onerous than under normal circumstances.
It is always important to exercise caution when invoking a force majeure clause, as unfortunate consequences can flow from seeking to do so unsuccessfully. This can include being found to have repudiated the contract.
Before seeking to invoke a force majeure clause, a party should consider all its circumstances, including whether it is still possible to complete some parts of the contract or whether the whole agreement is affected. Parties should also consider whether completion of their contractual obligations has become permanently impossible or whether this is a temporary situation.
Parties should also consider whether the other party is also unable to fulfil its obligations because of the force majeure event.
Is the Coronavirus a force majeure event?
The answer to this question will depend on the wording of each individual force majeure clause. In some cases, the outbreak of COVID-19 will clearly fulfil the requirements of the clause, where the clause specifies that particular events such as quarantine or an epidemic trigger its operation. In other cases, a force majeure clause may be triggered by events that occur as secondary consequences of the pandemic, such as the closure of ports or airports, which may make deliveries impossible.
A party may seek to invoke a force majeure clause because circumstances in Australia have made it impossible to perform some or all of their contractual obligations. They also seek to invoke it on the basis that circumstances in another country make it impossible for contractual obligations to be fulfilled
Parties who are currently negotiating terms of commercial contracts should consider whether a force majeure clause ought to be included. This may provide protection should their obligations under the contract become impossible or unduly onerous. This may occur, for example, because critical suppliers are unable to operate for long periods.
What if there is no force majeure clause?
Force majeure clauses are generally not implied into contracts. They must be explicitly included. However, if a contact does not include a force majeure clause, there may still be options available to a party who is unable to perform under the contract.
When a force majeure clause is unable to be relied on based on the Coronavirus outbreak, but where a contractual obligation has become impossible to perform as a direct or indirect consequence of the virus, the party may alternately rely on the common law principle of frustration.
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