COVID-19 and Its Impact on Your Contracts

Commercial

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DATE PUBLISHED: March 12, 2020

The novel coronavirus or COVID-19 has been declared by the World Health Organisation (WHO) as a global pandemic. While the confirmed cases continue to rise, so does the virus’ impact on business.

Some organisations, especially those doing business with China or other affected areas may seek to rely on ‘force majeure’ clauses or other contractual rights for relief from performance of certain obligations due to the impact of the coronavirus.


‘FORCE MAJEURE’ GENERALLY

Force majeure clauses are commonly included in commercial contracts and are designed to provide relief to parties where they are prevented from performance of a contract (either completely or partially) by an unavoidable or unforeseeable event. Common events covered by force majeure clauses include:

  • earthquakes;
  • storms;
  • floods;
  • epidemics;
  • tsunamis; and
  • strikes and government action.

The scope and effect of a force majeure clause is determined on a case by case basis, by reference to the wording of the clause and the relevant facts. Generally, the more broadly and explicitly defined force majeure clauses are the easier they are to rely on. While it may still be arguable that a phrase such as ‘natural disaster’ may capture an outbreak such as the coronavirus we recommend that terms such as ‘outbreak of infectious disease’ be included in a well drafted force majeure clause.


‘CHINA APPROACH’

The China Council for the Promotion of International Trade has issued thousands of ‘Force Majeure Certificates’ (legal exemption papers) to several firms, including steelworks, electronics companies, carmakers and auto parts suppliers. These certificates however, may not assist parties to contracts governed by Australian law, or the law of other common law countries.


‘FRUSTRATION’

Where there is no force majeure clause in your contract, or the impact of the coronavirus is outside its scope, the parties may consider whether a contract can be terminated through the doctrine of ‘frustration’. Generally, a contract is ‘frustrated’ where, through no fault of the parties:

  • a contractual obligation is impossible to perform; or
  • the nature of a contractual obligation is radically different from what was in the contemplation of the parties when the contract was formed.

In saying this, establishing that a contract is frustrated can be fraught with uncertainty and is unlikely to apply where performance is merely delayed or costs have increased. As such, frustration is somewhat rarely relied upon. For example, it may currently be more difficult to send or receive goods to and from China but not impossible.    


‘ENDEAVOURS’ CLAUSES

Terms such as ‘reasonable endeavours’ and ‘best endeavours’ are commonly used in commercial contracts to determine a party’s obligations to comply with certain clause(s) within that contract. Generally speaking, where a party is required to use their ‘best endeavours’ to perform an obligation, a higher degree of accountability is expected than where a party is to use ‘reasonable endeavours’.

Where coronavirus has impacted a party’s ability to perform its obligations under a contract, you should consider whether sufficient steps have been taken to demonstrate that reasonable or best endeavours have been used to comply with the terms of a contract before attempting to terminate or not perform aspects of a contract.   


HOW CAN WE HELP?

McInnes Wilson Lawyers can help:

  • review existing contracts to determine whether your contract has relevant coronavirus force majeure provisions or whether the contract may be frustrated;
  • draft clauses to be used in new or existing contracts that may protect you from the consequences of coronavirus; and
  • review contracts that are currently being negotiated and ensure that the force majeure clauses are capable of being relied on in the event of a contagion or pandemic occurring such as coronavirus.
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