Now is the time to review your commercial contracts to consider the scope of any force majeure clauses and your options if the clause is triggered or if frustration is applicable, writes Commercial Senior Associate, Charles Lethbridge.
The outbreak of the Coronavirus and subsequent social distancing and containment measures have negatively impacted local construction, manufacturing and supply chains. Attwood Marshall Lawyers are proactive in providing our clients with timely legal advice to protect their interests. Businesses should be carefully assessing their existing contractual arrangements now to understand the risks that may be presented if contractual obligations are impacted.
What is the affect on supply contracts and construction contracts if COVID-19 prevents you from performing your contractual obligations?
A party to any commercial agreement, including supply and construction contracts, may be able to seek relief through reliance on a ‘force majeure’ clause.
Such a clause may provide rights to parties to contracts as a result of a pandemic such as COVID-19, although, there is likely to be much debate and dispute around the law relating to force majeure and its interpretation. Parties to contracts may alternatively seek to rely on the common law principle of ‘frustration’ consequent upon the outbreak of coronavirus.
What is force majeure?
Force majeure clauses are often included in commercial contracts to allow parties to cease or suspend performance of their obligations under a contract in the event of an unforeseen circumstance caused by forces beyond the control of the contracting parties.
The term force majeure translates to ‘superior force’, and may include ‘acts of God’, war, riot or invasion, national emergency, government action including strikes, terrorism or the imposition of embargo, extreme weather events and possibly pandemics or epidemics.
Does your agreement have a force majeure clause to cover COVID-19?
Parties to contracts need to assess whether the contract contains a force majeure clause, and whether an outbreak such as COVID-19 is covered by that clause. It may be that force majeure clauses in existing commercial contracts do not contemplate events such as a pandemic or public health emergency and legal advice is required to assist in making that assessment as every contract is different and every force majeure clause is different. It may also be the case that a pandemic or public health emergency is implied under a force majeure clause.
Force majeure clauses may also make provision for consequential events, such as enforceable social isolation, quarantines, industry shutdown and government policies on work stoppages, travel bans and lockdowns.
Who has to prove force majeure?
The party seeking to rely on the force majeure clause bears the onus of proving both that the event falls within the ambit of the force majeure clause and that the event has prevented that party from performing some or all of its obligations under the contract.
If Covid-19 is covered under a force majeure clause, how does that affect a commercial agreement?
It will depend on how the clause is drafted and what process is to apply when there is reliance on the clause. A force majeure clause may include one of the following provisions:
- Notice: Oblige a party affected by a force majeure event to notify the other parties to the contract that a force majeure event has arisen or may arise;
- Suspension of obligations: The affected party’s obligations under the contract may be suspended;
- Termination of obligations: Permit termination by either party where suspension has endured for an extended period;
- Mitigation: A party whose performance is affected must mitigate the effects on the performance of the contact by performing the contract as soon as possible once the force majeure event is over.
Frustration of contract: an option if there is no force majeure clause
If a contract does not contain a force majeure clause, or if COVID-19 falls outside of the ambit of the clause, but the consequences of COVID-19 are making it impossible for a party to perform its contractual obligations, parties may consider whether the doctrine of frustration applies at common law, or as in many Australian states, under statue.
What is contractual frustration?
Parties must demonstrate that the ability to perform a contract has been radically diminished by an event such that performance of a contract has become impossible. For a party to rely this doctrine, it must be physically impossible for a party to comply with its obligations under a contract. Where a contract has been found to be frustrated, the contract is terminated automatically at the point of frustration and future obligations are discharged. The event which brings about the ‘radical’ change is referred to as the frustrating event. Obligations which were to be performed before the frustrating event will remain binding.
Examples of situations where frustration has arisen
- Restraint by injunction;
- A change in the law rendering performance illegal; and
- Physical destruction of the subject matter of the contract.
A contract will generally not be frustrated if (for example):
- It merely becomes too difficult or expensive to comply with the contract; or
- The impossibility of performance is the fault of either of the parties.
Should you negotiate?
Skilful negotiation outside of litigation very often results in an optimal outcome for parties when a contract is frustrated or an event outside the control of contracting parties takes place. Proactive settlement negotiations and the utilisation of the various forms of alternative dispute resolution, such as mediation, more often than not bring about resolutions to disputes.
That said, sometimes parties are unable to resolve disputes leaving litigation as the only alternative.
How can Attwood Marshall Lawyers help?
The exercise of legal rights pursuant to the doctrine of frustration and force majeure should be carefully assessed. Attwood Marshall Lawyers is an experienced Commercial Litigation law firm, currently working on an influx of COVID-19 litigation matters. We are ready to take legal action on your behalf. If you need urgent and quality legal advice and representation, call us today. Department Manager & Senior Paralegal, Amanda Heather, can be contacted on her direct line: 07 5506 8245, Mobile: 0425 260 837 and email: firstname.lastname@example.org.
Our 24/7 line is: 1800 621 071.