The ongoing Coronavirus (COVID-19) pandemic, and the measures implemented by governments worldwide to contain it are having an unprecedented impact on global financial markets, trade, and commerce.
As businesses deal with the growing impact of COVID-19, a key aspect of a broader risk management strategy, is to review key contracts to understand the risks (and opportunities) that may be presented if contractual obligations are severely affected. Fortunately, there are various protections available for businesses that are concerned about their ability to meet their contractual commitments.
Does your contract provide force majeure protection?
Force majeure clauses are typically included in contracts in case certain events occur, beyond a party’s control, which prevent it from performing its contractual obligations. If a force majeure clause is triggered, then the impacted party will have the ability to suspend the performance of its obligations and, in some cases, terminate the contract altogether.
Force majeure clauses typically require a party to establish that:
- a force majeure event has occurred;
- the force majeure event was beyond the party’s control;
- the force majeure event either delayed or prevented the party from satisfying its contractual obligations; and
- there were no reasonable steps that could have been taken to mitigate the impact of the force majeure event.
Whether a party will be able to rely on the effects of COVID-19 to exercise its rights under a force majeure clause will depend on the nature of the contract, the wording of the force majeure clause, and the impact COVID-19 has had on the parties’ positions. In our experience, outbreaks such as COVID-19 are typically captured by force majeure provisions.
Caution should be exercised before a contract is terminated in reliance on a force majeure clause. If a party incorrectly asserts that a force majeure event has happened in circumstances where it is not contemplated by the contract, then the other party can seek damages on the basis that the contract has been repudiated.
Can your contract be terminated on the grounds of frustration?
If a contract does not contain a force majeure clause that is triggered by COVID-19, then the contract may be frustrated by operation of law.
Frustration contemplates that, where a contract has become impossible to perform or radically different than what the parties initially agreed, due to the occurrence an unforeseeable event, then the impacted party is excused from its failure to perform its obligations and the contract is treated as being automatically terminated.
Frustration can apply in circumstances where:
- a change of law or government directive renders performance illegal; or
- the purpose of the contract is not able to be fulfilled (for instance, where the contract relates to an event that is no longer going ahead).
As with force majeure clauses, businesses should be careful before terminating contracts on the grounds of frustration. If it does not apply, then the claimant may have wrongfully repudiated the contract and exposed itself to a damages claim from the other party.
What other clauses may apply?
It will be important for businesses to review all relevant clauses against the impacts of COVID-19 on their business. These include:
- termination provisions;
- material adverse change provisions; and
- change in law provisions.
These provisions may provide a party grounds for suspending the performance of their obligations or terminating the agreement.
What steps can businesses take to mitigate risk?
In light of the current uncertainty associated with COVID-19, there are a range of measures that we encourage businesses to take to limit their exposure:
- Undertake a review of all key contracts to determine whether they contain a force majeure clause and, if so, the conditions for triggering it.
- Engage, as early as possible, with customers and suppliers to consider alternatives to avoid or minimise the impacts of COVID-19 (particularly as force majeure clauses often include a duty to mitigate the impact of the force majeure event).
- Make enquiries with your insurance broker as to whether insurance cover is available under a business interruption policy.
- When negotiating new contracts, carefully consider the potential impacts of COVID-19 (and similar outbreaks) and clearly outline what the parties intend to occur if the contract is affected.
Get in touch
Please feel free to get in touch with us if you would like assistance in assessing how your contractual obligations might be affected by COVID-19 and your available options.