With the ongoing COVID-19 contagion having an unprecedented and unrelenting impact on trade and commerce, it is clear that we are all currently operating in uncharted territory, both professionally and personally.
With the full force of consequences yet to be seen, and an ever-changing business landscape across Australia and the globe, the ability of businesses and individuals to hold up or enforce contracts has become a crucial issue. This applies in particular to businesses that may be unable to fulfill certain contractual obligations due to the impact of the Coronavirus outbreak and are considering invoking a force majeure clause.
What is force majeure?
In general terms, a ‘force majeure’ event is one that is the result of the elements of nature, as opposed to one caused by human behaviour. The term is often used in contracts to protect the parties in the event that a segment of the contract cannot be performed due to causes that are outside the control of the parties, such as natural disasters, that could not be evaded through the exercise of due care.
Many commercial contracts contain a ‘force majeure’ clause. To successfully invoke a force majeure clause, performance of the contract must be impossible – not inconvenient or too costly – actually impossible to fulfill.
Contracts that include a force majeure clause often define the events that will trigger the clause such as war, fire, flood, hurricane, lockouts, government action and more. So, when considering whether you can invoke this clause, you need to examine the terms of your contract.
Which industries have been most impacted by Coronavirus to date?
Due to a range of factors such as quarantine, travel restrictions, border closures, shut downs, social distancing policies, panic buying, lack of consumer confidence and a reliance on China as our main trading partner, the following industries have been heavily impacted by the Coronavirus pandemic:
Manufacturing – Transport – Freight – Logistics – Travel – Tourism – Hotels & Accommodation –Airlines – Hospitality – Live Performance – Art – Food Manufacturers – FMCG – Fitness – Retail
Can a business invoke force majeure if impacted by the Coronavirus?
There is no single “standard” force majeure clause as they, just like all other terms of a contract, are subject to negotiation and vary widely between industries. Whether or not you can invoke force majeure will be determined by the events that are defined as triggers of this clause in your contract, the obligations to be fulfilled and the individual circumstances faced.
The World Health Organization (WHO) declared a pandemic on the 11th of March 2020. Therefore, if your contract does contain references to defined events such as natural disasters, Government intervention, epidemics and, in this particular case, pandemics, and the performance of the contract has been affected due to those events, you should seek further legal advice as to whether you may be able to invoke any relevant force majeure.
It’s important to note that your ability to invoke the clause are not necessarily restricted to events in Australia. Different countries have been affected to differing extents at different times. If one of the contracting parties is from another country, for example China or Italy, and that country is affected with a consequential impact on your ability to fulfill a contract, you should seek further legal advice in relation to what remedies and legal rights you may be able to exercise under your specific contract.
Currently, many companies are in the process of collecting evidence of disruption to their supply chains from the outbreak to substantiate force majeure claims with the peak of the impact on supply chains and sourcing materials expected to reach new heights this month.
As many insurances that may otherwise cover disruption to supply chain generally exclude epidemics (following the impact of SARS), invoking force majeure may shift costs to the other side of the supply chain and without insurance to fall back on, it may mean significant losses and liabilities.
Don’t have a force majeure clause?
If your contract does not have a force majeure clause, you may need to consider whether your contract has been “frustrated”. A frustrated contract arises when without fault of either party and as a result of an unforeseen event that is outside a party’s control, a party’s contractual obligations become impossible to perform or where the frustrating event causes the terms of the contract to become drastically different than those initially contemplated.
Where frustration is established the parties may be released from their contractual obligations immediately, however, parties will only be released from their duties from the date of the frustrating event and may still be liable for performance of their contractual obligations prior to the frustrating event. Therefore this is a matter to be considered carefully.
There is no doubt that the Coronavirus pandemic is an unprecedented and unparalleled event both in enormity and impact on businesses and individuals. This, combined with the ever-changing business environment makes it difficult to predict how this pandemic will shape the legal landscape with regards to force majeure.
Taking this into account, alongside the fact that incorrectly claiming force majeure can be considered repudiation of the contract and result in the other party seeking damages from you, makes it vital to understand your options and potential outcomes before invoking this clause.
If you are considering utilising your force majeure clause, it’s important to seek legal advice. To find out how we can help you, simply call us on 02 8215 1521 or email us at firstname.lastname@example.org
This article is not a substitute for legal advice. Nor does it cover all aspects of the legal regimes or the circumstances of any individual case. Furthermore, enforcement climates and legal requirements in this area will continue to evolve and it is important to obtain up-to-date legal advice based on specific circumstances.