Will COVID-19 prevent you from operating? Protecting your business in the face of a global pandemic
The outbreak of the novel COVID-19 and subsequent containment measures are negatively impacting supply chains, manufacturing and transport. What will happen if COVID-19 prevents you from performing your contractual obligations?
A party to a contract may be able to seek relief through reliance on a force majeure clause, while reliance on the clause may give the other party certain additional rights, such as the right to terminate the contract.
Force majeure clauses are commonly included in commercial contracts as a way to allow parties to agree to change, suspend or cancel 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 is designed to exclude liability of a party where that party’s failure to perform is caused by forces (either natural or human) beyond its control. These forces can include an act of God (such as fire, flood or drought), war, strikes or any other cause beyond the control or influence of either party.
Does your force majeure clause cover the COVID-19?
Different contracts will define force majeure events differently. The clause may call out specific events, and may include a catch all for other similar events, or specify that the list is a non-exhaustive list. A detailed review of the clause and its context will be required.
Given the novelty of a global viral outbreak, it may be that force majeure clauses in existing commercial contracts do not contemplate events like an epidemic, pandemic or public health emergency.
To consider whether a party may rely on the clause for relief you should consider if the existing clause accounts not only for the COVID-19 phenomenon but also consequential events arising from a global pandemic such as quarantines, industry shutdown and governmental action, including work stoppages, travel bans and lockdowns of affected areas.
The party seeking to rely on a force majeure clause bears the onus of proving that both that the event falls within the definition of force majeure and that the event has prevented that party from performing the contract.
If an event like COVID-19 is covered what are your options?
The clause will likely set out the contractual mechanics once the clause is implemented: What are the notice requirements? Does the event give you or the other party the option to terminate the agreement? Is termination immediate or is there a requirement to mitigate and mediate?
You should note that many force majeure clauses are drafted to expressly exclude relief from any obligation to pay money.
What if there is no force majeure clause?
If there is no force majeure clause, or if COVID-19 falls outside of the ambit of the clause, but nevertheless the consequences of COVID-19 are making it impossible to perform your contractual obligations, an alternative basis for termination could be the common law doctrine of frustration.
Frustration occurs when, without fault of either party, a contractual obligation has become incapable of being performed due to an unforeseen event (or events) resulting in the obligations under the contract being radically different to a degree that was not contemplated by the parties to the contract. The event which brings about the ‘radical’ change is referred to as the frustrating event.
Where a contract has been found to be frustrated, the contract is terminated automatically at the point of frustration and future obligations are discharged. Obligations which were to be performed before the frustrating event will remain binding.
Establishing frustration of contract can be difficult. Frustration is not established merely because circumstances have made performance more difficult or less profitable. Rather, you must demonstrate that the ability to perform the contract has been radically diminished by the event so that performance of the contract has become commercially impossible. Determining whether a contract can be terminated for frustration involves a consideration of all of the terms of the contract and the events which have occurred.
Analysing your force majeure clause
Now is the time to review your contracts, determine the scope of any force majeure clauses and your options if the force majeure clause is triggered or frustration is claimed.
Suspension or termination of any contract is always a high risk activity, if you are considering relying on a force majeure clause or frustration, or if you are responding to a claim of force majeure or frustration, we recommend you first seek legal advice.
Maddocks has produced guides to a range of legal issues raised by the coronavirus (COVID-19). You can access these guides here.
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