How to navigate your business and commercial contracts or agreements through COVID-19

With the rapid economic shockwaves of COVID-19 being felt around the world, many businesses in Australia will experience how COVID-19 will impact their current and future business contractual obligations.

Trade, supply or distribution agreements, or commercial contracts often contain a provision called a force majeure clause. If a force majeure clause is not included or applicable, parties to an agreement may attempt to rely on common law relief based on the doctrine of frustration.

What is a force majeure clause?

A force majeure clause contained in a contract or agreement will define what a “Force Majeure Event” is, thereby governing what circumstances the parties have decided relief should be available from performance of their contractual obligations following an unexpected or unforeseen event.

A Force Majeure Event typically captures:

  • an act of God (including weather events);
  • acts of war or acts of public enemies;
  • terrorist acts, riots or civil commotions; or
  • industrial actions which involves a blockage, labour disputes or strikes,

which are not caused by and are outside the control of either party to the contract or agreement.

Relief from COVID-19?

Given the World Health Organisation has declared COVID-19 a “pandemic”, some force majeure clauses may provide relief to parties if they are appropriately structured. For example, a Force Majeure Event, if drafted to cover a wider spectrum of events, may include events such as a “pandemic” or “epidemic”.

The continuous impact of COVID-19 also has the ability to trigger events, trade controls or operating restrictions which are out of the control of the contracting parties. For example, measures which have already been put in place with respect to the Government mandating forced business closures for particular industries.

It is important for contracting parties to review their contracts or agreements to ensure that future unforeseen events may be covered by a force majeure clause and to explore whether any relief may be available given the wide-spread impacts of COVID-19.

Still feeling frustrated?

If a force majeure clause does not provide either one or both of the parties relief during this unprecedented COVID-19 crisis, parties may be able to rely upon the doctrine of frustration instead.

In Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, Lord Radcliffe described frustration as occurring whenever the law recognises:

“…that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract…”.

It is important to note that parties cannot simply rely on a contract being frustrated as relief if one party merely faces an increased financial burden to perform their obligations under the contract. A frustrating event must directly relate to and make it nearly impossible for a contracting party to perform its obligations. For example, if the Government issues a COVID-19 compliance ruling, performance by one party to a contract may become unlawful.

It is also important to bear in mind the nature of frustration. Frustration can only arise where the performance of the contract cannot continue in the manner intended by the parties. Where the parties have included a force majeure clause, the inference has to be that they have turned their mind to the manner in which the contract might be frustrated and have provided for those eventualities. Therefore, a higher level of event would be required to invoke the doctrine.

How can Creevey Russell Lawyers assist?

There is not a blanket solution for all businesses who continue to operate during this COVID-19 crisis.

We recommend you get in touch with the team at Creevey Russell Lawyers to discuss whether you have the ability to exercise any rights under a force majeure clause in your contract or whether performance of your contract will be hindered by frustration. Please do not hesitate to contact our office on (07) 3009 6555 or .

Jakob Mignone
Paralegal
Ph:   07 3009 6555
Email: jmignone@crlawyers.com.au
Josh Mountford
Associate
Ph:   07 3009 6555
Email: jmountford@crlawyers.com.au

Prepared by Jakob Mignone and settled by Josh Mountford of Creevey Russell Lawyers. The contents of this article are for general information purposes only and do not constitute legal advice.