COVID-19: Time to update your force majeure clauses

By Daniel Davey & Brent Weston of Tucker & Cowen

With the country, and indeed large parts of the world, grinding inexorably towards economic standstill as a result of the measures implemented to combat the spread of COVID-19 (Coronavirus), contractual delays will very soon become common place. In order to guard against the consequences of such delays, it is essential that an appropriate force majeure clause is included in the relevant contract.  Unfortunately, we are seeing a number of recent instances where the existing force majeure clause is inadequate to cover the situation which has arisen, or there is simply no force majeure clause at all.

Unlike some jurisdictions (mostly continental Europe), which essentially imply force majeure clauses into agreements, in Australia no such implication will arise in the absence of a properly drafted force majeure clause which covers the situation. There is no “force majeure” doctrine, and to compound matters for those who find themselves needing to rely upon them, even when such a clause is included, they are interpreted strictly and narrowly.  So, specificity is of paramount importance.

Common features

Some common features of force majeure clauses include:-

  • A definition or description of what constitutes a force majeure event for the purposes of the contract. Often lists of specific events are included, together with more general “classes” of event. (i.e. “COVID-19” versus “a viral pandemic”);
  • A requirement that the party affected by the event notify the other party (or parties) that one of the defined events has occurred;
  • Provisions (or sometimes a regime) for how the obligations of the party affected by the event may be suspended;
  • A restriction on suspension if the affected party has caused or contributed to the event (the former is very difficult to envisage arising in relation to COVID-19, but it may be possible that the affected party has contributed to the delay resulting from the event);
  • Provide a period for which the suspension is to last; and
  • At the end of this period, if the event is still affecting the performance of the contract, provision for the contract to the terminated by one of the parties (usually either party).

Ideally, a clause would refer specifically to a delay caused or occasioned due to COVID-19, but given the virus was only first documented late last year, and the measures in place to combat it were largely non-existent in Australia until early March 2020, the chances of any current clause containing such a reference are extremely slim.  So in most cases, the efficacy of the clause will depend on both the clause itself, and the circumstances in which the delay or other issue affecting performance has arisen.

At a minimum, you should consider including in your supply terms a special condition covering the following COVID-19 force majeure events: (1) delays caused by workforce shortages (whether self-imposed or imposed by an authorised government body); and (2) domestic or international shortages of essential supplies or raw materials.   Although such a clause can be quickly prepared and included in your standard terms, it is important to note that the COVID-19 situation is relatively novel, and clauses specific to this situation have not been tested as to whether they are enforceable.  Accordingly, you will also be well advised to review your supply arrangements with customers and to make contingency plans with respect to the COVID-19 pandemic.

Frustration

As a final point, it is important to note that a contract may become ‘frustrated’ when an event occurs outside the control of the parties that makes a contractual obligation incapable of performance.   This doctrine will apply even without a force majeure clause or other express contractual term.  In establishing whether performance is frustrated, the magnitude of the adverse impact on performance must be considered, and this is done by taking into account the nature of the contract and the obligation to be performed.  Actual or anticipated delay in performance resulting from COVID-19 lockdowns or personal isolation may amount to events of contractual frustration, but each circumstance will be different and should be separately assessed.

At Tucker & Cowen, we have significant experience dealing with the drafting, interpretation, application, and enforcement of these types of clauses.  So if you are concerned about the performance of a contract involving you, or your business, please give contact us. We have implemented a range of measures, in accordance with advice from government and health authorities, to ensure continuity of service for all of our clients, so we stand ready to assist you should you need us.

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