We are seeing an increasing number of enquiries from parties wishing to know whether they may be able to get out of their commercial contracts due to the various ramifications of the coronavirus (COVID-19) pandemic. Some may be able to rely on a force majeure clause in the contract.
‘Force majeure’ is a French term that literally means “greater force.” In law, it refers to a specific type of contractual clause that essentially frees the parties from their obligations when an extraordinary event or circumstance beyond their control prevents one or both parties from fulfilling their obligations under the contract.
Force majeure is entirely a contractual creation and will not be implied into the contract by the courts. The scope of application of such clauses will vary widely – there is no one size fits all standard wording for such clauses. The specific drafting of the clause will determine its usefulness in either suspending or terminating your obligations under the contract.
What events are covered?
These may vary widely, but the clause will often provide a general reference to, for example, an event ‘outside the reasonable control of a party’ and list specific events such as war, strike, riot, plague or act of God.
In relation to the current COVID-19 pandemic, relevant references would include ‘plague’, ‘pandemic’, ‘disease’ or ‘epidemic’ or less certainly ‘act of God or ‘natural catastrophe’. We may also see the term ‘lockdown’ come into play as the government response adapts. It is important to note that the jury is out on whether the COVID-19 outbreak is an ‘act of God’ per se and different views exist on this point.
The extent to which obligations cannot be satisfied
A force majeure clause will use language that determines to the extent to which the impact on a parties’ ability to satisfy their obligations before the clause may be relied on. The burden of proof to show this is on the party who wishes to rely on the clause. The language of the clause needs to be checked carefully, for example, to determine if it requires the force majeure event to ‘prevent’ or simply ‘hinder’ the performance of the contract:
- ‘prevent’ – this is generally considered to be where it is impossible for the party to perform its obligations under the Contract. This would apply where, for example, an importer was prevented from delivering its goods by a shutdown of all points of entry into the delivery country, but not if the problem was caused by a shutdown of a particular country and the importer could source the product elsewhere, even if at additional cost.
- ‘hinder’, ‘delay’ or ‘render impractical’ – this is a lesser standard than impossibility but refers to circumstances that would render the fulfilment of the obligations substantially more onerous. In this case, having to import from an alternative source at considerable added cost may be sufficient.
In some case, the clause will exclude events that should have been foreseeable by the parties. In practice, this will be another barrier to the party seeking to rely on such clauses. There are likely to be arguments in future court matters relating to whether the Coronavirus pandemic was foreseeable given previous pandemic events and in light of warnings given by various not-for-profit and government agencies.
Exclusion of payment obligations
The obligation to pay money will often be specifically excluded under force majeure clauses, meaning that you will not be released from an obligation to pay money as a result of a force majeure event.
Manner of exercise
In some cases, the contract will specify a process that a contracting party must follow before the benefit of the force majeure clause can be obtained. For example, some clauses provide that a party must issue a notice specifying the nature of the force majeure event. Giving notice that you cannot comply with a contract in the absence of having followed the procedures of a force majeure clause, could amount to a repudiation of the contract. Although communication is the key in achieving amicable outcomes in commercial contracts, you should be careful how you proceed in order to preserve and not jeopardise any rights you have.
Suspension or Termination
Does the clause permit the termination of the Contract for an event of force majeure? In practice, most force majeure clauses do not excuse a party’s non-performance entirely but only suspend or delay it for the duration of the force majeure. Termination is usually reserved merely for one-off supply or purchase arrangements.
My contract doesn’t contain a force majeure clause – now what?
There are other legal rights that may apply in some cases. You might consider whether the doctrine of frustration may apply to your contractual obligations. The frustration of a contract occurs as a result of an event which was not foreseeable by the parties and which makes complying with the terms of the contract impossible to or changes the parties’ obligations so substantially that would be unjust to require them to continue.
A contract is usually not frustrated merely because it becomes more expensive or more onerous or causes hardship for one party to comply with its obligations. It is usually difficult to meet the high threshold that the courts require before they will consider a contract frustrated (but then, these are unusual times).
There will usually be a need for at least an adverse impact on the performance of the contract. Compulsory acquisition of the subject matter of the contract is one example where the doctrine has applied. Another might be the destruction of the subject matter of the contract, without the fault of either party.
If a contract is frustrated most states in Australia has legislation that seeks to deal equitably with each party’s interests. In Queensland, there is no such legislation. The sometimes-harsh consequences of common law apply in Queensland where it is said that strictly the loss lies where if falls. That can be softened by reliance on restitutionary type solutions where for instance there has been partial performance by delivery of part of an order at the point of frustration with payment due at the completion of all deliveries. It would in the circumstances be unjust for the recipient to have the benefit of some goods without any liability to pay an equitable portion of the payment. Similar principles might apply to the recovery of money paid prior to frustration.
What can you do?
As the consequences of improperly terminating a contract or failing to perform your obligations thereunder can be dire and potentially result in claims for damages against you, we strongly recommend that you obtain legal advice as soon as possible if you are in the position in which you think that you may be unable to fulfil your obligations under a contract.
In particular, take the following steps as soon as possible:
- Check your contract to see whether it contains a force majeure clause. Because each such clause is different, you should seek legal advice in line with your particular circumstances to see whether it may permit you to suspend or terminate your contractual obligations.
- In the absence of a force majeure clause, seek legal advice as to whether the doctrine of frustration or other legal remedies may apply to your circumstances.
- Consider whether you have alternative ways of complying with your contractual obligations, even if those entail higher costs. For example, are you truly prevented from delivering on your contractual commitments by the unavailability of goods or materials from countries affected by coronavirus? Put in place a ‘plan B’ if at all possible.
- If you are in the process of negotiating terms, ensure that you put in place a properly drafted force majeure clause that clearly sets out the circumstances in which obligations will be suspended. In this environment a standard force majeure clause will be insufficient – it must be specific.
- We also recommend that you take advice to determine ways in which losses may be mitigated or deferred, including engaging with your counterparty, if practical. Consider, for example:
- if you have business interruption insurance or other insurances available; and
- if you can make use of any Government incentives (as these continue to be rolled out).
- If your business is in financial difficulty, you should also consider your personal situation, including whether you can access Centrelink benefits, your superannuation, make a hardship application or take alternative measures to boost your income and defer your expenses.
Please contact us if you would like to discuss this email as it is essential to try and act quickly on these types of matters.
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