Both businesses and individuals are already feeling the economic impact of the COVID-19 pandemic, even during what appears to be its early stages. Over the last month Holman Webb has received numerous enquiries from businesses of all sizes, who are looking to review their contracts to see how they may exit (or how the other party may exit), if doing so becomes necessary.
You may have seen the words 'force majeure' floating around since COVID-19 began hitting Australia. This term essentially refers to a clause in a contract providing a way of leaving the contract under certain circumstances.
So, what does it mean, and does it apply to you? To help clarify, here are 5 points that you should know about force majeure.
- There is no general 'force majeure' law
Force Majeure is typically thought of as an event, or some other circumstance outside a person's control, which makes it either difficult or impossible to comply with a contract that they are a party to. It is important to note, however, that it is not a blanket rule. Force majeure will only apply if there is a clause to that effect in one of your contracts, and COVID-19 falls within the clause.
Holman Webb recommends that the first thing businesses do is review their current contracts in order to identify which of them have force majeure clauses.
- It can apply in different circumstances
As there is no general rule, it is completely up to the parties to decide what 'force majeure' is defined as in their contract. In some cases, the clause may only apply where it is physically impossible to perform the contract under current circumstances - for example if a town, city or country puts a stop to people or goods coming in.
In other cases, a force majeure clause could be activated if performance of the contract would be made more difficult under current circumstances. In some clauses, specific events are listed (for example, war or a pandemic being declared), with the clause only applying if one of the included events happens to occur.
With this in mind, it is crucial to carefully review any force majeure clauses before deciding to rely on one.
- It can have different consequences
Typically, a force majeure clause will put a 'pause' on performance of the contract while the event is ongoing - although this is not always the case. Some clauses will pause performance indefinitely, others will pause for a period of time and then allow a party to terminate, and others again will allow either party to terminate as soon as the event occurs.
- Force majeure can be hard to enforce
Courts have interpreted force majeure clauses very strictly, meaning that unless you can satisfy each individual element of the clause, you won't be entitled to rely on it. If you assert that the clause applies, you will have the onus of providing evidence of this.
Many clauses have both a set process and timelines, which must be followed to the letter. This may not be a simple task, and can require pinpointing exactly when the event, or circumstance(s) first began.
- Trying to enforce can be risky
If you refuse to perform your contract on the basis of a force majeure clause, the other party can dispute your ability to legally do so. If this occurs, and it is ultimately decided that the force majeure clause does not apply, the other party may have the right to terminate the contract and seek damages for your refusal to perform.
As such, asserting that a force majeure clause applies, in circumstances where it may not, can carry substantial risk.
Holman Webb encourages all businesses to take caution before assuming that a force majeure clause applies to them during the COVID-19 pandemic. We also urge businesses to review their contract terms moving forward, in order to ensure that they are covered.
These are difficult times for us all, but with some advanced preparation and the right wording, some of the economic blow may be softened.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.