The COVID-19 (or coronavirus) pandemic has required extensive protective measures by governments across the world. In many countries, including Australia, these measures have included lockdowns and restrictions on social gatherings and travel. This has resulted in the cancellation of public events and disruption to transportation, construction and supply chains, which will mean that many parties are unable to comply with their commercial contracts for provision of goods and services. While non-performance of one party to a contract would ordinarily entitle the other party to relief, some non-performing parties may be protected by a force majeure clause in their contracts.
What is force majeure?
Force majeure is a legal concept which describes an unforeseen event or circumstance impacting one or both parties' abilities to fulfil their obligations under a contract.
There is no universal concept of what constitutes a force majeure event. Whether an event is a force majeure event for the purpose of a party's contract will depend on how force majeure is described in that contract. The description will vary from contract to contract, however some events are commonly included in force majeure clauses, such as natural disasters and weather events, war, and health-related events.
Force majeure relief will only be available to parties if:
- the contract governing the parties' commercial relationship includes a force majeure clause; and
- the force majeure clause covers the relevant unforeseen event (i.e. a pandemic event).
Is your force majeure clause adequate to cover a pandemic event?
In Australia, there are two common expressions of force majeure clauses.
The first is where there is a general description of the kind of events which are to be treated as force majeure events, with a list of examples of such events. General descriptions, for example "an event beyond a party's reasonable control" are likely to cover an event such as a pandemic.
The second kind of force majeure clause is where there is an exhaustive list of specific events which are to be treated as force majeure events. If the force majeure clause is expressed as an exhaustive list of events, an item such as 'pandemic', 'health-related event' or 'change in law' would likely need to be included in the list in order to protect the parties in the event of a pandemic.
It is important to seek legal advice to determine whether a particular event, such as the current COVID-19 pandemic, is a force majeure event for the purpose of your contract.
Effect of a force majeure clause
The parties' contract will state what is to occur in the event of a force majeure event. The nature and extent of the relief is also determined by the terms of the contract, and may differ depending on the nature of the contract and the parties' relationship.
Frequently, but not always, the occurrence of a force majeure event will trigger suspension of the relevant party's obligations under the contract. It may also allow termination by either party if the force majeure event is ongoing for an extended period of time.
What if your contract does not contain a force majeure clause?
If an event occurs which prevents you from meeting your contractual obligations, but your contract does not contain a force majeure clause, you may in certain circumstances have recourse under the doctrine of frustration.
Unlike force majeure, frustration of contract is a common law doctrine, which means that it can apply to contracts without needing to be set out in the contract and agreed to by the parties.
Frustration of contract may occur where an unforeseen event (not caused by either party) occurs after a contract is entered into which makes it impossible for the parties to perform their obligations under the contract.
If a contract is frustrated, it is effectively set aside with neither party being liable in relation to any breach of the terms.
It is important that parties are aware that there is a high threshold for establishing that a contract is frustrated. A temporary event, or an event which will make it more difficult or expensive for a party to perform its contractual obligations will generally not be sufficient to cause the party's contract to be frustrated. Whether or not the COVID-19 pandemic is a frustrating event will vary from contract to contract, and will depend on the nature of the party's obligations under the relevant contract and the extent of the impact the pandemic will have on the party's ability to perform those obligations.
Parties who anticipate that they will be unable to perform their obligations under a contract as a result of COVID-19 and who are not protected by a force majeure clause should seek immediate legal advice in relation to avoiding liability for breach at the earliest possible opportunity.
What to do if you, or the other contracting party, can't perform your contractual obligations?
Parties to contracts which may be affected by the COVID-19 pandemic should assess whether their ability to perform the contract may be compromised.
If a party considers that it may not be able to comply with the contract, it should immediately seek legal advice as to the party's rights. Parties should be very cautious about taking any steps to enforce a force majeure clause without first seeking legal advice. A party that does not properly enforce a force majeure clause could itself be in breach of the contract and sued in damages by the other party.
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.