As COVID-19 spreads we are all realising the vast number of businesses, industries and supply chains affected. This includes the actual or potential disruption of many contractual obligations. Many of our clients have asked us what this means for them in terms of their trading terms and commercial contracts. Our starting point with such queries is to consider whether force majeure will apply to the relevant contractual arrangement and if so, what are the practical next steps.
What is the purpose of a force majeure provision in a contract? These provisions address the consequences where a party is prevented from performing its obligations by events or circumstances and none of the parties are at fault.
The general principles of a force majeure event are that:
A force majeure clause may outline steps to take in the event of a force majeure. Typical steps may include:
If a force majeure event occurs an affected party may seek to utilise the protections offered by a force majeure clause which may include:
Whether a force majeure clause covers the impacts of COVID-19 will depend on its precise wording and any other relevant contractual provisions. A helpful indicator may be determining whether or not the force majeure provision is exhaustive and contemplates a COVID-19 outbreak or associated government directive.
It may be that COVID-19 does not fall under a contract’s definition of a force majeure event. Even still, you may be entitled to some protection under the doctrine of frustration. This doctrine provides for instances where contracts become impossible to perform. Establishing frustration involves a high threshold, but if proven, results in that contract automatically ending by operation of law.
If you think a contractual arrangement is, or will be, affected by COVID-19, you should carefully review its terms to check for any force majeure clauses and understand the parties’ rights and obligations in light of those clauses.
Extreme care needs to be exercised as an unfounded attempt to trigger the clause could have other unfortunate consequences under the contract including in certain circumstances amounting to a repudiation.
If you believe your contract may be affected by COVID-19 you should seek legal advice to:
Even if COVID-19 is not affecting your current obligations, these recent events should be a useful reminder to reconsider your current contracts and terms of trade to ensure force majeure provisions are appropriately drafted.