COVID-19: is it a force majeure event?.

18 March 2020 | Reading time: 2 minutes

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.

Force majeure provisions.

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:

  1. the event, or circumstances arising from the event, prevents a party from performing some or all of their contractual obligations;
  2. they are events or circumstances that are reasonably unforeseeable and beyond the parties’ reasonable control; and
  3. the relevant party was not in a position, or was unable, to prevent the consequences of the event.

A force majeure clause may outline steps to take in the event of a force majeure. Typical steps may include:

  • providing notice to the other party;
  • fulfilling ongoing obligations that are unaffected by the event; and
  • mitigating the impact of the event.

If a force majeure event occurs an affected party may seek to utilise the protections offered by a force majeure clause which may include:

  • excusing a party from non-performance or breaches where performance is prevented due to force majeure events;
  • suspending relevant obligations; or
  • terminating the contract.

Does my force majeure clause cover COVID-19?

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.

What do I need to know?

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:

  • determine if you are covered by any force majeure clause in your contract;
  • understand your rights and responsibilities under the clause;
  • ensure you comply with your contract’s obligations;
  • understand the impact in invoking a force majeure clause and the notification process required in order to do so;
  • discuss other relevant options, such as the doctrine of frustration or other provisions which may be triggered by COVID-19 related circumstances eg change of laws; and
  • consider contacting counterparties of contract to discuss a possible renegotiation, or postponement of obligations, as appropriate.

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.