COVID-19 - Impact on legal obligations
Updated: Mar 25, 2020
As Governments around the world grapple with the challenge of how to stop the spread of COVID-19, more and more drastic measures are being taken. Borders are closed, public events are cancelled, schools are closing, and it is likely only a matter of time before there is widespread lockdown to ensure person to person spread of the disease is halted.
The ever-increasing measures imposed by our Government are likely to have a drastic effect on businesses everywhere, not necessarily just in how clients and customers engage with the business, but also how they manage other day to day contractual obligations.
It is likely that COVID-19 will have significant and widespread economic effect, therefore it is time for businesses to consider their options with respect to their contractual obligations. In particular, businesses should consider whether their contracts contain force majeure clauses, or whether the doctrine of frustration may be relevant.
A force majeure clause in a contract is usually inserted to protect against the impact of events that are beyond the control of the parties to the contract. Force majeure is not an implied term, and therefore the wording in the contract must be specifically agreed between the parties. This means the exact wording should be carefully considered before making a claim of force majeure. Courts tend to place a reasonably high threshold on force majeure clauses and therefore take a narrow approach to interpretation, as such the specific wording contained in the clause becomes very important.
Typically however, when parties are claiming relief from a force majeure clause, they will need to show:
The occurrence of an event that was beyond the parties’ control;
The event has had such an effect that the party has been prevented from performing their obligations; and
The party has taken reasonable steps to mitigate the effects of the event.
An ‘event’ is usually described in the clause itself and typically refer to specific events, such as fires, floods, earthquakes or acts of war. Some clauses go further and specifically state ‘epidemics or pandemics’ and some go further again and include general ‘catch all’ wording such as an event that is ‘beyond a party’s reasonable control’. It is worth considering whether the language used is sufficient to be considered an ‘event’ for the purposes of the force majeure clause and for the specific circumstances facing the business. Whether the arrival of COVID-19 will meet this threshold will need to be considered against all the relevant factors on a case by case basis.
Further, whether COVID-19 has prevented the parties from performing their obligations should also be considered carefully. Typically, performance is required to be legally or practically impossible for a force majeure clause to be upheld in Court, rather than it just being delayed or uneconomic. However, some clauses may refer to a lesser standard and may make allowances for circumstances where performance is ‘hindered’ or ‘delayed’. This is an important distinction that will need to be contemplated especially considering Government announcements that may be recommended courses of action but not be legally required.
The party intending to rely on force majeure will need to have taken reasonable steps to mitigate or avoid the effects of COVID-19, however what is reasonable will depend entirely on the circumstances for each individual business and will be assessed in light of the contractual obligations. What is reasonable will only be able to be determined on a case by case basis, but by way of example, may require the business to take steps that possibly incur additional costs and difficulty.
Businesses which are not able to rely on a force majeure clause might find some relief in the contractual doctrine of frustration by arguing that COVID-19 has made it impossible to perform their obligations under the contract and therefore find that their contract has been ‘frustrated’.
Typically, a party may be able to rely on frustration where:
performance of a contract is impossible or radically different from what was initially agreed; and
the parties were not responsible for the reason why the contract has been frustrated and it is outside of their control.
A frustrated contract is where the obligations in a contract are unable to be performed because of an unexpected event or events which cannot be attributed to either party. It is important to note that the event that causes the interruption to the contract cannot be merely transient, and must leave the parties in a position where they are permanently unable to perform the obligations in the contract, or in a position where it appears that the period may be of such duration that the delay could be considered indefinite. The Courts will likely assess the information that was available to a reasonable person at the time the event occurred when determining whether the interruption was indefinite or otherwise.
As with force majeure, the Courts tend to set a high threshold because to decide that a contract is frustrated absolves each party of further obligations. Given the consequences, the Courts will tend to consider a number or factors including the contractual terms, the obligations of the parties, how the contract was negotiated, when it was negotiated (important if the contract was negotiated after the arrival of COVID-19), the event that has caused frustration, and likelihood of performance in the future.
It is worth noting that some contracts exclude frustration as a remedy if the contract already expressly deals with a particular risk. We therefore stress that advice should be sought prior to any assertion that the performance by a party under a contract has been frustrated.
Where to from here?
Businesses that are currently negotiating contracts should seek advice to ensure that any adverse effects from the COVID-19 outbreak are minimised.
In particular, force majeure and frustration are not the only remedies when considering contractual difficulties. There are several other clauses that should be considered when reviewing obligations under a contract, these include limitation on liability clauses, time of essence clauses, termination clauses, or material adverse change provisions. We suggest a thorough review of all the clauses to make sure nothing is overlooked when negotiating a contract or reviewing the obligations during this difficult period.
Unfortunately, the ability to meet contractual obligations is being tested by the impact of COVID-19, if you have any concerns or want to examine your options, please feel free to contact our team to discuss your specific circumstances and what options are available to you.