The COVID-19 pandemic is having an unprecedented impact on the economy. The effects of escalating government counter-measures will change the way we do business for the foreseeable future.
The effects of COVID-19 may make it impossible for you or your commercial counter-party to fulfil your respective contractual obligations, or at least to do so at the time or in the manner you envisaged when you entered into that contract.
Depending on the provisions of your contract this could:
- trigger a ‘force majeure’ clause’, terminating or suspending the contract;
- ‘frustrate’ the contract entirely, terminating it with immediate effect;
- cause a default or insolvency event and its attendant consequences; and/or
- trigger disclosure or reporting obligations, or cause material adverse changes in the commercial or financial circumstances of you or your counter-party.
What is force majeure?
A force majeure clause allows a party to justify the non-performance of its contractual obligations by reason of a particular event.
A force majeure clause will typically require that the force majeure event:
- be beyond the control of, and not have been caused by the negligence, fault, or actions of either of the parties:
- be unforeseen, unavoidable and not capable of being prevented; and
- makes performance impossible – if the obligation merely becomes more difficult or expensive to perform, the event will not normally be regarded as force majeure.
Force majeure clauses are not implied and must be expressly written into an agreement. If present, they will operate according to the provisions they contain. That said, the courts will seek to resolve any ambiguity in the clause against the party seeking to rely on it.
When can you trigger a force majeure clause, and should you do so?
The party seeking to rely on a force majeure clause must prove that the alleged force majeure event has affected the performance of its obligations under the relevant agreement. This means that party needs to ask a number of pertinent questions, including but not limited to:
- Is there a causal link between COVID-19 and/or its effects on their ability to perform under the agreement?
- Is the outbreak of the virus itself a force majeure event, or is the WHO declaration of a pandemic the specified event?
- In either case, how did this render the contract incapable of performance?
- If the outbreak or pandemic is not itself a force majeure event, is a secondary consequence in fact the trigger for force majeure, and is it covered by the clause in question?
- Is there a notification requirement in the clause?
- What are the consequences of a successful force majeure claim? How does it deal with funds already paid, the impact of losses, and what might it do to the parties’ future commercial relationship?
- What if the claim does not succeed? Is there a risk of the other party seeking damages for wrongful termination of the contract?
What is frustration?
In the absence of a force majeure clause, or one which covers the relevant event, the doctrine of frustration may apply.
- The doctrine of frustration will apply to a contract if an event which is not the fault of either party has made performance impossible, or would render it fundamentally different from that for which the parties contracted. Whether an event is a frustrating event will depend on the commercial context of the agreement.
- A frustrated agreement terminates with effect from the frustrating event. From that point, the parties are mutually discharged from all future contractual obligations from the point of the frustration event.
- There is no fault, and therefore neither side can claim for damages – losses lie where they fall at termination. This may mean work already carried out is not paid for, or that work already paid for is not carried out.
- Frustration does not allow any claim for damages for any of the losses above. Victoria, New South Wales and South Australia have enacted legislation which may allow a refund of monies paid for unperformed work, though this is not guaranteed and may require litigation.
When is a contract frustrated?
Frustration has been found where:
- a change in the law makes performance illegal – this may be of particular relevance as the government response to COVID-19 escalates;
- the subject matter of the contract has been destroyed – this may also occur if goods which are inaccessible or undeliverable due to quarantine or other measures have to be destroyed (eg food stuffs or other comestibles which spoil or degrade); and
- performance is restrained by injunction – this may be very relevant where premises are forced to close due to government action on COVID-19.
Materially adverse events, or significant changes to the financial health of a business (eg the loss of suppliers, customers, market access or other knock on effects of the responses to COVID-19) could trigger withdrawal of funding, prevent loans being fully drawn down, and lead to contractual milestones and their payments being missed. Cash flow impacts may make a payment default more likely or even trigger an insolvency event.
ASX-listed entities have continuous disclosure obligations which may be triggered where COVID-19 consequences impact earnings forecasts, contracts, financing, or sales, or where the business is affected by government intervention.
Insider trading risks
COVID-19 measures are causing violent fluctuations in share prices across the globe, and bring an increased risk of insider trading.
It is unlikely that the parties to a contract executed or negotiated in this period could claim the impact of COVID-19 is a force majeure event. Consider the impact this may have on what warranties may be given, whether conditions precedent can be met, and signing meetings can in fact proceed.
Corporate governance risks
Travel restrictions may make it impossible to meet Corporations Act requirements in relation to AGM and other meetings. The company’s constitution should be checked and amended to ensure it permits the use of technological solutions to resolve these difficulties. External auditors may be unable to work in the normal way, alternatives should be considered to allow them to do so in compliance with movement restrictions.
The impacts of COVID-19 mean that key aspects of a construction project may need to be reconsidered. The correct approach will depend on a range of factors, including the stage at which your project is impacted.
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Landlord and tenant impact
If premises are rendered unusable or inaccessible due to quarantine measures, rent abatement clauses may be triggered. Enforced closures may trigger business interruption provisions in leases, voluntary closures may result in a claim that the tenant is being denied quiet enjoyment.
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COVID-19 will trigger enhanced employee occupational health and safety concerns for every business, including a critical need to stay up to date with shifting government measures. It is possible an infection contracted at work could be deemed to be a work place injury. Work place and home working policies should therefore be amended accordingly.
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How can we help?
The consideration of force majeure or frustration is complex and must be carefully considered. Our team can provide you with advice regarding whether terminating a contract as a result of COVID-19 can, and should, be part of your business strategy.
|Disclaimer: This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication.
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