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Coronavirus: A Force Majeure to be reckoned with?

Mar 2020

This article explores the meaning of force majeure under Australian law, provides guidance as to whether such clauses may be triggered by the fallout from COVID-19, and highlights the need for pre-emptive consideration by businesses for robust continuity plans.

The first half of March 2020 has seen a dramatic escalation in the disruptive impact of COVID-19 in Australia, and businesses are undoubtedly feeling that impact – whether from absent staff or quarantined offices, wide ranging travel restrictions on an international level, or consumer uncertainty and an unstable stock market. As the virus continues to spread, and the situation changes on a seemingly hour-by-hour basis, it is likely that the full extent of the virus has not been felt in Australia or internationally, and this may mean that businesses are unable to deliver on contractual obligations entered into before the current pandemic made itself known.

In some cases, force majeure clauses may provide some relief for parties exposed to the unpredictable consequences of COVID-19 - this article explores the meaning of force majeure under Australian law, provides guidance as to whether such clauses may be triggered by the fallout from COVID-19, and highlights the need for pre-emptive consideration by businesses for robust continuity plans.

What is a force majeure?

Force Majeure is a legal construct that aims to provide relief to parties affected by unforeseeable or unavoidable events. Typically, Force Majeure clauses operate to release the parties to a contract from some or all of their obligations where the performance of those obligations is adversely impacted by events outside the control of the parties – often catastrophic events such as natural disasters, civil strife or war, and in many cases, serious epidemic or pandemic health crises.

In Australia the concept of Force Majeure is entirely a creature of contract – meaning that the drafting of specific Force Majeure clauses will be the sole determinant of the scope and application of the clause to the facts and circumstances of the parties, necessitating a “case-by-case” analysis.

Depending on the parties and the contract, a Force Majeure clause may be based on an industry standard clause, or may be heavily negotiated with specific inclusions and exclusions- for example it would not be unusual for a mention of civil strife to be hotly debated where the performance of the contract relies on political stability in an historically unstable country. As a consequence, the protections afforded by a Force Majeure clause must be assessed through a careful analysis of the clause itself.

Does my contract's force majeure clause cover COVID-19?

The social and economic effect of COVID-19 have been escalating over the past fortnight on an international basis – border closures in the USA, stringent isolation rules in Australia and New Zealand, alongside workplace disruption and the obvious disruption of supplies from China. These wide-ranging disruptions may already be sufficient by themselves to trigger the operation of a Force Majeure, especially where a contract is reliant on interaction with those countries which have felt the effects most severely to date. On 12 March 2020 the World Health Organization classified COVID-19 as a “pandemic”.

As outlined above, the operation of a specific clause must be assessed through careful analysis of that clause in the context of the broader contract- indeed, some contracts do not include a Force Majeure clause at all; though supply of goods contracts often include a Force Majeure clause, they are less common in supply of services contracts. Where such clauses do exist, the change to “pandemic” status is likely to significantly expand the number of Force Majeure clauses which are capable of being triggered.

There are two main kinds of Force Majeure clauses: an ‘exhaustive’ clause listing examples, or an ‘inclusive clause’ with a broader definition such as ‘an event beyond the control of the parties’ which is followed by an inexhaustive list of examples.

A pandemic is commonly listed as a Force Majeure under either kind

although this is still dependent on the specific contract. Note that inclusive clauses will be more likely to provide relief, since even where a ‘pandemic’ or ‘health event’ is not listed, it may constitute a Force Majeure under the broader definition. Conversely, in an ‘exhaustive list’ clause, a pandemic or infectious disease (like COVID-19) will not constitute a Force Majeure unless listed.

Even where COVID-19 is a listed Force Majeure, some contracts only grant relief where the Force Majeure impacts a specific worksite (e.g. construction contracts) regardless of the impact on the supply chain at large. Such a clause would clearly be problematic in circumstances where for example, an Australian site remains open and capable of operating at full capacity, but is unable to do so due to an inability to obtain key materials from an offshore supplier who has been closed down by the pandemic.

WHAT CAN MY BUSINESS DO?

First, businesses should understand which contracts include Force Majeure clauses. Clearly the specific wording of the Force Majeure clause in each case will be critical, as well as the identity of the party who is entitled to benefit from such a clause.

Under most contracts, the party seeking relief from a Force Majeure must inform the other parties to the contract that a Force Majeure has arisen or may arise within a specified timeframe. From there, the parties may be entitled to suspend the affected parties’ obligations, or even permit termination of contract where the suspension endures for long or indefinite periods of time – depending of course on what the clause permits.

Planning for the possibility of contract suspension or termination is vital for obvious reasons to all parties involved- not just the party seeking relief. However, there may be additional matters to consider. For example, possible alternate solutions that mitigate the need to trigger the Force Majeure clause, or how to manage suspension in order to provide longevity if the problems caused by COVID-19 impact the business indefinitely.

If your business is looking to enter new contracts which you believe may become impacted by COVID-19, it is imperative to draft a Force Majeure clause carefully. Generally, these clauses only apply where the event is ‘unforeseeable’ and occurs after the contract commences. As COVID-19 is now prevalent, clear drafting is required to ensure any related delays are captured in the contract.

Consideration of these matters, and the creation of a robust continuity plan in the event that your business is impacted by COVID-19 is now more important than ever.

This is equally true in the instance that a contract can be suspended, and where a Force Majeure clause is unavailable or provides no relief.

HOW HAZELBROOK LEGAL CAN HELP

As emphasised throughout this article, Force Majeure clauses in Australian contracts need to be assessed on a case by case basis. Hazelbrook Legal can help you navigate the legal repercussions of COVID-19 in various ways, including: considering specific contracts and whether COVID-19 qualifies as a Force Majeure; advising you on the rights and obligations of the parties that arise or fall away on such a clause being triggered, and providing planning and business continuity planning advice to minimise the disruptive impact on your business so far as possible.

Material in this article is available for information purposes only and is a high level summary of the subject matter. It is not, and is not intended to be, legal advice. You should first obtain professional legal advice prior to taking any action on the basis of any information contained in this article. This article is copyright. For permission to reproduce this article please email Hazelbrook Legal: enquiry@hazelbrooklegal.com

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