Combatting the impact of COVID-19 (Coronavirus) on commercial agreements
In the past week, global financial markets have reacted strongly to the outbreak of COVID-19.
Governments worldwide are implementing measures to contain the virus and investors are wary of the impact these measures, as well as the practical effects of the virus, will have on businesses and economies.
Many businesses are concerned about how the virus will affect their existing contractual obligations.
HopgoodGanim has already begun assisting clients to manage and prepare for these impacts.
Here are our top 10 tips for Australian businesses considering the impact of COVID-19 on their commercial agreements.
Businesses should be reviewing the force majeure clauses in their existing contracts.
A force majeure clause is a common contractual term. The meaning and effect of the term varies, depending on the specific wording in the agreement. Typically, the clause will describe certain events which are beyond the control of contracting parties and which have the effect of impacting a party’s ability to perform its contractual obligations and then identify the consequences of such an event occurring.
Whether COVID-19 is considered to be a force majeure event, and what the consequences of that classification are, will depend on the interpretation of the terms of the contract and the factual circumstances.
If a contract does not contain a force majeure clause which is triggered by the impacts of COVID-19, the contract may be frustrated at common law.
Frustration is a common law concept which recognises that, after a contract has been entered into, an event may occur, through no fault of either party, which renders performance of the contract impossible or fundamentally different.
A frustrated contract will often lead to outcomes that seem unfair. At common law, upon the occurrence of a frustrating event, a contract is automatically terminated, and the loss lies wherever it falls. No further obligations are enforceable. Legislation relating to frustrated contracts has been passed in New South Wales, Victoria and South Australia to produce fairer outcomes.
Each COVID-19 situation will turn on its own facts, but discharge by frustration is notoriously difficult to establish.
If an event caused by COVID-19 merely changes the circumstances of performance, or makes performance of the contract more onerous or expensive, a court is unlikely to find that the contract has been frustrated.
A contract will not be frustrated if either party is at fault.
Similarly, even if a force majeure clause does not expressly state that an event must be beyond the reasonable control of either party, courts will generally interpret the clause in this way. A force majeure clause will usually also require a party to take reasonable steps to avoid or minimise loss.
The virus may lead to the occurrence of a frustrating event or a force majeure event, rather than being the event in and of itself.
Businesses need to anticipate the potential events which may arise because of COVID-19, including government measures (for example, the closing of ports, forced quarantines and travel bans) and the practical effects of the virus.
Often a force majeure clause will need to be activated by giving written notice within a defined period. Failing to do so may be interpreted as a waiver of a party’s contractual rights.
The party receiving the notice should respond disputing the notice if it does not believe a force majeure event has arisen.
It has been reported that the China Council for the Promotion of International Trade (a quasi-governmental body) has issued a record number of ‘force majeure certificates’ for Chinese exporters to rely on to exempt them from fulfilling their contractual obligations. Whether or not these certificates will be sufficient to trigger a force majeure event will depend on the terms of each contract.
When drafting new agreements, businesses should carefully consider the potential impacts of COVID-19, and clearly set out what the parties intend to occur, if their agreement is affected.