Coronavirus Support: Force Majeure Clauses and Frustration
As services continue to close and restrictions tighten, the potential for parties to be unable to deliver on a contract has drastically increased. Where parties are unable to negotiate a possible alternative for the completion of the contract, there are two primary protections available. These include the operation of a force majeure clause and the doctrine of frustration.
What is a force majeure clause?
This is a clause which can appear in contracts absolving a party of obligations under a contract. The clause will only be invoked in situations where it is impossible for a party to perform their obligations under the contract because of events which are outside of their control. Mere inconvenience or cost will not be enough to invoke this clause.
If the clause is invoked by one of the parties, their obligations will be suspended until the supervening event and its effect on the party has ceased. It is usually the case that, if the event has not been resolved within a certain period of time, the contract will stipulate that the parties will have the right to terminate or variate the contract.
Will COVID-19 be covered by this clause?
It will not always be clear whether contracting parties can rely on the force majeure clause in providing COVID-19 relief. This will depend on whether the contract in question defines the events that triggers a force majeure clause. Events can include natural disasters, government interventions and epidemics as well as catch-all phases such as ‘any causes beyond the reasonable control of the party’. Parties will need to assess whether the coronavirus pandemic falls within the defined events.
If the contract does not define events that trigger a force majeure close will generally have a wider scope and coronavirus will be more likely to be a triggering event. Unfortunately, if a contract does not contain a force majeure clause at all, a party may not rely on this for protection from contractual obligations.
Where contracts do not include a force majeure clause, parties may seek to rely on the common law doctrine of frustration. This allows a contract to be terminated where an event occurs, after the contract was entered into, which makes it impossible for a party to perform their obligations.
Frustration is traditionally not an easy doctrine to establish with a narrow scope. Further, a contract will not be frustrated when it has a force majeure clause that deals with the relevant issue. Parties who hold contracts with persons or companies in South Australia should be aware that there is specific legislation that deals with this.
What should businesses do?
For businesses seeking to invoke the force majeure clause, it is recommended that they consider a number of factors including:
- whether there are any possible alternatives for the completion of the contract;
- whether the entire contract will be affected meaning there are parts that can be completed;
- whether the contracting party is an overseas entity;
- whether the supervening event is a temporary interruption; and
- whether completion will be possible.
Those currently undertaking contract negotiations should consider including a force majeure clause with specific reference to the global pandemic afoot. It may also be appropriate for parties to consider amending existing contracts with respect to the current situation, check their insurance arrangements and seek independent legal advice.