Are your contracts crisis ready?

With the COVID-19 outbreak now declared a pandemic by the World Health Organisation (WHO) and the climate emergency intensifying, entities are looking at their contracts to see if they are ‘crisis ready.’

As a result, force majeure, frustration and termination for convenience clauses have been brought into the spotlight, as entities consider what relief is available to them where they are unable to perform their contractual obligations due to the impacts of the recent bushfires, floods and global COVID-19 emergency.

Force majeure

A force majeure (literally ‘superior force’) clause allows one or both contractual parties to cease or suspend performance of a contract following the occurrence of a pre-defined event.

If successful, the party will not be liable for failing to perform its obligations under the contract. It may also give rise to termination right, usually where the force majeure event continues for an extended period.

In most cases, a force majeure event includes acts of God, war, riot or invasion, national emergency, government action including strikes, terrorism or the imposition of embargo, or extreme weather events – which could include bushfires or severe flooding. The clause may also specifically include epidemics or pandemics, which would now include COVID-19 as a WHO declared pandemic.

However, changes in economic circumstances are usually commonly excluded, meaning delays or stoppages due to disrupted global supply chains as a fallout of a natural event, rather than a direct cause, may be excluded.

Ultimately, it will depend on the drafting of the particular clause, and entities should be examining their suite of contracts to determine the scope of their force majeure clauses.

Frustration

The common law doctrine of frustration may, in extreme cases, be able to be relied on where there is no force majeure clause, or where the crisis event does not fall within the definition of a force majeure under a particular contract.

Frustration requires the impossibility of a contract’s performance, or the obligations under the contract being so fundamentally changed, by an unforeseen event from what was originally contemplated by the parties.

However, frustration is not easy to establish, as it requires the parties to prove that they did not contemplate performing the contract in the radically altered circumstances.

Performance of a contract becoming more expensive or onerous, even through no fault of the parties, will generally not be enough to establish frustration.

Other relevant clauses 

If the contract is international, with parties across jurisdictions, parties should also be looking to the governing law clause.

This is especially important where the contract does not have a force majeure clause, as certain jurisdictions imply force majeure into the contract where it lacks an express term.

Under Australian law, force majeure clauses will generally not be implied where there is no express clause, however this is not necessarily the case for other jurisdiction, such as China.

Finally, a party may have a right to unilaterally vary a contract, suspend the performance of a contract in certain circumstances, or be able to rely on a termination for convenience clause.

Conclusion

The recent crises in Australia, and across the globe, have sparked concern for contracting parties regarding what they can do if they can no longer perform their obligations under the contract.

In most circumstances, this will depend on the wording of the contract itself, and whether the crisis in question satisfies a force majeure or suspension event, or whether a party has a right to terminate the contract for convenience.

Failing that, parties may seek to rely on the common law doctrine of frustration in extreme circumstances, although it is often difficult to establish the ‘impossibility’ required.

Authors: Scott Alden & Victoria Gordon

• This article was originally published in Sourceable.

Disclaimer

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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