Running a business is tough, but with the COVID-19 pandemic on our doorstep, many organisations have suffered a knockout blow. In commercial agreements, force majeure (act of God) clauses and the legal concept of frustration may serve as a vital lifeline to help your business in uncertain times.
The coronavirus effect
COVID-19, also known as coronavirus, is highly infectious and rapidly spreading worldwide. While some people experience mild flu-like symptoms, others are dying; it’s created unprecedented levels of fear and uncertainty.
As countries close their borders and people self-isolate, the world economy is hurting. In Australia, people are stockpiling toilet paper and hand sanitiser. Share markets have plummeted. On current projections, it may take years to recover, even with the Australian Government’s economic stimulus measures.
Your business is probably also feeling the effects: cancelled orders, difficulty getting goods from suppliers. With restricted consumer spending on products and services, you may think your business is on the ropes.
So what can you do to protect it?
Implementing force majeure clauses
Now is the time to review your organisation’s commercial agreements and contracts for force majeure clauses (also known as act of God clauses).
These clauses allow a party to breach or suspend their agreement because an event prevents them from meeting their obligations. The event must be unforeseeable or unavoidable.
If you intend to rely on a force majeure clause, you must give notice to the other parties to the agreement. This may allow you to keep any benefit which has already flowed to you, for example, money or benefit of work done.
Can you rely on a force majeure clause? It depends on how it’s drafted. If the clause is specific, listing many different force majeure possibilities, you may need it to specify a pandemic or other type of public health emergency before being able to rely on it.
General force majeure clauses may be more accessible. Many general clauses specify natural disaster as a force majeure. Then it becomes an issue of whether COVID-19 is a natural disaster.
Performance of the contract must be impossible. It’s not enough that things got too expensive or difficult. Impossibility is the key.
Implementing the concept of frustration
When your agreement doesn’t have a force majeure clause, you may be able to rely on the legal concept of frustration.
Frustration means an agreement’s terms have become impossible to perform; it’s not the fault of either party, but rather is more or less a case of bad luck.
Frustration requires that the agreement was made before your company felt the effects of COVID-19 (or another event). Frustrated agreements terminate automatically, and the parties have no further obligations.
In New South Wales, the Frustrated Contracts Act 1978 (NSW) applies to all contracts except insurance contracts. In limited circumstances, it allows a party to claim damages due to frustration. A party who has made a pre-payment for a service offered under the contract may be able to claim back the money because of non-performance.
Importantly, hardship doesn’t count as a reason to frustrate. To seek to rely upon the concept of frustration, the contract must have become drastically different from the originally agreed terms. This makes frustration challenging to establish – it will only rarely apply to a commercial contract.
What to do
If you’re concerned about your organisation’s ability to withstand the effects of COVID-19, it’s time for an urgent review of your agreements. We’ll help you interpret your force majeure clauses and work out whether frustration may apply. We’ll also set up a plan for implementing and managing any issues in fulfilling agreement terms.
We’ll help your business get off the ropes. Contact us today to find out more.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.