August 2020
Second Wave of COVID-19 – The Terminator?
The effects of the COVID-19 pandemic were first felt in Australia in late February/early March 2020, and the first Government intervention in an attempt to control the spread of the pandemic involved the temporary shutdown of businesses across Australia. At that early stage, the general consensus was that a short and quick shutdown would ensure Australia would recover in a relatively short period of time.
However, with the recent second wave of the pandemic being felt throughout the world and in Victoria and the escalation of cases in NSW, it has become clear that the path to recovery for Australia will be longer than anticipated.
At the beginning of the pandemic, much was made of the ability of businesses to terminate contracts which could not be performed because of the Government shutdown and the effects of the pandemic. However, the general consensus was that because the effects were temporary, the use of force majeure clauses may be limited. In that context, it was said to be hard for a business to demonstrate more than a temporary inability to perform its contractual obligations.
Now that parts of Australia and the world are suffering a second wave, does that mean businesses face more than a “temporary” inability to perform their contractual obligations? Does this assist a business that wishes to terminate or temporarily suspend a contract based on a force majeure clause?
What is Force Majeure?
Force majeure is a legal construct designed to provide relief to contracting parties affected by an event beyond their fault or control. Although the concept of force majeure operates in many civil law systems, common law in Australia does not recognise the doctrine of force majeure. Rather, contracts commonly include force majeure clauses, which apply to the extent agreed in the terms of a contract and are construed by Courts in the usual way (i.e. that the words contained in the force majeure clause should be construed in each case with consideration to those which precede or follow them, and with due regard to the nature and general terms of the contract).
Although force majeure clauses generally operate in a similar manner (i.e. to provide relief to parties from temporary performance of their contractual obligations or termination of the contract because of an external event beyond the affected parties’ reasonable control), they are not universal, and are a matter of contractual interpretation. Force majeure clauses usually contain as follows:
- a definition of “Force Majeure Events”, which provides reference to an exhaustive and/or non-exhaustive list of events that constitute a force majeure event (such as acts of God, epidemics, pandemics, natural disasters, war or Government action or interference);
- requirements for a party affected by a force majeure event and seeking relief under the contract;
- how a party affected by a force majeure event is relieved from performance of its contractual obligations (either in whole or in part); and
- termination or suspension of the contract. Often termination becomes available to either party where the affected party is unable to perform its contractual obligations, either permanently or after a minimum time period.
Accordingly, a business affected by COVID-19 who is seeking to be relieved from performance of its contractual obligations will need to firstly assess whether its contract contains a force majeure clause, and secondly, whether COVID-19 falls within the definition of force majeure events (such as reference to an epidemic or pandemic). If so, and subject to the remaining provisions of the contract, the affected business can seek to be relieved from performance of their contractual obligations, in whole or in part.
However, as COVID-19 is an unprecedented event, contracts in existence prior to the occurrence of COVID-19 may not include specific references to either a pandemic or epidemic. Despite this, in our view, businesses may be relieved under some other defined event, such as:
- An Act of God. Arguably, COVID-19 is a natural phenomenon that has caused worldwide illness and death.
- Government action or interference. Arguably, measures implemented by Governments, internationally and domestically, in response to COVID-19 has severely disrupted parties’ abilities to perform their contractual obligations.
- Any other event beyond the reasonable control of the contracting parties.
Businesses seeking to rely on a force majeure clause must satisfy the necessary level of disruption, being that the relevant force majeure event prevents, hinders and/or delays performance of the contractual obligations of that business. The responsibility of the affected business is relieved because the relevant force majeure event has made it impossible for the affected business to perform its obligations under the contract. A business seeking to rely on a force majeure clause should be aware that a mere commercial impracticability may not be sufficient.
Is the effect “temporary” or has it now become more than temporary?
Most force majeure clauses will permit a business to suspend the performance of the contract if the event is temporary in nature. Termination of the contract is usually only available where the event causes more than a temporary inability for one or both parties to perform their obligations under the contract.
Businesses who are considering their position and the availability of force majeure clauses in their contracts need to consider whether the change from the initial short, sharp shutdown to the now extended period since March 2020 have changed their ability to perform their contractual obligations, and therefore to rely on force majeure clauses. It is conceivable that the effects are now more than “temporary” and may change the rights of a business under such clauses.
When considering the effects on performance, the factual circumstances are broader than simply the Australian experience. The inability to perform a contract may be influenced by international events, such as international supply chains which have been severely disrupted or altered by the continued effects of the COVID-19 pandemic worldwide, including second wave outbreaks across the world.
Force majeure clauses also regularly include a minimum time period before termination rights are enlivened. In our view, the initial COVID-19 shutdown may not have satisfied the minimum time period in many such clauses. However, the cumulative effect since the initial shutdown, and now the second wave, in our view, may be enough to satisfy the minimum time period under particular force majeure clauses. A business affected by COVID-19 and which is beginning to question their ability to perform their contractual obligations, should reconsider whether the current circumstances enliven legal rights which were not originally available to them in the first shutdown.
Whether a business in the current circumstances can now rely on a force majeure clause will depend on an analysis of the actual wording in its contract and the combination of the particular facts and circumstances applicable to that business. What is clear is that this is a fluid situation with developing facts and circumstances. Legal rights that might not have previously been available to a business, might now or in the near future become available.
In our view, all businesses who are affected by the pandemic should review their position, to determine if they have rights that they might be able to exercise, in order to provide them with more flexible options than they initially considered.
In the event that your contract does not contain a force majeure clause, or the force majeure clause in your contract does not capture the COVID-19 pandemic, then you may be able to rely on the doctrine of frustration, which we will address in a further article.
Contact Us
If you are experiencing difficulties complying with performing your contractual obligations and wish to know more about your rights to temporarily suspend or terminate your contract, contact us today.
We would be happy to assist you with specific advice on your contractual rights and relief, during these unprecedented and challenging times.
Craig Higginbotham and Harrison Dobb
10 August 2020
