COVID 19 & Force Majeure Clauses in Commercial Contracts

COVID 19 & Force Majeure Clauses in Commercial Contracts

Force Majeure was for a long time a rather boring and often short precedent paragraph in contracts that referred to the unprecedented forces that affected the performance of a contract. In light of the outbreak of COVID-19 pandemic, substantial consideration should be given to the force majeure clause both at time of drafting a commercial contract and when the contract is being interpreted for the purpose of occurrence of force majeure events.

It remains to consider whether the disruption of the pandemic will instigate parties to a contract to consider how the unprecedented situation will alter or discharge their contractual obligations.

What is Force Majeure?

Force Majeure sometimes referred to as “act of God” is defined to be an occurrence not anticipated by either party of the contract and that is exclusively the consequence of natural causes.

In Nugent v Smith [1876] 1 CPD 423 “act of God” was interpreted to be “elementary forces of nature unconnected with the agency of man or other cause“.

There are a number of cases historically that interpret some illnesses to be a considered as an “act of God”.

Frustration of Contract

Under the common law, if a party voluntarily enters into a contract, that party must perform all its obligations that are outlined under the terms of the contract, even in the circumstances that performance is impossible. Failure to perform the obligations may render the non-performing party liable to compensate the other party or parties in the contract.

The application of the doctrine of frustration of contract is that in fact the performance of the contract becomes impossible through neither party’s fault.

Legally, once a contract is frustrated in this manner, it follows that the contract automatically terminates at the time of frustration.

Force Majeure and COVID-19

The wording of the clause of Force Majeure in contracts are usually the starting point if not the main source of considering whether Force Majeure covers COVID-19. The wording may refer to particular illnesses such as viral, pandemic or epidemic diseases. There could also be references to the government regulatory and legislative actions, economic emergency or national emergency.

For example an obligation of an artist under the contract to perform in an event may not be prohibited by COVID-19 virus per se, however under the current circumstances of lockdown and social distancing regulations it will be prohibited by way of the restrictions placed by the Government.

In the current circumstances arising from the outbreak of COVID-19 pandemic, there are several issues to be considered if there is the possibility of non-performance of the contract. For example in a construction contract there could be issues of delay, shortage of material, shortage of skilled tradesperson and government restrictions such as social distancing that may require a limited number of tradespersons on the site at any period of time which may incur inherent risks for the continuation of work at a construction site.

The parties should also consider and seek legal advice in relation to the relevant regulations and legislations now in place for COVID-19 in different states.

It remains to be argued whether COVID -19 fits into the concept of consequences of natural causes. On one hand the circumstances of force majeure could be considered as the outcome of an illness which is the consequence of human to human infection by COVID-19. Alternatively, the disrupting outcome may be the result of government’s regulations and legislations including the effect on economy rather than the virus itself.

Another issue of significance is the force majeure clause in the contract. A substantial consideration should be given to the specific wording of the Force Majeure Clauses. This will also cover obligations that are impossible to be performed, or alternatively can be performed but will be costly and inefficient.

It is imperative that parties pay more attention to the Force Majeure Clause in future with a view of addressing all the unprecedented occurrences that the parties wish to cover such as the detailed obligations of the parties to be outlined under force majeure circumstances, the right to terminate the contract without incurring penalty in the event the force majeure event continues for a nominated period of time and the payments that ordinarily are payable under the terms of the contract to be temporarily suspended until such time when the force majeure event terminates and the parties are able to continue their obligations under the contract.

The clause should also make reference to a reasonable period of notice that the party or parties affected by the force majeure event are required to provide.

The preparation and interpretation of a force majeure clause in a commercial contract is crucial to the sustainability of the contract and the minimisation of damages and costs incurred by the parties to the contract.

If you have any queries in relation to the terms of your contract or require a contract to be prepared for your business, please seek legal advice from one of the efficient solicitors of Pavuk Legal.

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