Could a Force Majeure clause save your business from coronavirus?

Businesses all over Australia are starting to feel the effects of the coronavirus (COVID-19) on our economy.  Restaurants and cafes are empty, venues for hire are receiving multiple booking cancellations, domestic and international tour operators are cancelling tours, retailers are struggling to make ends meet.

Clients are contacting us daily, seeking our help in developing practical steps to deal with these issues.  The good news is most of your business dealings take place in a contractual framework, for example a contract for the supply of goods or services, a lease, the terms and conditions of a booking form, an insurance policy etc.   Most contracts contain a special clause called a “force majeure” clause. This is a not clause you have probably heard of or one which you have ever had to rely on, however that might just be about to change.

Force majeure clauses may offer your business some relief from the impacts of the coronavirus.

What is “force majeure”?

Force majeure is a French term which when translated means “act of God” or “act of nature”. It is a clause in a contract that enables termination or suspension of contractual obligations where circumstances beyond the control of either party arise making performance impossible or impracticable.

Can I rely on the force majeure clause?

To determine whether you can rely on a force majeure clause to cancel or seek relief under your contract as a result of the coronavirus, depends on the terms of your contract and the application of those terms to your individual circumstance.  Some of the questions we ask when assessing contracts for clients include:

  • Does the contract contain a force majeure clause?

Firstly, there must be a force majeure clause in your contract. A typical term may say something along the lines of “in the event of (xyz), the parties are no longer bound by the terms of the contract”.  Read your contract carefully to see if such a clause exists.

  • Assuming the force majeure clause exists, what is the “event” to which the clause relates?

The coronavirus may fall under the “events” of the clause in one of two ways. The first way is if the event that occurred was specifically addressed in your clause. Such specific events may include ‘in the occurrence of a… pandemic/epidemic, a global health emergency, supply/work stoppages (occurring as a result of government intervention), government intervention (travel bans, export bans etc.)  If this is the case, you will likely be able to rely on the clause.

The second way is a general statement that accounts for all circumstances unforseen by parties preventing performance.  This is the more likely of the two scenarios as many contracts were not drafted to account for a global pandemic like the coronavirus.  If your contract has a general force majeure clause on which you want to rely, please contact us for advice.

  • What contractual obligation is affected or hindered by the event?

Obligations which could be hindered in your contract include things like:

  • The inability to pay rent due to quarantine restrictions or a general lack of customers from the economic down turn.
  •  The inability to supply a good or service due to a supply chain breakdown or a sick or quarantined workforce.
  •  The inability to perform your booking due the patrons being banned from travel or gathering in numbers smaller than 100.

It is important to note it must no longer be possible to physically or legally perform an obligation as a result of the coronavirus outbreak. It must not be possible to give some form of substituted performance that would amount to substantial performance of the contract – European Bank Ltd v Citibank Ltd (2004) 60 NSWLR 153.

An example of this would be a cleaning contractor who claims to be unable to perform cleaning works due to the quarantine of its workers.  The contractor cannot rely on a force majeure clause for the simple fact that they could hire more casual workers who are not quarantined to complete the cleaning works.

  • What is the causal connection between the coronavirus outbreak and the contractual obligation?

To create a causal connection it is necessary that the coronavirus has caused the contractual obligation to be affected or hindered.  This is relatively easy to establish. The coronavirus is not something that is within the control of either party to the contract. Neither party could have reasonably taken into account the effect of the coronavirus at the time of entering into the contract.  The effects of the coronavirus could not reasonably have been avoided.

Importantly, any contracts entered into subsequent to the coronavirus outbreak should be carefully drafted to take the coronavirus and a pandemic into account.

If force majeure applies, what does it mean for you?

Unfortunately, every contract is different and the remedies available will depend on the individual terms of your contract.  In general, contracts usually provide for one of the following remedies:

  • Suspension of the contract or a specific obligation to be performed under the contract for a period of time.  This could be, for example, a period of rent relief under a lease. A tenant could use a force majeure clause to apply for temporary suspension of rental payments during the coronavirus outbreak.  Once the coronavirus passes and things return to normal, rent payments can be resumed under the terms of the lease.
  • Termination of the contract without penalty.

Regrettably some contracts are silent as to the remedies available under a force majeure clause.

If you have any doubt as to what remedies are available to you under your contract, please contact us for advice.

My contract doesn’t have a force majeure clause or I don’t think it applies, what can I do?

The first thing you need to do is contact us.  There are other options available to you, including a claim for frustration of contract which we will be happy to help you with.

Coronavirus is having a devastating impact on many of our clients’ businesses.  We believe that this period of uncertainty will end and business will recover. Our aim is to make sure we are doing everything we can to ensure businesses weather the storm, continue to have a positive outlook and emerge stronger on the other side.

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