COVID-19 AND CONTRACTS
HOW WELL ARE YOUR CONTRACTS PREPARED FOR THE PANDEMIC AND WHAT CAN YOU DO ABOUT IT NOW?
The COVID-19 pandemic has affected a lot of people in different ways, and there is a lot of confusion and apprehension surrounding how it will continue to affect the future of our lives and businesses. Below we will look at what can be done contractually to protect yourself and your business.
FORCE MAJEURE. This is a term readily used in contracts and means something that is out of either party’s control, i.e an unforeseeable circumstance. It is important to know that there is no blanket rule for Force Majeure, and therefore contracts have to be drafted to contemplate unforeseen circumstances such as pandemics.
If contracts do have Force Majeure clauses, it is important to be aware that sometimes they can be hard to enforce. Courts will look at the contract as a whole and the definitions within the contract. Having a properly drafted contract with a well-defined Force Majeure clause is essential.
NEGOTIATION. Many contracts are silent on the issue of pandemics or contain no force majeure clauses. In circumstances such as these the best solution is to negotiate new contract terms. Parties should talk openly and frankly and detail the difficulties each party is facing as a result of any pandemic. Once a resolution is found a new agreement should be executed detailing the new contract terms to ensure that all parties are aware of their obligations under the new arrangement. Any new terms could be temporary or permanent, there are no rules in negotiations.
LEGAL CONTRACT REVIEW. If there are no Force Majeure Clauses and the parties are unable to negotiate new contract terms, it is important you obtain legal advice on the contract as a whole to determine any other rights under the contract that can terminate or amend the contract. This could include step-in rights, alternative suspension rights or reducing volume of services/goods procured.
INSURANCE. In conjunction with reviewing and negotiating your agreement you should look into the insurances you have for the business to see if pandemics are covered. Specifically, contingent business interruption insurance (CBII) and business interruption insurance (BII) are likely to be of help in these circumstances. Make sure to look into how and when they are covering you, as well as excess, indemnity periods and limit of cover. Prompt notice to the insurance company is often required. Cover is often not available during epidemics or pandemics, but some will still cover, so you need to look into your insurance covers to find out.
COMMON LAW OF FRUSTRATION. Even though there is no overall law of Force Majeure in Australia, there is a common law of frustration. This means that if an intervening event has occurred through no fault of either party that has made it impossible to fulfil contractual obligations or caused an obligation to transform into a fundamentally different one, the contract is ended. This is only applicable in very limited circumstances, and it is important to be aware that it is not enforced due to mere hardship, even severe ones. If the situation could have been foreseen or if it is transient or temporary it will not fit within the requirements of the law of frustration. The situation needs to be reviewed to assess whether the situation or event fundamentally changes any obligation within a contract.
