I received my first enquiry about the commercial impact of COVID-19 in late February, which grew to a steady stream of queries about delays and force majeure clauses.
Restrictions on manufacturing in China seem to be easing, which gives hope to companies that have been experiencing supply chain interruptions. However, we now have widespread lockdowns throughout Australia which are impacting on delivery of all kinds of contractual obligations at both ends of the chain.
As for whether a contract or commercial relationship can be “paused” due to COVID-19, the answer is: it depends.
There is no basic legal principle that allows parties to delay their obligations under a contract, even if something happened that was totally unexpected and out of their control (*cough* coronavirus). At least, not without breaching the contract.
Assuming we aren’t talking about an industry being addressed by government policy or legislation (like commercial leasing), there are two ways that you can press pause on your contract:
- An express provision of the contract (like a force majeure clause) allows it.
- You negotiate with the other party to put off or alter your obligations, at least until the unexpected circumstances have passed.
Force majeure, AKA “When the sh*t seriously hits the fan”
The term “force majeure” refers to an unforeseen, serious event or situation that prevents one or both parties from fulfilling their contractual obligations. In my experience with Western Australian clients, this often means a cyclone that is serious enough to delay construction or production on a mining site in WA’s north-west.
These kinds of events were historically referred to as “acts of God” due to their nature being largely beyond the parties’ control. You might recall a fairly entertaining Billy Connolly film exploring this in the early 2000s. The main character’s fishing boat was hit by lightning and after his insurance claim was denied due to the damage being an “act of God”, he attempted to sue God to recover his loss. I won’t spoil it for you by sharing the outcome, but I’m sure no one will be surprised to hear that the insurers’ purses stayed firmly closed.
Typically, force majeure clauses will allow the parties to press pause for “excusable delays”. The contract will often require that the events causing the delay:
(a) are beyond the control of, and not substantially caused by, either party;
(b) could not reasonably have been protected against before entering the contract; and
(c) after coming about, could not reasonably have been avoided or managed by either party in any meaningful way.
Usually, there will be a list of allowable examples including things like wars, extreme weather events, riots and natural disasters. Rarely, there will be a “catch-all” category, which may even be described as “acts of god”.
In the thousands of contracts I’ve reviewed over the last decade I have never been concerned that epidemics or pandemics were missing from the list of excusable delays. I’ve looked at numerous force majeure clauses over the last 6 weeks and so far, I have only seen one that expressly referred to “epidemic or pandemic”. Obviously this is something I’ve been urging clients to consider for future projects, but for now, it does present challenges for some clients.
The absence of “pandemic” from the list of excusable delays doesn’t necessarily mean you can’t rely on the force majeure clause. But you may need to have a productive discussion with your client asking them to consider COVID-19 to be the kind of event contemplated by the clause.
How does it work?
If your contract has a force majeure clause, a delay caused by an allowable force majeure event may not cause you to default or breach your obligations under the contract. This means that the other party cannot terminate or otherwise penalise you, provided the force majeure procedure has been invoked and followed.
Sometimes the entire procedure to support the relevant delay will be contained within the force majeure clause itself. Other times, the force majeure “pause button” will allow the parties a right to suspend or extend the time for completion as a result of the force majeure event, provided the requirements of the relevant suspension or extension of time clauses are also satisfied.
What are my obligations?
If you want to rely on a force majeure clause, you need to make sure you are observing all the notice requirements. Often, the force majeure clause will have strict deadlines for the initial notification of the delay, and then require ongoing communications regarding the steps being taken to minimise any consequences for completing the contract.
Many contracts will also require the parties to follow the necessary procedure to extend the deadline for completion as well as the force majeure notice, so you need to check that you have addressed all the initial and ongoing obligations in all relevant clauses. You should also check if the contract contains any entitlement to delay or standby costs and confirm that you can satisfy any pre-requisites.
Usually, the parties will only be able to pause performance for delays that are directly caused by the force majeure event. The contract will also often require the service provider to take active steps to minimise any fallout from the force majeure delay. This means that if the program dates can be shuffled around or if other actions can be taken to reduce the impact, they should be. Any proposed changes to construction methodology or delivery obligations to improve the program should be communicated and agreed between both parties, and possibly subjected to the variation procedure.
What if we can never start up again?
A prolonged force majeure delay may entitle one or both parties to terminate the contract. If there’s no way of predicting an orderly return to workable conditions this may be in both parties’ interests. If you’re the service provider, you would usually want this to mean that you can recover at least some of the costs of termination (e.g. demobilisation from site).
It is also possible that an ongoing or indefinite force majeure delay will result in the contractual obligations becoming incapable of being performed and the contract ending due to frustration. This may mean that both parties are excused from performing their future obligations, although existing rights and obligations remain intact. Frustration of construction contracts is affected by legislation in some Australian states.
And if there’s no force majeure clause?
The absence of a force majeure clause does not automatically mean that the relationship is doomed. However, it may mean you need to brace yourself for a tough and frank conversation with the other party. Sometimes people forget that the terms of the contract are open to negotiation between the parties throughout their relationship, not just prior to execution. As with any tense situation, I urge clients to open the dialogue as early as possible. This typically allows for less pressured and more creative exploration of the paths that will cause least distress and loss to both parties.
When in doubt, talk it out
I’ve advised a number of clients on COVID-19 related delays over the last 6 weeks, and to the best of my knowledge none of those commercial relationships have broken down as a result. That is because they have leveraged their strong working relationships to find the best and most collaborative way through this crisis.