Force majeure and COVID-19: How to use the law to get relief from your contracts

Many Australian businesses have already suffered enormously under the impact of restrictions, disruptions to supply chains and economic uncertainty.

And, as a result, many have been unable to meet their contractual obligations and are now looking at facing severe financial impact or the potential of shutting their doors permanently.

Below, I look at whether protective ‘force majeure’ clauses in trade or project contracts can provide some relief in such desperate times.

What is a force majeure clause and how can it help small business owners?

In civil law, “force majeure” or “superior force” is a clause that when written into a contract, could relieve a party from performance of its contractual obligations where that performance has been impacted by external supervening events.

Whether it’s an extraordinary event — like a war, a strike or an ‘act of God’ — the event makes it impossible for parties to comply with the contract within the agreed timeframe.

The clause is not a ‘get out of jail free’ card by any means, but in many cases, it will allow for the temporary suspension of trade — buying the relevant parties an extended period of time in which to meet the obligations of the contract.

Small business owners should review their contracts to see if such a clause is in the contract terms and then, if unsure, seek advice or manage the situation in accordance with our hints and tips below.

What do I do if my contract does contain a force majeure clause?

Even if the contract does not contain a force majeure clause, you may be able to rely on another legal principle to suspend obligations under contracts.

The “doctrine of frustration” allows parties to be relieved of their obligations under the contract if the contract is said to have been “frustrated”.

Circumstances must be extreme enough to render the contract physically or commercially impossible to fulfil.

A very high threshold must be met before a contract can be considered by the court to be frustrated. However, it is likely that COVID-19 may constitute such circumstances.

This is yet to be tested in court but we can anticipate cases that seek to rely on these principles. If you are unsure, seek advice.

Hints and tips

If you believe your contract obligations or supply might be interrupted for any reason it is important to be on the front foot early.

Proactively reach out to your trading partners and try to develop a peaceful solution together.

In situations like these, the way you go about enforcing your rights can have long-lasting impacts. A nasty legal letter of demand at the wrong time can be disastrous.

Instead, think strategically about managing the situation and dealing with the dispute like any other negotiation.

Find out whether you have a force majeure clause and can rely on it, or whether the doctrine of frustration applies, but do your best to resolve the matter commercially like any other problem with a supplier.

Reliance on legal principles will only get you so far and a commercial, practical resolution agreed with your trade partners will no doubt stand you in good stead.

We’re in uncharted waters, and if nothing else, it’s a timely reminder about the importance of contracts and the definitions within.

Not every contract dispute needs to go to court. Especially in times like these, it’s crucial that we focus on preserving business relationships through peaceful and expedited means where possible, to allow for the future growth and success of Australian businesses.

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