How do I cover myself for issues which may arise in a contract due to a Pandemic?

The current COVID-19 pandemic has highlighted the need to give consideration to incorporating clauses in contracts to cover situations where supply chains may be impacted and/or restrictions are imposed on a party to a contract which may prevent them from being able to perform their obligations under the contract.

If you are entering into a new contract you should give consideration as to how you may be able to minimise your exposure in the event that you suffer from restrictions in your supply chains or restrictions imposed on your business prevent you from being able to perform your obligations under the contract. Also from the point of view of the party who is not affected by the Pandemic, you may need to consider how you deal with circumstances in which the other party may wish to seek to vary the term of the contract due to the pandemic.

There is a contractual principle of frustration of contract. Frustration of contract enables a party to be able to get out of a contract on the basis that it is unable to perform a contract due to an unforeseen event preventing their performance. It has been used in rare circumstances in the past. As we have now experienced restrictions on the conduct of business due to the COVID-19 pandemic it would be extremely unlikely that in relation to any contracts entered into since the pandemic began that a party would be able to rely upon the doctrine of frustration in being able to get out of the contract due to such restrictions.

The alternative is to rely upon a force majeure clause which would be a specific provision in your contract. There is no general legal principle of force majeure. What may constitute a force majeure event entitling a party to get out of a contract or to be able to seek variations to their contractual obligations has to be in accordance with a term of the contract itself.

Negotiating contracts moving forward persons in business should give serious consideration to seeking to have a force majeure clause inserted in the contract which would enable a party to be able to get out of or vary the terms of a contract, and if to vary on what basis, in circumstances where a pandemic has restricted their ability to perform.

In the event you are unable to rely upon frustration or a force majeure clause and you wrongfully purport to try and get out of, or avoid your obligations under a contract, the consequences could well be that the other party to the contract could consider your failure to perform (and incorrectly relying upon frustration or a force majeure clause) as a repudiation of the contract, entitling them to terminate the contract and to sue you for damages for your breach of the contract.

Therefore a carefully worded force majeure clause catering for various scenarios and providing for various entitlements in those scenarios is something that is worthwhile considering including in all of your contracts moving forward to give certainty as to how these issues should be dealt with and avoiding costly disputes.

Are you in the process of negotiating a contract in this COVID-19 crisis? Contact Solari and Stock Miranda on 8525 2700 or click here to make an appointment with one of our Commercial Team.

Image by Unsplash