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Is Force Majeure a Potential Get-Out Clause in Commercial Contracts Due to COVID-19?

With COVID-19 Leaving Many Businesses Unable to Fulfil Commercial Contracts, a Force Majeure Clause Might be the Saving Grace

From relying on a supply agreement to service provision to holding an event, almost every industry is feeling the effects of COVID-19 restrictions.

This has left many businesses wondering what their contractual obligations are in the current environment.

The good news is, a “force majeure” clause in a contract means you might be in the clear.

What is a Force Majeure Clause?

A force majeure clause relieves parties to a contract from their contractual obligations if an event occurs outside of their reasonable control. Examples include war, riots, earthquakes, hurricanes, lightning and explosions, but can also include energy blackouts, unexpected legislation, lockouts, slowdown, and strikes.

Does COVID-19 Classify as a Force Majeure?

Ultimately, when determining whether COVID-19 classifies as force majeure, wording is the key. 

First, you must determine how the contract defines a force majeure event. If the definition includes clear terminology like “pandemic” or “epidemic”, it is likely it covers COVID-19. Broader wording—such as “national emergency” or “government restrictions”–may also be relied on.

Second, you need to work out if the clause requires a party to be prevented from performing an obligation as opposed to it being delayed or hindered

If the COVID-19 pandemic has made it impossible for a party to fulfil their obligation (for example, a tour guide who can’t run a wine-tasting tour in Europe), the wording may not matter. But if it has just made it more expensive or delayed the possibility of completing your part of the contract, judicial interpretation becomes more important.

What are the Potential Outcomes of Activating a Force Majeure Clause?

Activating a force majeure clause might lead to a range of outcomes that depend on the contract and the point at which it has been impacted.

These may include:

  • Suspending the contractual obligations of each party or extending the time allowed for completion;
  • Excusing one or both parties from liability for non-performance or delay;
  • Terminating the contract;
  • Renegotiating some terms of the contract.

Doctrine of Frustration

If you don’t have a force majeure clause in your contract, you may be able to rely on some common law.

The “doctrine of frustration” allows a contract to be discharged if performance becomes impossible and neither party is at fault, with the contract automatically terminated from the “point of frustration”. 

So, using the tour guide example, any money already paid to them would not be refunded, but any balance due is forfeit.

In Victoria, the Australian Consumer Law and Fair Trading Act 2012 acts to mediate the doctrine, and under this legislation, a deposit will generally be refunded in the above circumstances. 

For more specific advice on how the Act applies to your business, get in touch with us and we can take you through your specific circumstances.

What Businesses Should Do

For suppliers of goods or services and customers, it’s important to review any existing supply contracts to see if any force majeure clauses are relevant as outlined above.

If you believe there is a clause that fits, reach out to us so we can advise you on both what to do next and what the appropriate remedy might be.

And, if you need to negotiate a future commercial contract, we can also help draft the force majeure clause to cover you if COVID-19 or another global emergency affects your business.

Is Force Majeure a Potential Get-Out Clause in Commercial Contracts Due to COVID-19? : City Pacific Lawyers

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