Coronavirus and Force Majeure clauses in contracts

Unfortunately, the Covid-19 pandemic has had a profound global economic impact, resulting in many companies and individuals being unable to comply with their contractual obligations. Therefore, the question to consider is whether you as a party, are able to avoid an obligation under a Contract arising from the World Health Organisation’s announcement that there is a worldwide pandemic and the subsequent announcements by the Australian Health Authorities. Many of us may also be enquiring as to whether there are entitlements to obtain refunds for deposits paid for travel and or sporting, cultural or personal events

The first issue for one to consider are the terms of your Contract and whether they incorporate either a specific “exit or termination” clause or a force majeure event clause. In the absence of an “exit or termination clause”, the relevant question is whether there is a definition of what constitutes a force majeure event so as to determine whether it is broad enough to incorporate an event such as a health pandemic.

What is a Force Majeure?

Force Majeure clauses are typically included in commercial contracts to remove liability for each party, arising from natural and unavoidable catastrophes that interrupt the expected course of events and restrict parties from fulfilling their contractual obligations. A force majeure clause may encompass “acts of God” such as natural disasters and certain disruptive and unforeseeable acts of man.

Does the Coronavirus trigger a force majeure clause?

Assuming your contract includes a force majeure clause, the question is whether it is limited, or whether it is broad enough to cover the coronavirus outbreak. If your contract is silent on defining a health pandemic, or epidemic as being a force majeure event, it is likely that a judge would consider the relevant risks that were in contemplation of both parties at the time of entering into the contract. If you intend to rely on a widely worded force majeure clause, the Court would likely have regard to whether or not the parties “reasonably contemplated” a health related outbreak, and whether the event was beyond reasonable control of the party that sought to invoke the clause.

My force majeure clause includes ‘acts of God’ – will this suffice?

Force majeure clauses tend to include ‘an act of God’. According to the case of Nugent v Smith (1876) 1 CPD 423, an act of God is regarded as an “event that is due to natural causes, without human intervention, and that could not have been prevented by any amount of reasonable foresight or care”.

In applying this case, there is a strong argument that Covid-19 could be regarded as an ‘act of God’ in contracts that were entered into prior to the manifestation of the virus. However, it is likely that the Court would still apply the “what was reasonably contemplated by the parties” test.

Seeking Relief for Force Majeure

Force majeure clauses usually state that a party will be removed from its obligations under a contract, to the extent that its performance of those obligations is prevented or hindered as a result of a force majeure event. Typically, if there are alternative methods or options that the affected party could use to honour its obligations, it will be necessary to pursue those avenues. If a force majeure clause uses the term “is prevented from” the affected party will need to demonstrate that it is physically or legally impossible to carry out those obligations in order for relief to be sought. Conversely, if the term “hindered” is used, the affected party will likely need only demonstrate that their operations and obligations have been effected and impeded by the force majeure event.

Ultimately of course Parliament (whether State or Federal) may elect to override your contractual rights, which would have an impact on your ability to recover monies and/or limit your liability to pay the balance of any contractual obligation. Furthermore, it may be that your contracting party will dispute your interpretation and litigate or pursue you for monies owing which may conclude in a Judgement. Whether or not you successfully avoid liability or are entitled to claim a refund will likely depend upon the evidence (in particular the terms of the contract) and a determination by the presiding Judge. Ultimately of course if ­­you end up with a favourable result, the ability for you to recoup money will also depend upon the financial impecuniosity or capacity of the party you are making the claim from.

Contact Us

In the event that you require some specific advices as to any agreement that you have, baron + associates would be happy to assist and provide you with a fixed quote for preliminary opinion.

We take this opportunity once again to wish our readers to maintain the focus as directed by the Health Authorities to ensure that the health of themselves, their family and friends are at all times maintained and protected.