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Is the coronavirus infecting your business contracts?

04 March 2020

#Corporate & Commercial Law, #COVID-19

Trent Taylor

Published by Trent Taylor, Friedrich Kuepper, Amy Hancell

Is the coronavirus infecting your business contracts?

The World Health Organisation (WHO) has declared COVID-19 (or the Novel Coronavirus) as a “public health emergency of international concern" and warns that we are in “unchartered territory”. This emergency has caused many nations to close borders and implement travel bans, while China has imposed restrictions such as mandatory office closures and full or partial lockdowns of cities. It is also affecting manufacture and transport of goods. Given the current emergency and measures in place, contracting parties need to consider whether their contracts have been affected.

Businesses should carefully review any contracts that may be affected by the coronavirus, either directly or indirectly such as by result of quarantines, industry shutdown and travel bans. 

For example, these may include:

  • supply agreements
  • distribution agreements
  • manufacturing agreements, particular with off-shore manufacturing
  • transport agreements
  • travel and tourism agreements
  • other agreements with cross-border application.

If a contract includes a “force majeure” provision, consideration needs to be given to determine whether its scope extends to the outbreak. In particular, how may a declaration of force majeure impact the arrangement? If such a clause is not present in the contract, the outbreak may in some circumstances have other outcomes (e.g., a claim of “frustration” of the contract).

Force majeure

A ”force majeure”, meaning ‘superior force’, clause is a mechanism used to allocate risk between the parties, typically by excusing one or both from performing the contract in some way following defined events. The party excused or entitled to suspend performance of its obligations will then not be liable for its failure to perform. The scope and effect of any such clause is dependent on its construction and drafting. In most cases, they contemplate acts of God, extreme weather events, riot, war or invasion, government or regulatory action including strikes, terrorism or the imposition of embargo.

While you may have a force majeure clause, it is important to consider whether the outbreak of coronavirus is considered a force majeure event. This will depend upon the terms of the contract. Your contract may specify events such as pandemics, epidemics and work stoppages, which may arguably be grounds for declaring force majeure due to the virus and the related mitigation measures.

While the virus has been declared an emergency, it is not yet determined whether it is classified as an “epidemic” or “pandemic”.

Generally, WHO defines an epidemic as the occurrence of an illness within a community or region clearly in excess of normal expectancy, while a pandemic is the worldwide spread of a new disease. WHO has so far declared that coronavirus is not a pandemic, although it is advising countries to prepare for the possibility of a pandemic and has increased the global threat level to very high as 65 or more countries have confirmed coronavirus cases, including those originating from local transmission.

Further consideration should be given on whether or not to invoke any existing force majeure clause. If a party relies on the event, they generally have the burden of proving the event. Invoking it may also have unintended consequences as the clause may include a right for the unaffected party to terminate where the event is for a continued period of time. It should be noted that a seller of generic goods is not usually relieved, even by these clauses, from a duty to appropriate goods simply because a source becomes unavailable or there is a shortage of supply, especially if it can be overcome at cost.

Frustration

If there is no force majeure clause, there is a possibility that the contractual doctrine of “frustration” may apply. However, this is not easy to establish. Frustration may bring a contract to an end where an intervening event has occurred, through no fault of the parties, which makes contractual obligations impossible to perform or transforms it into a fundamentally different obligation. However, the events must lead to serious consequences – that is, not just by making performance more onerous or expensive.

Impact so far

The Australian government has maintained the ban on travel from China and has now extended this ban to Iran, with the possibility of more countries, particularly South Korea and Italy, being included. In expectation that this crisis will be declared a global pandemic, Australia has implemented its emergency response plan and is now operating on the basis that the virus is a pandemic. A worst-case scenario provided for in the plan could see large gatherings cancelled, aged care homes locked down, childcare centre closed and more. Since the confirmation of local transmission, Australia is now considering the banning of mass gatherings.

Further, businesses should be aware that the China Council for the Promotion of International Trade announced on 30 January 2020 that Chinese entities may apply for force majeure certificates for disputes with foreign trading partners arising from coronavirus control measures.

The full extent of the outbreak and its effect on contractual arrangements is unclear, however, for now, business are advised to carefully review their existing contracts and carefully consider this issue when negotiating and forming future contracts, given there may be further exposure to the risks of coronavirus.

Authors: Trent Taylor, Friedrich Kuepper & Amy Hancell

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Trent Taylor

Published by Trent Taylor, Friedrich Kuepper, Amy Hancell

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