As risks of the COVID-19 pandemic continue to spread globally, the ramifications of the virus are being felt far beyond the initial health concerns and travel restrictions. In attempts to limit its outbreak, restrictions and precautionary measures are being imposed by governments, and workplaces, which are having much more far reaching implications and knock-on effects that many of us, including businesses, have unlikely anticipated for, nor had to consider before.
This includes considering the potential contractual ramifications, as the spread and attempts to contain the virus, creates significant supply chain issues and other 'business as usual' disruptions for many businesses now opting to work remotely.
So, to what extent is COVID-19 affecting your business and its ability to perform 'business as usual' which may compromise or impact its contractual obligations? What does your contract say and is it sufficient for addressing, or protecting against, potential performance disruptions due to the novel circumstances of COVID-19?
Contracts generally contain a number of express obligations, warranties and representations provided by a party to ensure the delivery of goods or performance of services. This may also include providing services or goods within certain period of time or by a due date or milestones, using specific key personnel and usually regardless of using subcontractors or other third party suppliers.
Therefore, as Australia braces itself for further outbreaks of COVID-19 across the country, businesses should be preparing for potentially prolonged business as usual disruptions. This includes:
- Checking the terms of existing contracts. Whether as a customer or service provider of goods/services, know and understand what contractual obligations have been agreed to under your existing contracts, in order to determine whether there are any risk those obligations may not be met during these uncertain times. Also, check if there any rights, remedies or mechanisms available under the contract that may help address, or alleviate, potential non-performance or delivery issues arising from the effects of COVID-19.
- Negotiating new contracts that anticipate appropriate mechanisms for addressing 'business as usual' disruptions. Whether negotiating new contracts, or seeking to amend an existing contract, consider negotiating terms that anticipate and provide some relief, or allowances (such as extensions of time), for legitimate business as usual disruptions, before resulting in breach or termination of the contract.
In helping Australian business prepare for the effects of COVID-19, we have put together the following checklist of legal issues to consider (and will continue to add to), including contractual terms to look out for in existing contracts, or in negotiating new ones, that may anticipate and afford some relief for certain performance issues, disruptions or delays, and help minimise the risks of liability for breach of contract.
Force Majeure clauses
Generally contracts contain force majeure provisions contemplating the alleviation of a party's liability for non-performance of its obligations under a contract, due to events beyond its reasonable control. There is no general right to a force majeure relief if it is not set out in the contract. However, force majeure terms can vary between contracts and may also contain certain conditions in order for the affected party to rely upon them, such as the following.
A definition of a "Force Majeure Event"– this definition will usually expressly list permitted circumstances and/or simply refer more generally to 'events beyond the reasonable control' of a party. The definition can also be expressed as an exhaustive or non-exhaustive definition that may/may not expressly contemplate epidemics or pandemics. It is important to then consider how the term is used and what right or obligations are forgiven. For example, if the contract can be performed remotely, working from home options may mean the force majeure clause is not activated (see also obligations to mitigate below).
Notification obligations – a force majeure clause will usually require the affected party to notify the other party of a Force Majeure Event in order to rely on it. For example, the obligation to notify may be immediately, promptly or as soon as the affected party becomes aware of a Force Majeure Event or the likelihood of such an event occurring. Additionally, some force majeure terms may require the affected party to notify the other party of how it will minimise the effects of the Force Majeure Event and when the Force Majeure Event is over.
Obligations to mitigate – in general a contract will include a common law duty to mitigate any loss. However in some contracts, an obligation to mitigate may not alleviate or suspend an affected party's obligations under the contract when a Force Majeure Event arises. Some force majeure provisions may expressly require the affected party to continue to use 'reasonable efforts' to perform its obligations and/or mitigate the effects of a Force Majeure Event, despite its existence. Mitigating loss or using reasonable efforts to continue to perform that contract may include enabling employees to work from home, the ability to provide services remotely or implementing an agreed business continuity plan.
Rights to terminate - if the Force Majeure Event continues for an agreed period (commonly 30 days), then usually the parties have a right to terminate the agreement with no liability with respect to such termination. One party (usually the party not relying on the Force Majeure Event may however, where possible, choose to agree to extend the period of a Force Majeure Event, rather than terminate, for the more practical reasons of wanting to maintain the commercial relationship.
Provisions allowing for delays or extension of time
Contracts, particularly services contracts, may contain provisions allowing for delays or extensions of time, in some circumstances. However, these can also vary between contracts and contain certain conditions, such as the following, in order for a party to rely upon their temporary relief.
Permitted delays – usually extensions of time are provided in strict circumstances, as expressly agreed and specified in the contract. For example, delays caused by the other party, or strict allowances for failing to meet a due date or milestone and subject to rectification within a certain period. Rather than contemplating or anticipating more broadly delays due to general business as usual disruptions (such as supply chain or resourcing issues), or disruptions caused by more novel circumstances such as COVID-19, unless otherwise agreed.
Strict notification requirements – often the delayed party must follow strict notification requirements in order to rely on relief for a permitted delay, such as notifying the other party of the delay, or the likelihood of a delay, either immediately, promptly, or within a certain period of time. Also, obligations to notify may include letting the other party know how the delay will be rectified, mitigated, any workarounds, raising a change request for addressing the delay and/or providing revised due dates or milestones.
Obligations to mitigate and rectify the delay – this may include for example, requirements on the delayed party to rectify the delay within a certain time period, using 'reasonable efforts' to continue to perform its obligations, find suitable workarounds and/or minimise the effects of a delay, despite its existence (similar to force majeure terms). Therefore, circumstances where rectification or workarounds are possible, such as working from home or providing services remotely, may not necessarily relieve a party from its performance under a contract on the basis of a delay.
Costs associated with delays – be aware of terms regarding any costs that may be expressly contemplated in the contract for delays. Such as claiming costs incurred, or changes to fees, as a result of the delay, or any other form of compensation or remedy agreed in the contract as a result of the delay. Otherwise, where no such terms are expressly agreed, parties may be unlikely to claim (or may find it more difficult claim) costs, fees, compensation or other remedies associated with permitted delays.
Rights to terminate – where permitted delays occur but are not rectified in accordance with the terms of the contract this will often trigger rights for the other party to terminate the contract for breach.
Obligations to implement remedial and business continuity plans (BCPs)
Contracts, such as services contracts, may anticipate issues (like delays, breach or other business disruptions) by including obligations to prepare, implement and maintain a BCP when certain performance issues or disruptions arise, which may contain the following terms.
Obligation to prepare a BCP for the other party's approval – often where a BCP is contemplated, such plan may be required to be prepared by a party and submitted to the other party for approval at an agreed time (e.g. generally at the commencement, or within an agreed time period from commencement, of the contract) before being implemented. Alternatively, a party may already have BCPs or related policies which the other party is required to follow under the contract.
Triggering events for implementing BCPS – usually the parties will agree on what events, business disruptions or other performance issues will trigger implementation of a BCP.
Strict notification requirements – often there will be obligations to notify the other party of performance issues or disruptions, the details and the BCP and/or steps to be taken, to address, mitigate and resolve the performance issue or business disruption.
Conditions or criteria to meet in implementing a BCP – the requirements of a BCP may also include certain criteria to be met in its preparation, implementation and/or maintenance, such as success criteria for determining whether the performance issue or business disruption has been satisfactorily resolved.
Accordingly, if a party faces a performance issue or business disruption that requires submission, notification and implementation of a BCP under its contract, and fails to do this, then such party is not only at risk of breach for non-performance but is also in breach of its obligations to implement the BCP. This may also result in that party's inability to rely on other provisions, such as force majeure terms or other delay/extension of time provisions, containing conditions referring to adopting the BCP too.
Replacement of Key Personnel
Contracts may also contemplate strict terms on only using certain personnel (for example in the provision of services), also identified as "Key Personnel". As a result, such terms may contemplate the following.
Replacement of key personnel requiring other party's strict approval only – this may mean the approving party can withhold its consent in its absolute discretion and therefore may not offer relief for replacing Key Personnel due to business as usual disruptions, such as those caused by COVID-19 (e.g. illness, self-isolation or quarantine).
Caveats to consent – alternatively, contracts may require approval of replacing key personnel to be 'reasonable' or such approval not to be 'unreasonably withheld'. In some cases, the parties may also expressly agree on exceptions to replace key personnel without approval, such as in circumstances of illness or approved absences from work (e.g. annual leave). Expressly including exceptions may help overcome the obligation to provide certain personnel and allow for more flexibility, in circumstances such as those arising from COVID-19.
Termination or suspension rights
Party's should bear in mind when facing potential breach, non-performance, delay or force majeure events, what termination, or alternatively suspension rights, are expressly available under the contract in relation to such issues, which may include the following.
Rights to terminate the contract for convenience – often a termination of convenience right is only available to the party receiving goods or services under a contract. It also generally requires advance written notice and may be subject to early termination fees where appropriate.
Rights to terminate/suspend the contract for breach or other non-performance issues/events – usually circumstances on which termination, and in some cases suspension, may occur are agreed under separate categories of agreed events (such as due to breach, multiple failures, force majeure). These may then be further categorised into circumstances where termination, or suspension, may occur immediately or within a certain period of notice.
Strict triggers for termination/suspension – generally termination and suspension rights will include strict time periods to rectify a failure and notify the other party of the intent to terminate the contract or suspend performance, in writing, before termination or suspension is triggered.
However, it may not always be in the best commercial interest of the parties to simply terminate a contract just because termination is available, when facing non-performance issues or disruptions to business as usual, particularly those caused by novel circumstances such as COVID-19. Instead parties may seek to re-negotiate and vary the contract to help address certain, immediate needs (such as agreeing on extensions of time, revising milestones or due dates, suspending certain obligations or decreasing service levels for a certain period of time) rather than terminate.
It is also worth noting that under common law in Australia, the doctrine of frustration will terminate a contract where severe circumstances significantly alter or change the ability to perform the contract as intended and as a result, the terms of the contract cease to operate. For example, frustration may similarly be applied in circumstances where no force majeure terms exist in a contract. However, showing a contract has been frustrated to the extent that it can no longer be performed, can be a high bar to meet, and therefore often a less practical approach to rely on, than expressly agreeing on specific force majeure events 'beyond the reasonable control' of the party and the associated terms providing temporary relief before terminating, if the novel event subsists.
Further content on Australia and COVID-19:
Last reviewed: 25 March 2020