COVID-19 and Your Business Contracts

Date: March 27, 2020
Author: FAL Lawyers
Posted in: News

Headlines in all media sources have been dominated by COVID-19, or the coronavirus, and governments around the globe are ramping up their protective measures to combat the spread of the virus. It has been officially declared as a pandemic, and the Australian government aims to reduce transmission rates by implementing lockdown procedures and closing non-essential services and outlets.

List of Closures

As of Tuesday the 24th of March 2020, Australian Prime Minister Scott Morrison has updated the restrictions on businesses and individual behaviours. The table below summarises the current list of closures and restrictions:

Banned or Closed Restricted Open
Registered and licensed clubs, licensed premises in hotels and pubs, casinos and night clubs Hairdressers and barbers can continue, but must maintain social distancing. Supermarkets and grocers
Cinemas and entertainment venues Boot camps and personal training must be limited to 10 people and maintain social distancing Shopping centres and other shops not specifically told to close, including bottle shops
Auctions and open house inspections Restaurants and cafes may offer delivery and takeaway food only (inclusive of food courts) Medical centres
Personal services such as beauty therapy, tanning, massage and tattoo parlours Weddings are restricted to five people – the couple, the celebrant and two witnesses Pharmacies
Outdoor and indoor markets Funerals limited to 10 people total
Amusement parks and arcades, indoor and outdoor play centres Visits to houses should be kept to a very small number of people.
Galleries, museums, libraries and swimming pools
Gyms and indoor sport venues
Overseas travel
Effect on the Australian Businesses and Associated Contracts

The economic and financial effects of the COVID-19 outbreak have been nothing short of disastrous. Many branded retail names have gone into closure, the ASX has shed percentages that almost rival those of the global financial crisis, and the Australian employment statistics are taking a heavy hit as many more businesses are forced to close either by government orders or decreased consumer activity.

Australian businesses will experience a range of different consequences as a result of the COVID-19 outbreak, with many common ones being:

  • Reduced consumer demand as consumers undergo self-isolation procedures;
  • Businesses required to undertake work from home protocols, which may result in complications and hits to business efficacy;
  • Supply of materials and/or goods become limited as restrictions are placed on borders as well as general economic downturn of manufacturing;
  • Inability to operate due to targeted closures by government actions; and
  • Continued liability to pay rent, or honour other contractual obligations, despite business levels decreasing.

Given that these are unprecedented times for Australian businesses, it is highly recommended that all businesses revisit any and all contracts that they currently have in place to determine not only their rights and obligations, but the rights and obligations of other parties, in light of the COVID-19 outbreak and to identify and implement plans and precautions to protect themselves from the ongoing consequences of such.

Force Majeure

In many modern contracts, which include many industry standard ones, there will be a force majeure clause which deals with extreme unforeseen events.

Force majeure is a legal construct for contracts to deal with unavoidable or unforeseeable event, with its application and effect differing from contract to contract.  A force majeure clause will often describe what qualifies as a “force majeure event”. Contracts generally define a “force majeure event” in one of two ways; either by reference to an exhaustive list of events or by reference to a general description of the event (e.g. “an event beyond the reasonable control of the parties”) accompanied by a non-exhaustive list of events that qualify. Examples include certain weather events, contamination of various kinds, acts of war, and health related events (such as epidemics and/or pandemics). In some cases, the definition of “force majeure event” limits the qualifying effect of those events to effects at the “site” (but not to the “supply chain”).

The general elements required in order to invoke a force majeure clause are:

  1. That it falls into the contractual scope of the force majeure clause;
  2. That it cannot reasonably have been foreseen by the parties when entering into the contract;
  3. It was completely beyond the parties’ control; and
  4. The parties could not have prevented its consequences.

It should be noted that mere economic downturn isn’t, in and of itself, often sufficient to constitute a force majeure event. Changes in economic or market circumstances affecting the profitability of a contract or the ease with which a parties’ obligations could be performed is unlikely to constitute a force majeure event.

Where a force majeure clause has been successfully invoked, the parties are relieved from their obligations under the contract, although accrued rights under the contract prior to the invoking of the clause remain intact.

Frustration of Contract

Where a construction contract does not have a force majeure clause, or where the scope of the force majeure clause does not cover pandemics, there exists the doctrine of frustration in contract law. Frustration generally occurs where an event renders performance of the contract into something fundamentally or radically different from what was originally anticipated by the parties.

As with the force majeure clauses, general economic downturn and difficulties would generally not constitute sufficient grounds for claiming frustration of a construction contract. Examples such as general shortage of materials, shortage of customer or consumer activity and increased costs would be insufficient to claim frustration as they are inherent risks associated running a business in general and are therefore reasonably foreseeable. However, where the government forces a business to close or cease operating, or where the business is contingent on unique materials and resources sourced from overseas and countries have closed their borders, there may exist an argument for claiming frustration of the contract.

Mitigation may also play a factor in any claims of frustration and will be particularly important to subsequent claims for payment or damages. It is expected of all parties that, upon discovering an event that may give rise to a claim of frustration, the parties are expected to mitigate, or attempt to mitigate, the frustrating event insofar as what is reasonably possible. Failure to do so may result in additional costs later down the line.

Assistance and Precautions

The Australian government has announced as $66.1 billion economic plan to help small businesses stay afloat and keep people employed until the COVID-19 related economic downturn passes. The grant has an upper limit of $50,000.00 for eligible small and medium businesses that have employees and may be claimed twice depending on the circumstances. The government has defined small and medium businesses as businesses that have an aggregated annual turnover of less than $50 million and has employees. The size of the grant will be based on PAYG taxes.

In the interim, there are several precautions that Australian businesses may put in place to protect themselves from the consequences of the COVID-19 outbreak, which includes:

  1. Initiating dialogues with all parties and stakeholders to cooperate and discuss plans of actions regarding the coming COVID-19 related disruptions and how it will affect each parties’ contractual obligations;
  2. Review all contracts in place to determine a businesses’ rights and obligations, particularly with regards to force majeure events and claims of frustration;
  3. Consider ‘business hibernation’ tactics to lower cost impacts during disruption phases;
  4. Identify steps and actions that may be taken to mitigate the oncoming disruptions, such as identifying alternative suppliers or business operation streams; and
  5. Consider the effect of any such disruptions on employees and business plans and plan accordingly.

If you have any questions regarding your contractual rights and obligations and their interaction with the COVID-19 outbreak, or have any legal questions relating to the operation of your business during this pandemic phase, please contact us.

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