By Tony Ruterford, Partner and Jackson Dyer, Associate
Last Wednesday 11 March, the World Health Organisation declared the COVID-19 outbreak to be a pandemic. The virus is causing major disruption to all industries, including sectors of the economy that are dependent on supply chains (both domestic and global). While arguably not as vulnerable as some other industries, the construction industry is likely to suffer significantly given its reliance on products and materials manufactured and supplied overseas or in other States. In some cases contractors and suppliers may be unable to perform contracts or supply products to their customers, or contractors (or owners and developers themselves) may be operating with a depleted workforce.
In light of recent events, an important question for developers, contractors and suppliers is whether the COVID-19 pandemic constitutes a “force majeure” event under their contracts which will entitle them to relief from liability for non-performance.
Definition of Force Majeure
It is standard for construction, operations and maintenance and supply contracts to include a “force majeure” clause. The purpose of the clause is to ensure that any significant event outside the reasonable control of the affected party (and which could not have been foreseen by that party), and has an impact on the ability of the affected party to perform its contractual obligations, does not result in that party incurring liability for such failure to perform.
The concept of a pandemic is typically included in most definitions of force majeure. That said, there is no standard definition of force majeure and therefore it is essential that the affected party (or the non-affected party who has been notified of a force majeure event) closely review the definitions and contractual terms to determine the nature and extent of its rights under the contract.
A key component of claiming force majeure is that your business, as a matter of fact, is unable to perform (partly or wholly) its obligations under the contract. A further feature is that the affected party must mitigate or seek to overcome the impact of the force majeure event.
Put simply, you must be impacted by the force majeure event and do everything you can to ensure that you comply with your contractual obligations wherever possible.
Claiming Force Majeure
If you find that you are unable to perform your obligations (such as supplying a product or constructing a building) because of the COVID-19 pandemic, the first thing to do is ensure that your contract contains a force majeure clause. Assuming it does, you should focus on the following:
- Look to see if the definition of force majeure includes “pandemic”, “disease” or epidemic (or similar language). In cases where your supply chain is impacted, you should also look for a provision that includes a failure to obtain products or components from a supplier (although this is less common). Note that even where this is the case, you will likely be required to mitigate the impact which includes trying to source the same of similar component or product from an alternative supplier.
- If the definition of force majeure does not include the language discussed above, look to see if the clause is “inclusive” or exclusive”. An inclusive definition is one that typically says something along the lines of “events beyond the reasonable control of the affected party, including ….” followed by a list of specific events. In relation to COVID-19, this type of clause will give you a good opportunity to argue that you are being impacted by a force majeure event. However, keep in mind that the scope of the clause will be subject to definition by the courts. On the other hand, if your contract contains an exclusive definition (i.e. a list of specific events that constitute force majeure) and the list does not include “pandemic” or something similar, it is likely you will have limited or no rights to claim relief from performance.
Compliance with Notice Requirements
The existence of the force majeure event alone will not be enough to give you an entitlement. You will need to ensure that you comply with the specific provisions in the force majeure clause. As touched on above, these typically include:
- promptly notifying the other party that are you unable to perform as a result of the force majeure event, as soon as you become aware of the force majeure event. This typically includes the nature of the force majeure and details of its impact on your contractual obligations;
- providing a strategy or plan for dealing with the force majeure event; and
- using your best endeavours to overcome or reduce the impact of the force majeure event and get back to full performance as soon as possible.
Failure to comply with these requirements may limit or extinguish your right to obtain relief for non-performance.
Ongoing and Prolonged Force Majeure
Simply notifying the non-affected party will generally not be enough. For as long as the force majeure event is sustained, a party must generally keep the non-affected party informed about whether the force majeure event is ongoing and the specific actions they are taking to overcome the force majeure. They must generally also provide the other party with written notification once the force majeure event has ceased.
If a force majeure event continues for a sustained period (typically in the range of 6-12 months), either party will typically have a right to terminate the contract without penalty. Of course, the parties may come together to negotiate a commercial outcome and agree amendments that will take into account the extent of the obligations that the affected party may continue to perform.
Receipt of a Force Majeure Notice
For parties that receive a notice of force majeure from a contractor or supplier, the key requirement is to closely check the specific provisions in the contract. It is best to reserve your rights in relation to any force majeure notice, meaning that you should not automatically acknowledge that COVID-19 constitutes a force majeure event.
Legal advice should be sought once the notice is received and prior to providing any response. This advice will include consideration of whether the relevant contractual requirements such as written notice periods (discussed above) have in fact been met.
No Force Majeure Clause
If you contract does not contain a force majeure clause, in common law jurisdictions like Australia you will need to look to the specific law of the contract that applies (in Australia, this will be a State while international contracts often choose a well-known international jurisdictions such as the law of England and Wales, or New York).
Again, you will need to seek legal advice to determine the circumstances that courts in that jurisdiction have determined constitute (or might constitute) a force majeure event.
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