By Scott Coulthart, Special Counsel, and James Jessup, Lawyer
In addition to our recent update on the ‘Force Majeure’ possibilities relating to COVID-19, it is important to consider the broader practical implications for commercial and consumer agreements. The classification of the COVID-19 as a ‘pandemic’ by the World Health Organisation is having a dramatic impact on the ability of businesses and individuals to perform under commercial agreements.
Two significant questions businesses should be asking themselves in the light of the pandemic classification are:
- What happens if someone else terminates an agreement because of Coronavirus?
- Can I (and should I) terminate an agreement because of Coronavirus?
The answers to these questions are heavily dependent on the wording of certain clauses in each specific commercial contract.
The effect of the ‘pandemic’ classification will impact not only project based contracts, where a deliverable is required by a certain date and may involve multiple agreements, but also day to day transactional contracts, insurance contracts and exigency-based contracts. There may also be a ‘chain reaction’ where certain contracts may be affected (and perhaps even effected) by the outcome of some other agreement.
Commercial contracts often contain certain types of clauses which, when closely reviewed, will help businesses to better understand their rights and obligations in times like these. It may be possible for either party to suspend an agreement, alter an agreement, or exit it all together.
To determine the possibilities, it is important to look to clauses which relate to:
- Force Majeure (read more here),
- Conditions Precedent, and
- Warranties and Indemnities.
What is equally important is that the contract should be reviewed ‘as a whole’ to determine how all clauses interplay to apportion risk between the parties, and how parties should determine rights and obligations in unforeseeable scenarios which might prevent the performance of an agreement – such as the COVID-19 Coronavirus pandemic.
A ‘Force Majeure’ clause is a type of clause which is often included in an agreement to apportion risk in times of commercial uncertainty.
A detailed analysis of Force Majeure by us is linked to above. In essence, the effect of such a clause will be determined by the specific wording of the contract, and each clause may have different notification or mitigation obligations which must be complied with.
Some Force Majeure clauses will contain the word ‘pandemic’, some will neglect to mention any sort of illness at all, and others might be worded broadly enough to encompass a pandemic without referring to it. It will be important to review agreements of concern so that your business is prepared to either rely on the clause or mitigate the prospect of the other party doing so.
We recommend that you seek legal advice before relying on any Force Majeure clause or considering using it as part of a commercial strategy.
Where an agreement contains no Force Majeure clause, a party may be able to rely on the doctrine of frustration. ‘Frustration’ occurs where an unforeseen event makes performing the contract impossible. It is a strict test which is not applicable where the ‘impossibility’ is due to financial hardship.
While similar in effect to Force Majeure, frustration only occurs when:
- the parties did not anticipate a frustrating event, and
- that event renders performance of the contract impossible or
- what remains possible by way of performance renders the agreement completely different from what was initially bargained for.
Consumer Law Considerations
Businesses who sell products or services to consumers need to consider their obligations under the Australian Consumer Law before refusing to provide those products or services.
While it may feel justified to cancel services in light of the current pandemic, a decision by the business to cancel will likely require that business to refund consumers who have already paid for the goods or services.
The ACCC has recently announced that it expects businesses which cancel travel or events to offer refunds to consumers.
However, if the consumer cancels or requests a refund while the business is still willing to offer the product service the business might not be legally obliged to offer a refund. A careful consideration of the circumstances, terms and conditions, and the Australian Consumer Law will be required to accurately ascertain the rights of both the consumer and the business.
Importantly, even if there is a term in a business’ ‘terms and conditions’ which purports to allow the business to cancel the service unilaterally without a refund, it is advisable that the business seek legal advice before doing so. Such a term is likely to breach the Australian Consumer Laws for being an unfair contract term as it would give unreasonable unilateral decision making power to the business.
- Review ongoing contracts to determine whether you may have an exit strategy, or whether you can prevent a counterpart from having one.
- Review flow-on or ancillary agreements, such as insurance policies, whose outcome depends upon the outcome of those ongoing contracts, to determine whether they might need amending at this stage before they are enlivened or otherwise affected.
- Consider a pandemic risk management strategy which incorporates a variety of commercial agreements
- Seek legal advice before relying on contractual cancellation provisions
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