Force Majeure and Contractual Obligations Under COVID-19

Throughout the turbulence of COVID-19, many questions and issues have been raised in relation to obligations and agreements, including how they are impacted by the current circumstances.

Force Majeure

Force majeure is a term used to describe an exclusionary clause negotiated into contracts. It can be relied upon to exclude liability where a party’s failure to perform a contractual obligation is caused by events out of their control. Commonly, force majeure events are defined in reference to a definitive list of possible events which include:

• Acts of God
• Tornadoes
• Fires
• Floods
• War
• Government intervention
• Changes in legislation
• Industrial dispute/action

COVID-19

It’s highly unlike that an agreement drafted prior to Coronavirus health crisis would have included its possible impact.

The mere existence of COVID-19 won’t affect all contracts and obligations. A party relying on it to validate a force majeure clause would likely need to analyse the contract to identify whether Coronavirus can be captured under an existing umbrella term, such as infectious disease or pandemic.

A party looking to invoke a force majeure clause to avoid liability for non-performance will need to demonstrate that their performance has been truly prevented by the circumstances. Speaking generally, it may be difficult to successfully argue that the clause applies in these circumstances. Consider an obligation which requires a party to repay money to another. Because of government-imposed restrictions, the owing party’s income has fallen substantially. In these circumstances, it’s still highly unlikely that a force majeure clause would relieve the obligation.

Dependent on the specific clause, relief could include a suspension of contractual obligations, excuse from liability for non-performance, extension of term or a renegotiation. Relief is often available for the duration of the event. Parties should be aware that a breach or default of obligation could potentially apply to non-performance. For this reason, it’s crucial to consider those particular clauses’ presence in a contract, in case a party’s right to seek relief under force majeure is disputed.

Doctrine of Frustration

Contract law contains a doctrine of absolute liability. This states that if a party voluntarily enters into an agreement, they must fulfil all stipulated obligations. Strict adherence to this doctrine in circumstances where no party can be held accountable for non-performance will inevitably result in a dead-end.

In remedy to absolute liability, the Courts introduced the doctrine of frustration. The doctrine of frustration permits mutual discharge from an obligation wherein no party can be held accountable for unforeseen events out of their control. This rule is that which is typically relied on if parties have not included a force majeure clause or if the existing one only concerns a short-term interruption. In invoking this doctrine, it’s important to remember that frustration does not suspend a contract but terminates it.

In one of our latest instalments in Morrows Conversations, our podcast series, Noor Othman of Morrows Legal discussed this topic with Murray Wyatt and Adam Neylon. Their discussion can be found on our podcast page here:

Should your ability to perform your contractual obligation be impacted by COVID-19, we recommend that you speak with your Morrows advisor. Contract law can be an extremely complicated discipline to navigate and the consequences for misstep can be severe. A timely review of these clauses can be of significant benefit to your businesses in determining the best course of action.