Australia has done extremely well in managing the impacts of COVID-19. Public restrictions are being eased to allow for more movement and interaction. We know from the Spanish flu that there was a second wave and it was devastating. There is present and real risk of a second wave of COVID-19.
Why does it matter?
Typically, obligations to perform a contract may be discharged or excused if the contract is terminated, there is a force majeure clause in the contact or there is a frustrating event.
Much has been written about the first wave of the COVID-19 pandemic being a force majeure or frustrating event. It riddled the world with panic, insecurity and wrought economic havoc in so many countries, undermining contractual relations, ways of life and the sustainability of businesses, great and small.
Now that we understand the impact of COVID-19, businesses need to make changes to their commercial arrangements to ensure they are COVID safe. Unless you take a proactive approach, your business will be unprotected from the commercial impact of a second wave.
What does this mean for you?
Whether or not a business can terminate or suspend certain contractual obligations with its suppliers and customers in a second wave scenario depends on whether the contract permits or provides the parties with rights to do so even without fault.
Will a second wave constitute a force majeure event? It depends on the force majeure clause in each contract. Typically, to rely on the force majeure clause one would have to demonstrate that the event was not in their control and it was not reasonably foreseeable. This may not be easy to demonstrate in a second wave.
Frustration of a contract occurs if there is an intervening event outside of the parties’ control, which makes the contract incapable of performance. Conversely, a contract will not be frustrated if its terms provide for the occurrence of the intervening event, such as a second wave of COVID-19. If a contract is frustrated, then the contractual obligations are deemed to have been discharged and the contract is at an end. It will be much harder to rely on frustration in a second wave scenario.
Now is the time to go back and take a look at your contracts. Do they measure up in times of crisis? Have you included clauses to adequately protect your interests or those of your business? A contract should include clauses which:
- contemplate and provide a mechanism to deal with the realities of uncertainty in a world riddled with instability;
- provide for the continuation (or suspension) of contractual relations when crisis hits; and
- lead to the mitigation of loss rather than total loss.
The big picture
State and Federal Governments will eventually wind down stimulus measures. Australia is already in recession. The capacity of Governments to protect the economy from a second wave will be limited. Now is the time to future proof your business. If it is not the second wave of COVID-19, it will be something else that takes the world by surprise. Use this time to re-assess and discuss your commercial risks with your suppliers and customers to prepare for the second wave of COVID-19.