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COVID-19 & Contracts – Can I Delay Delivery or Terminate?

If your business has been impacted by COVID-19, you will probably need to delay or cancel the delivery of your products or services.  Similarly, if your customers or suppliers have been impacted, they may need to change or cancel orders.

These challenges will require changes to existing contracts.  The best way to make those changes is through negotiation and agreement.  However, if you can’t reach agreement on how the contract should be changed, you may be stuck with the existing contractual terms.  Thankfully, most contracts have terms which might give you the flexibility to deal with the challenges of COVID-19.  You may be able to set aside the contract completely or delay the timetable for delivery under “force majeure” clauses or the doctrine of “frustration”.

What is Force Majeure?

Where there is an event outside the control of the parties, a force majeure clause allows one or more parties to not honour the contract.  Common force majeure events include “natural disasters”,  “acts of God”, “government action strikes”, “national emergencies” and “acts of war”.

The big question is – does COVID-19 fit within these definitions?  The answer will depend on the exact wording of your force majeure clause and how your business has been impacted by COVID-19.  If you have been forced to shut your doors by the government bans, you will probably fit within the “government action” event and be entitled not to comply with the contract.

Keep in mind that generally performance of the contract must be impossible, not merely inconvenient or more costly than before COVID-19.    You should also be conscious of whether the contract and the circumstances justify the delay, suspension or termination of the contract.  You may be entitled to delay but not to terminate the contract altogether as the government restrictions are now easing.

What is Frustration?

Frustration occurs where the parties are no longer able to perform the contract.  For example, if the subject matter of the contract has been destroyed or is now unlawful.  Generally COVID-19 is unlikely to cause the frustration of a contract because most of the impacts of COVID-19 will pass in time.  However, a contract may be frustrated if, for example, it related to a particular music festival that was now prohibited due to the rules against public gatherings.

If you are able to show the contract is frustrated, the contract will be permanently terminated – not just delayed or suspended.

Action to take now

If you have been impacted by COVID-19, or your customers or suppliers have been impacted, you should consider your current contracts.  You may need to renegotiate your contracts or give notice that you are relying on the force majeure clause or the concept of frustration.

If you need assistance with impacts to your business, please contact a member of Taurus Legal Management on (03) 9481 2000 or at info@tauruslawyers.com.au.

 

Posted by Taurus Legal Management