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COVID-19 and contracts - Where do I stand?

With Australia stumbling from disaster to disaster, suppliers and businesses need to consider what may happen to supply contracts.

Australia was hit by a crippling series of bushfires over the summer, and we now face the coronavirus, COVID-19. This pandemic has caused the disruption in many supply chains and demand-driven shortages. If we put aside the justification, or lack thereof, of panic-buying toilet paper and social media paranoia, there are real effects on supply chains that will have suppliers and businesses looking at their contracts for protection.

Force Majeure

Force Majeure is a Latin term meaning ‘superior event’. Force Majeure clauses in contracts change the parties’ obligations if certain non-avoidable events occur. Commonly, a party will not be liable for its inability to perform its obligations under a contract as a result of national emergencies, acts of terrorism, war or other like events. There will often be termination rights attached to Force Majeure clauses if Force Majeure events persist.

A party seeking to rely on a Force Majeure clause bears the burden of proving that they are unable to perform their obligations under the contract. Accordingly, if you are thinking of declaring an event of Force Majeure, it may not be as simple as it first appears. There are many elements to consider whilst a Force Majeure event persists. This may require negotiating with counterparties and contract amendments that we can assist with.

Thinking to the future - Do I need a Force Majeure clause in my contract?

There is no doubt that Force Majeure clauses are important, particularly in supply contracts. Despite this, think about what the ramifications are for you in the event a counterparty declares an event of Force Majeure.

Too often when asked the question of how to handle certain events, parties say “we will work that out together if one occurs”. This is not a good idea, particularly with Force Majeure events. Parties are less accommodating and tighten up during times of uncertainty.

Although not every disaster can be predicted at the time of signing a contract, it is important to test the contract by thinking “what may happen if a Force Majeure event occurs”.

Tips for businesses when contemplating Force Majeure events:

  • You want the ability to lower the minimum amount of goods ordered;
  • You want the ability to source from elsewhere if the supplier cannot meet your demand; and
  • You don’t want the supplier prematurely terminating the contract.

Tips for suppliers when contemplating Force Majeure events:

  • You want time to be able to meet supply demands;
  • You don’t want businesses to cease ordering your goods all together; and
  • You don’t want a business prematurely terminating the contract.

We recommend that if you are in an industry that is particularly vulnerable to Force Majeure events, ensure that there are specific clauses dealing with how certain rights are to be varied, (for example exclusivity rights, minimum orders and termination to name a few) rather than relying solely on a Force Majeure clause.

If you would like further information or advice about Force Majeure clauses, a specialist Contract Lawyer from of our corporate and commercial team can assist. Please click here to contact us

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.

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