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Contractual obligations in a COVID-19 world

With the advent of COVID-19, there have, of course, been substantial changes to the global economy and the way we go about business. More challenging, these impacts continue to be in flux as the virus wreaks havoc around the world.

As this crisis deepens, businesses are suffering increasingly broad and unchartered interruptions to their operations. These are presenting as increasingly complex and often interrelated with breaches of contract and insurance coverage uncertainty emerging.

While we can’t address all the legal implications around COVID-19 in this article, we will examine how the virus is impacting contractual obligations for companies. From sporting events to conferences, from airline travel to supply chain disruptions, many, many organisations are facing unprecedented changes, variations and breaches to their contractual arrangements.

We have listed a few of the more common questions below. We do note, however, the responses we provide are of a general nature and should not be considered definitive. We always encourage you to speak to a legal professional for advice specific to your situation and needs.

OK, some Q+A.

 

Q: Our supplier cannot meet his obligations. Can we engage a new supplier?

A: The short answer is, yes, if the supplier has not been appointed on an exclusive basis. It’s important to bear in mind that when this crisis has passed, you may still be liable to pay your current supplier (under your contract) once they begin to perform their supply obligations.

 

Q: Can pandemic or contagion clauses be used in contracts?

A: In most (current) contract cases, the horse has already bolted, however, for future contracts, you can have your legal counsel include a dedicated or exceptional event clause (rather than using a general force majeure*). This will give you more certainty if things go awry again.

 

Q: Does our insurance policy cover events caused by COVID-19?

A: This is, of course, dependent on the terms and conditions of your insurance arrangements as polices can differ dramatically depending on the wording included. The two types of insurance that are likely to be relevant are business interruption insurance (BII) and contingent business interruption insurance (CBII).

In a nutshell, BII covers loss of income in circumstances where your business is interrupted because of damage to your premises. CBII on the other hand, insures you against losses when your ability to supply a product or service is interrupted due to an impact on your suppliers.

Typically, losses caused by a pandemic such as COVID-19 are excluded, however, in some cases you may be covered. Again, we advise you seek legal counsel to review your contract.

 

Q: We don’t want to terminate an existing supply contract. Do we have other options?

A:  Yes, there are some options. You could consider reducing the volume of the services and / or goods under the contract if your demand has dropped. This is becoming increasingly apparent with COVID-19. You can also, in conjunction with your legal counsel and other party, consider alternative suspension rights.

 

Q: Our contract does not have a force majeure clause. Without this, do we have alternatives to cancel a contract?

A: Yes, in certain situations. There is a common law known as the doctrine of frustration. In certain circumstances, this can bring a contract to an end where an intervening event occurs (such as COVID-19) and through no fault of either party makes contractual obligations impossible.

It should be noted that the doctrine of frustration has very narrow scope and is often only considered where the event in question has been totally unexpected or foreseen. In the case of COVID-19 – this may well be the case. Again, we ask you to consult your legal counsel for clarification.

Overall, the best course of action is to look to negotiate a commercial arrangement with your supplier that is mutually beneficial to both. Again, legal counsel can help you negotiate this.

In these commercially uncertain times, we strongly encourage businesses that are facing contractual issues, to consult legal advice before they act.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9274 8820 or email ch@lawbase.com.au.

 

*In contract situations, force majeure is best described as unforeseeable circumstances that prevent someone from fulfilling a contract.

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