Do you need to get out of your contract due to COVID-19?
The coronavirus and all its implications are impacting people all around the world on a fundamental level and COVID-19 will also severely impact business. If you operate a business that has been impacted by COVID-19 you may need to get out of, or be released, from some or all of your business contracts.
This articles talks about how you may be able to walk away from you contractual agreements.
How will the Coronavirus impact your business contract?
In essence, due to circumstances beyond your control you may not be able to perform the obligations that you agreed to in a contract you have with another party. We can give you a simple real world highly important and complex example that paints the picture quite well:
- Given that the world seems to be going to hell in a handbasket we thought ‘right’, now is the time to self-isolate… and what better way to self-isolate than to go fly fishing.
- The only problem is we needed to buy some new fly fishing flies that guaranteed that we would ‘catch the hell out of them’. We had our eye one some really good ones in Poland.
- So we jump online and buy some through the Polish website (clicking the ‘I accept’ button binding us to the seller’s terms in the process). The purchase of those flies created a contract between the seller and us for the goods.
- However, it turns out that the seller couldn’t deliver the flies, because Poland seemed to be locked down and there were severe and continuing delays with the postal service. The seller gave us the option of an international courier but given the expense (the courier costs were 4x the cost of the fishing flies) we decided to pass.
- The seller, being an honest sort of a chap, cancelled the contract and refunded my money. Thanks! No harm no foul.
So what does this highly important example show? Well it shows that events outside of your control can have a negative impact on your ability to fulfil your contractual undertakings.
What if we insisted on Seller performance?
In our example both parties were willing to walk away and cancel the contract. But what happens if one party still wants the other party to perform and the other simply can’t?
For example, what if we insisted on the flies and we insisted that the standard shipping fee that we paid was the only shipping fee we were going to pay and we would not pay the expensive the courier costs. Simple – the seller is obligated to perform the contract and would have to wear the expensive courier costs (given that the postal service was no longer operating) unless:
- Both parties agree to walk away and not proceed – which hypothetically we aren’t willing to do; or
- There is a clause in the contract that allows the seller to terminate, or bring the contract to an end, if the seller wants.
Being the good citizens we are (i.e. we have no friends and nothing to do) and out of general interest in contracts we did scan the seller’s terms and conditions and did see a force majeure clause. A force majeure clause is a clause in a contract that allows a party (in this case the seller) to bring the contract to an end if a ‘force majeure’ or ‘unforeseen event’ occurs.
This is an example of what we are talking about.
Example Force Majeure Clause
- If performance of the seller’s contractual obligations are prevented or hindered by a force majeure event, the seller may, upon giving the buyer reasonable notice, terminate the contract.
- In this clause, ‘force majeure event’ means any event beyond the reasonable control of the seller, including (but not limited to) any strike, lock-out, act of God, severely inclement weather, war, act of terrorism, government action, prohibitions on export/import, or any other event that is unable to be foreseen by the seller that negatively impacts the seller’s ability to perform.
The impact of a Force Majeure Clause
In this case because the clause adequately covered an event or circumstance that was beyond the seller’s control (government action causing restrictions in an effort to hinder the spread of COVID-19) the seller was able to bring the contract to an end and not have to fulfil their obligations.
Unlike our example, force majeure clauses are important and should be inserted in all contracts, especially higher value contracts (but as you can see they equally apply to small business).
How should my business contracts adapt for COVID-19?
Given that the Coronavirus has a real ability to impact your obligations to perform a contract, you should ensure:
- All the business contracts that you create, or are being asked to sign, include a ‘force majeure’ or ‘Unforeseen Events’ that allow you to terminate the contract if an ‘unforeseen event’ occurs; and
- You should make sure that the definition in the contract clause for ‘unforeseen event’ is broad or wide enough to cover events like COVID-19.
If you need any assistance please get in contact with Australia’s contract experts.