20 Mar Force majeure clauses and COVID-19
With COVID-19 causing major disruptions to businesses and rendering performance of certain contractual obligations almost impossible, businesses are needing to turn to their contracts or terms and conditions to seek relief from liability.
If your contract or terms and conditions contain a force majeure clause, you may be able to avoid liability for your inability to perform your obligations under the contract.
This article will discuss the nature of force majeure clause, whether COVID-19 is covered by them and the effects of the clause.
What is force majeure?
Force majeure clauses seek to absolve a party of liability for any failure to perform its contractual obligations due to circumstances or an event that is beyond the party’s reasonable control. This event is known as an event of force majeure.
What are examples of force majeure events?
Each contract will have slightly different wording, but general examples of force majeure events include, but are not limited to:
- acts of God;
- acts of war or terrorism;
- pandemics or epidemics;
- lock-out or other industrial action;
- compliance with a government request;
- shortage of supply; and
- civil unrest.
Is COVID-19 covered by the force majeure clause in your contract?
At first instance you need to review the terms of your contract and determine what is defined as a force majeure event. Generally, it will be defined as any circumstance that is beyond a party’s control and most contracts go on to list examples of events.
If pandemics or epidemics are listed in your contract as a force majeure event, then COVID would be covered by the contract.
Where terms like ‘pandemics’ or ‘epidemics’ are not specifically referenced in the clause and the definition of a force majeure event is defined broadly as circumstances beyond a parties’ reasonable control, it is certainly arguable that the existence of the COVID-19, recently labelled a pandemic by the World Health Organisation, is an event outside of a party’s control and parties would therefore be able to rely on the clause to avoid liability for any failure of performing their obligations.
If the force majeure clause makes reference to terms like ‘government action’ or ‘act of God’, this would also arguably cover COVID-19 as well, and you would be able to invoke the clause.
How to bring the force majeure clause into effect?
Once you’ve established that the spread of COVID-19 is captured by the force majeure clause in your contract, you must look to the clause for the process of invoking it. It is common for contracts to require that the party seeking to invoke the clause to provide the other party with written notice of the force majeure event, the details of the surrounding circumstances and the impact of the event on the party’s ability to perform its obligations under the contract. This ordinarily should be accompanied with evidence of the event and how it has impacted performance.
What is the effect of the force majeure clause?
The effect of seeking the relief provided by a force majeure clause is that the party seeking the relief is released from liability of having to perform its contractual obligations under the contract. The clause allows the parties to temporarily suspend their obligations until the force majeure event has passed. The contracting parties are also provided with the ability to terminate the contract.
Force majeure clauses and cancelling live events
Due to Government bans on events with 500 or more people, certain businesses have been left with no choice but to cancel large live events and even reconsider holding events of any size to minimise the risk of spreading of the virus. Examples of this are music festivals like Splendour in the Grass and Bluesfest which have either been cancelled or postponed due to the prevalence of the virus.
In this situation where a business is forced to cancel an event that it has pre-sold tickets for due to the virus, if they have a force majeure clause in their terms and conditions, and especially if the clause covers pandemics or specifically mentions COVID-19, they may be able to avoid liability and not be required to provide their customers with a refund. However, “given the exceptional circumstances, the ACCC encourages all businesses to treat consumers fairly and compassionately” and still provide a refund or a credit note or voucher. Business need to weigh up the desire to accommodate customers and provide refunds, and the commercial viability of doing so. For some small businesses this may be challenging.
Ticketek has a force majeure clause in its terms and conditions that states that customers are not entitled to a refund if they are unable to attend a concert due to the outbreak of a disease. Even though it is within its power to reject refund requests, in these circumstances, Ticketek has said it will provide refunds. Other events like the Australian Grand Prix have been cancelled, but the Australian Grand Prix Corporation reassured ticket-holders that refunds would be provided.
Where an event has not been cancelled, but a customer simply chooses not to attend an event due to concerns about COVID-19, this can be treated as ‘a change of mind’ and businesses are not obligated to provide a refund. A customer’s rights to refunds in these circumstances will depend on the terms and conditions adopted by a business.
How to approach future contracts?
Businesses should take extra care when entering contracts to ensure they understand the effect of force majeure clauses, including what will trigger the clause and who bears the risk of a force majeure event.
Instead of relying on force majeure clauses that are drafted broadly, it is recommended to expressly include pandemics and COVID-19 in the list of force majeure events in contracts going forward.
© Progressive Legal Pty Ltd (2020) All legal rights reserved.
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Ian Aldridge is the owner and principal lawyer at Progressive Legal. After 12 years practicing as a litigation lawyer for small, medium and large firms in Australia and the UK, Ian returned to Australia disillusioned with the way Law was being practiced at all levels, especially for small business.
Ian started Progressive Legal in 2014 and provides a range of fixed-priced legal services for small business owners. Ian changed the way legal services are provided in Australia, by building Legal Shield™, a legal subscription to obtain tailored legal documents immediately and pay over time.
Ian has completed a Degree in Economics and Law from Macquarie University, has a Diploma of Legal Practice/Professional Program from the NSW College of Law (Commercial Law, Litigation, Legal Advice) and is a Key Personal of Interest (KPI).