Contractual obligations in the wake of coronavirus
If you are about to sign a contract or have already signed a contract, you should be thinking about how the COVID-19 restrictions, business conditions and challenges may impact on your contractual obligations. In addition, whether you have any contractual rights to suspend or delay your contractual obligations due to circumstances arising from COVID-19 related conditions and challenges.
Force majeure
Certain circumstances may enable parties to be relieved from fulfilling their obligations under a contract. Many commercial agreements include ‘force majeure’ clauses which bring the contract to an end if a situation occurs that is out of the parties’ control like a natural disaster, war or public emergency. The words used in such a clause will determine whether a pandemic such as coronavirus will enable the contract to come to an end.
We emphasise though that many standard contracts do not include “pandemic” as a delay event or force majeure. You need to review the contract carefully, particularly the definitions and seek legal advice. If you have not signed yet, consider if you should be asking your lawyer to insert special conditions. We are here to help you with this if needed.
For example, in the REIQ contract for houses and residential land, the term “delay event” at clause 6.2(8) is very specific. We do not believe that “pandemic” itself is a delay event under this clause. However, the clause does include “compliance with any lawful direction or order by a Government Agency” which may assist in some circumstances provided the cause of the delay is due to a direction given by a level of Government e.g. compulsory close down of business.
Further, you should never seek to exercise a right to suspend, terminate or delay a contract without seeking legal advice. Unlawful or the wrong exercise of a right, can amount to a repudiation or breach of the contract. Therefore, you do need to get legal advice before notifying the other party if you believe you cannot perform your obligations due to COVID-19.
Frustration
Failing the inclusion of a force majeure clause, general contract law provides that a contract may be ‘frustrated’ by events beyond the parties’ control which make performance of the contract impossible or illegal. Case law provides various examples of frustration.
Frustration though historically has not been easy to establish and parties are often left with the uncertainty of being successful or not in such legal cases. It should be seen as a measure of last resort for this reason and it is best to have express contractual rights to suspend obligations or terminate the contract where possible.
You should before communicating with the other party to the contract seek legal advice if you wish to rely on the doctrine of frustration.
Finance and other conditions
Our contacts in the finance industry are telling us that clients should expect delays for approval to their finance. For this reason, it is prudent to include at least 21 days for finance approval in a contract where finance is required. This is due to banks, like most other businesses, experiencing staff shortages and changes in operational requirements from the COVID-19.
We recommend a similar approach to other conditions. For example, we expect that it will take longer to obtain search results and information to satisfy a due diligence condition. Therefore, we recommend negotiating a longer due diligence period where possible, at least 21 days.
Given the above, it would be prudent to also nominate a sensible settlement timeframe when preparing a contract. 30 days may now not be sufficient time to organise settlement. Nominating 45 days for settlement is perhaps the better timeframe to start with.
We’re here to help
Coronavirus presents enormous challenges and the domino effect on the economy of a pandemic such as this, will in turn put even more strain on health and wellbeing, and cannot be ignored.
We hope you find this information useful, noting that the circumstances we are facing are unique, and the directions issued to address the complications of COVID-19 are constantly evolving. We urge you to keep up to date with developments by closely monitoring reliable sources of information. Most importantly, we trust you and your loved ones stay safe.
Please call us on 07 4724 1016 or email [email protected] if you need more information or assistance.
