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Since the emergence of COVID-19 there has been an indefinite period of uncertainty to almost all aspects of our lives and none more so than our economy. From as early as March 2020, we watched as cities all over the world were forced into strict lockdown in attempts to contain the virus, with Australia following suit shortly thereafter.

In complying with government orders, many local businesses were required to close their doors, whilst others remained open with limited or strictly reduced trading terms. Since this time, we have seen a significant increase in commercial disputes whereby businesses effected by forced closure and/or restricted trading are unable to meet contractual obligations and the other party to the contract is unwilling to negotiate its terms. In these circumstances, the suffering business could then receive another agonizing blow by becoming liable for losses resulting from breach of contract.

Whilst we could not have predicted COVID-19 or the issues it has caused in the commercial world, it does provide a timely reminder to all business owners to consider their current and future contractual obligations and implement procedures to ensure they are best positioned should they be faced with another unforeseen event of this calibre in the future.

We suggest the following as a starting point:

 

1. Ensure your contracts have a force majeure clause

 

A force majeure clause sets out the terms in which a contract may be dealt with in the event of an unforeseeable circumstance which prevents a party from fulfilling their obligations under the contract. The clause will normally refer to the most common force majeure events such as natural disasters, industrial disturbances, riots, wars and acts of terror, but a well drafted force majeure clause, will have a catch-all phrase to capture other events, such as a pandemic.

The relief provided under a force majeure clause will vary from contract to contract but it will generally provide you with a period of time in which you will not be liable to carry out your obligations under the contract and/or provide an opportunity to terminate the contract, with no consequence, if the disruption caused cannot be rectified within a reasonable timeframe.

If your contract does not include an express force majeure clause or, if it does, and the clause is insufficient, then it is critical that the contract terms be updated. When inserting the force majeure clause into the contract, you must ensure that it includes the catch-all phrase to ensure all unforeseen events are captured by the clause and also that it sets out terms of relief that are favourable to you.

 

2. Review any insurance requirements under your contracts 

 

In many circumstances a contract will have a provision requiring at least one of the parties to obtain and effect insurance. The purpose of this, is to enable the contracting parties to deflect any risks associated with performance under the contract (and financial consequence thereof), to the insurer.

If you are entering into a contract which has been drawn up by the other party, it is likely that the insurance provision is written in favour of them and not you. Often, the conditions under the provision are so unfavourable that it would make it impossible for your insurer to agree to the terms. Consequently, if you were to sign a contract without reviewing, negotiating and/or deleting the unreasonable insurance terms, it may jeopordise or invalidate any insurance claim in relation to the contract which you may be required to make. If this happens, you could find yourself significantly out-of-pocket for expenses which would normally be covered by your insurance.

Given the trying times of COVID-19, we expect to see a rise in commercial contract insurance claims. Accordingly, it is critical that you carefully consider and collaborate with your insurance broker in relation to any insurance requirements before executing a contract. Alternatively, if you find you have already entered a contract and you now realise the insurance terms are not achievable, we strongly suggest you re-negotiate the terms immediately.

 

3. Know how you can vary your contracts?

 

When an unexpected event occurs, it may effect your ability to perform your obligations under the contract to their full effect. Accordingly, you may want to be able to negotiate a variation to the contract. This means that you could potentially vary the contract to terms which are achievable in the new unforeseen circumstances and, if the variation is agreed, you will not be liable to the other party for breach of contract for not meeting your obligations as had been originally agreed.

A variation to a contract can occur when the parties agree to do something different from what is set out in the original agreement, but the general terms of the agreement are otherwise the same. Normally, the contract will have a provision which sets out on what terms the parties may vary the contract. Usually there will be a requirement for both parties to agree and that the variation be recorded in writing. A well drafted variation clause will allow you to nominate a variation which consent to the variation cannot be unreasonably withheld by the other party. This will make it harder for the other party to deny your variation request when the basis of the request was an unforeseen circumstance.

If you do not have a variation clause in your contracts, we suggest amending or renegotiating your contract to include this.

 

4. Communication 

 

Finally, communication is key, and we cannot strongly recommend enough that you regularly communicate with your contracting parties about any uncertainties you have surrounding your contracts.

Should you be experiencing difficulty in fulfilling any contractual obligations or you are considering entering a new contract, please do not hesitate to contact us on (08) 8333 2130. Clarke Hemmerling Lawyers can assist you to provide a review and advice on contracts and also to negotiate terms on your behalf.

Michelle Moore

Ph: (08) 8333 2130

This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you.  Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.