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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Australia | Publication | March 2020
With the Prime Minister announcing on 18 March 2020 that Australian measures to combat the spread of COVID-19 (novel coronavirus) may be in place for at least 6 months, the need for Australian businesses to stabilise their supply chains and contractual relationships in order to see out the crisis is abundantly clear.
This article explores how businesses might navigate contractual obligations that are affected by COVID-19 and provides tips for negotiating contracts during these unprecedented times.
COVID-19 is likely to affect all businesses across all industry sectors. In some cases, both parties to a contract may be in breach of its terms due to COVID-19, and each will certainly have its own concerns regarding business continuity.
Accordingly, many businesses will first attempt a negotiated interim solution. If you are exploring this option, carefully consider how to do so without compromising your rights. For example, you may lose contractual rights if you fail to notify the counterparty promptly of your intent to exercise them.1
If performance of a contract is affected by COVID-19, you may be able to rely on the contract’s force majeure clause, if one has been included.
The purpose of force majeure clauses is to protect the parties from events that are agreed to be outside normal business risk. Force majeure clauses excuse the performance of contractual obligations if specified events outside the parties’ control have prevented such performance. If successfully invoked, the clause relieves a party from the performance of its obligations under the contract, thereby avoiding a breach.
Unlike some jurisdictions, ‘force majeure’ is not a legal doctrine in Australia. It is a contractual right only, meaning that whether a ‘force majeure event’ excuses performance of obligations is wholly dependent on the wording of the relevant clause(s) of the contract.
The following points are relevant when seeking to rely on a force majeure clause to avoid what would otherwise be a breach of contract during the current pandemic:
If you cannot perform a contract because of a radical change in circumstances, so radical that the situation is now fundamentally different to what the parties had in mind, the contract may be discharged for frustration.4
A contract is not frustrated if it merely becomes more difficult or expensive to perform. Because the parties’ precise arrangements and communications are highly relevant, the same incident could frustrate some contracts but not others.
For example, a wave of contract cases ensued from delays to the coronation of King Edward VII in 1902. Some contracts were not frustrated (eg. a planned naval fleet tour could proceed as a day cruise even though the coronation was delayed), whereas others were frustrated when the contract’s underlying purpose was destroyed.5
At common law, a frustrated contract is terminated automatically, but this does not affect rights and obligations accrued before termination. However, discharge for frustration is governed not only by common law, but also by legislation in several States.6 Obtaining a complete picture of potential rights and obligations if a contract is frustrated therefore requires reference to the contract’s governing law.
It is important to be clear about the basis of your rights before invoking a force majeure clause or claiming that a contract is frustrated. Doing so invalidly may be deemed a repudiation of the contract and may give the counterparty the right to terminate and claim damages for the loss of the benefit of the contract.
To ensure a consistent strategy is employed with full recognition of the ramifications, including the various reputational and conduct risks, we recommend considering what internal controls will apply to such decisions, and whether a business-wide approach can be implemented.
In the current crisis conditions, both government and the business sector has stressed the need for business (and relationship) continuity, where possible. This thinking also applies to exercising force majeure. Working through the possible consequences of a decision is critical: for example, what might be the status of your business relationship with your counterpart post-force majeure? Is there a possibility of brand damage if you are perceived to exercise force majeure “unfairly”?
In addition, regulated businesses (that are considering force majeure exercise) need to be aware that regulators will be looking closely at commercial decision-making in the current circumstances. How a business’ conduct risk is managed (eg. was the question “should we do this?” asked in relevant circumstances) will be a matter of acute concern for many regulators as they pursue their risk-based supervision mandates.
The most common area of dispute when force majeure is invoked is whether the contract’s force majeure clause in fact captures the event that has occurred. Accurately and contemporaneously documenting both the direct effects of the event (including their duration) and your communications with the counterparty are critical. At the height of the crisis, a party may give acknowledgements of its consequences from which they might seek to resile after it has passed.
Generally, a refusal to accept that there is force majeure (or a claim that it is applicable which is rejected) will constitute a dispute which must be resolved using the process specified in the contract (if any). Ideally, this will require good faith negotiations, and possibly a mediation, before court or arbitral proceedings can be commenced. Even if it does not, the Federal Court and State Court legislation and rules generally oblige parties to explore settlement options before the issue of proceedings.
Resolution of disputes of this nature by informal means or by mediation is consistent with the current business and societal imperative to work co-operatively to maintain normal activity and preserve economic structures as far as possible. If an appeal to your counterparty in those terms does not work, it might be worth pointing out to them that the courts are all basically closed now for the duration anyway!
A contract is not frustrated if the parties could reasonably have foreseen the change in circumstances.7
Exactly when the implications of COVID-19 became sufficiently foreseeable to defeat a claim of frustration could well become the subject of future litigation. However, COVID-19 and its many potential associated disruptions are at least now clearly foreseeable.
It is impossible to know exactly how COVID-19 may continue to affect Australian businesses, but we can take some instruction from the experience in other nations with higher infection counts, as well as public health experts’ predictions.
Accordingly, we recommend including contingencies (ie. cascading provisions dealing with different scenarios) to respond to various COVID-19 related escalations. This approach minimises the risk that you cannot rely on a specific force majeure event, and it also allows the parties to agree tailored solutions rather than relying on a comparatively generic force majeure clause. In effect, terms are drafted which set out the rights and obligations of the parties during the interim period and provide a roadmap to get back to normality once the pandemic abates.
Exactly what events to account for in such provisions will depend on the industry and the nature of the contract, but may include:
The current climate is not permanent, but restrictions may ease only gradually and could be re-introduced if a subsequent outbreak occurs. As part of any contractual negotiations consider:
The current situation faced by contracting parties is unique but that does not mean that parties should act in an irrational manner when deciding what their next step is under an existing contract or negotiating the terms of a new contract. It is important to look closely at the contractual terms and carefully determine how to approach any suspension or alternative arrangements and what to say in any notices or communications to the other party. This can help to ensure that the parties come out the other side of this pandemic with their contractual relationship intact when normality resumes.
Davis Contractors Ltd v Fareham UDC [1956] AC 696, Lord Radcliffe at 729, adopted in Brisbane CC v Group Projects Pty Ltd (1979) 145 CLR 143 and Codelfa Construction Pty Ltd v State Rail Authority (NSW) (Codelfa Case/Eastern Suburbs Railway Case) (1982) 149 CLR 337.
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Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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