The current COVID-19 crisis has highlighted how many contractual rights and obligations can be impacted by circumstances outside a parties’ control. Some contracts do not contain adequate protections to respond to these situations, leading to instances where parties are in a breach of contractual obligations and potentially exposed to claims for damages or termination. We have compiled a checklist of important considerations and clauses that may help below.
REMEMBER: you should ensure that any contracts currently being negotiated have adequate protections and flexibility to deal with this (and any potential future) crisis, and associated flow-on effects, to help you come out the other side with your contractual relationships intact when normality resumes.
| Supply of goods agreements |
- Ensure the contract covers what happens if the supplier’s ability to maintain supply levels is adversely impacted (e.g. transportation of the goods is unavailable)
- Consider the ability to pass through cost increases outside the supplier’s control (e.g. third parties charging the supplier more)
- Consider the potential impact of anything that prevents the customer from switching to an alternative supplier (exclusivity arrangements)
|
| Services agreements |
- Consider to what extent the service can be provided remotely, and the potential impact on the timeliness, cost or quality of the service
- Consider what is to occur if the provider is unable to deliver the service, (e.g. switching to another service provider)
|
| Interim performance obligations |
- Clearly set out the parties’ interim rights and obligations during a period of interruption, such as the COVID-19 crisis
- Consider agreeing a roadmap to “ramp-up” those rights and obligations back to “normal” and each party’s expectations as interruptions (such as government measures) begin to ease
|
| Contingencies in case of escalating government measures |
- Set out each party’s rights and obligations in case of increased government restrictions
- Consider what to do if a business is required to close or operate differently under a government “lockdown” or if they voluntarily close operations due to an infection or on a precautionary basis
|
| Force majeure clause |
- Having considered the above, less reliance may be placed on force majeure (which may not be the best commercial outcome)
- Ensure any force majeure definition refers to “pandemics”, “quarantine restrictions” and “acts of government”
- Consider whether the clause should apply if a party is prevented from performing their obligations, or where their obligations have merely been “affected” or “hindered”
- Include express mitigation obligations for the affected party to take “all reasonable steps”
- Consider what relief is granted? Immediate suspension or termination, or termination after a certain period of time has elapsed?
- Ensure strict notice requirements to prevent further losses
|
| Change in law clause |
- Consider the need for an express clause dealing with what happens when a change of law leads to performance being adversely affected or becoming unlawful
- Provide a process for the parties to agree to amendments that make performance “normal” or lawful again
|
| Extension of time clause |
- Provide a process for a party to request for an extension of time for performance
- Agree any consequences for delays upfront
|
| |
|
These updates are applicable to Australian law only and are generic in nature. If you have any specific legal concerns relating to the impact of COVID-19 on your people or your business, please reach out to our pro bono team (ausprobono@nortonrosefulbright.com) and we will consider your pro bono legal request. If we aren’t able to help you, we will try to find someone else who can. This update is current as at 21 April 2020.
