As the Coronavirus pandemic sweeps across the globe, many Australian businesses are experiencing unprecedented levels of disruption.  This is due, in large part, to measures introduced by Australian and foreign governments to control the spread of the Coronavirus, including travel bans, geographic lock downs and social distancing and quarantine/isolation requirements.  These measures have disrupted supply chains within Australia and globally, and the ability of individuals to travel freely, both within and outside Australia.

In this environment, the ability of individuals and entities to comply with ongoing contractual obligations may be severely tested, and in some cases, may be rendered impossible.  Even though the occurrence of a global pandemic could not reasonably have been foreseen by parties to a contract, a party that is unable to comply with its contractual obligations due to the effects of the Coronavirus pandemic may, depending on the terms of the relevant contract, still be in breach of the contract and liable to compensate the counterparty for the counterparty’s resulting losses.

Since the effects of the Coronavirus pandemic will likely linger for the foreseeable future, it is important that parties under a contract take immediate steps to head-off any issues that may arise.  We would recommend taking the following actions:

Undertake a review of active contracts

Now is the time to undertake a review of your active contracts, with the assistance of your lawyers, to identify the options or remedies that are available if either you, or a counterparty, cannot comply with contractual obligations in the current circumstances.

Some key things to look out for in a contract review are:

• Force majeure provisions that allow a party to delay the performance of contractual obligations due to the occurrence of an event beyond its reasonable anticipation or control and which prevents it from performing those obligations.  Generally, the occurrence of a global pandemic would ordinarily fall within a broadly drafted force majeure provision, but it is important to check the definition carefully.  It is also important to understand the precise steps required for a party to validly rely on a force majeure provision and to follow them as required under the contract.
• Delay or extension of time provisions that entitle a party to a delay, or an extension of time, in complying with contractual obligations, as a result of specified events occurring.  Checking these specified events will be critical to determining whether or not one or more of them would apply in the current circumstances.  Equally important is understanding the precise steps that a party seeking to rely on the benefit of these provisions must follow.
• Default provisions, which specify the circumstances in which one or more parties will be in breach of the contract.  A failure to comply with any provisions of a contract is a common event of default.  For example, in an equipment supply contract, a failure to deliver the relevant equipment to the purchaser by a specified date would ordinarily be an event of default under that contract.
• Termination provisions, which provide for the termination of a contract by a non-defaulting party if an event of default occurs in relation to the defaulting party.  Ordinarily, being in breach of a contract, and failing to remedy the breach within a specified period (if the breach is capable of remedy), will entitle the non-defaulting party to terminate the contract.  Some contracts may also provide a non-defaulting party with a right to terminate the contract if the defaulting party is unable to comply with one or more of its obligations under the contract for a specified period of time due to events beyond the defaulting party’s reasonable control.  One of the consequences of a non-defaulting party terminating a contract due to an event of default occurring in respect of the defaulting party is that the non-defaulting party can seek to recover, from the defaulting party, its losses arising from the termination of the contract.

Regular communication with counterparties

Keep in regular contact with the other party(ies) to your contract and notify them as soon as possible if you suspect, or expect, that you may not be able to comply with any obligations due to the effects of the Coronavirus pandemic.

Notifying your counterparties early may enable them to take steps to minimise or eliminate any adverse effects that they may experience if you are unable to perform one or more contractual obligations.  This may help generate and maintain goodwill between the parties, which may be required if you need the counterparty’s co-operation to amend the contract to accommodate the difficulties you are experiencing.

The contract may also contain a specific requirement requiring you to notify the counterparty in writing if you suspect, or expect, that you may not be able to comply with any obligations under the contract.  A failure to do so may constitute an event of default.

Take action to mitigate any losses

It is not just the party that may be prevented from complying with its contractual obligations due to the Coronavirus pandemic that should take some action.  If you anticipate that the counterparty to your contract may experience difficulties in complying with the contract due to the Coronavirus pandemic, you should take active steps to minimise the losses you may suffer as a result. 

Not only is this a prudent commercial approach to take, it is also required by law in many instances.  Even if the counterparty breaches the contract and you are entitled to terminate the contract and recover from the counterparty the losses you have suffered as a result, you may be prevented under law from recovering any losses that you would not have suffered had you taken reasonable steps to minimise your losses.

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If you have any questions regarding the drafting of, or compliance with, any commercial contracts given the effects of the Coronavirus pandemic, please get in touch with Ken Gitahi or one of the other Sierra Legal team members – https://www.sierralegal.com.au/team.