Could Covid-19 allow you to renegotiate contracts?
01 May 2020
The Covid-19 pandemic may provide you with an opportunity to renegotiate your company’s contractual obligations.
“Many affected businesses are finding themselves asking questions regarding their contractual obligations: Can I terminate or re-negotiate an existing contract based on the circumstances brought by Covid-19? Or, how should I deal with breaches of existing contracts by the other party?” say solicitor Jennifer Kwaan and principal Sylvie Tso, both lawyers at Spruson & Ferguson in Sydney.
Whether a contract caters for the current unprecedented environment will depend on the terms and wording of the contract, say Kwaan and Tso, writing in a client alert. “There has been much discussion about ‘force majeure’ and the doctrine of frustration, and it is important that businesses are aware of their rights and options when facing these uncertain times.”
Many contracts and agreements contain a force majeure provision, they say, explaining that a force majeure provision in a contract excuses a party from contractual obligations and liabilities as a result of an event or circumstance outside the reasonable control of the affected party during the affected period. But, they note, in Australia, a force majeure provision is the result of commercial agreement and is not codified in law.
“The scope and effect of a force majeure provision is dependent on the wording of the contract and needs to be determined on a case-by-case basis,” they say.
Whether Covid-19 will trigger a force majeure provision will apply, in Australia, if the provision specifically refers to “infectious disease,” “pandemic” or similar, they say.
“It can also be argued that the disruptions brought by Covid-19 may also indirectly lead to the occurrence of other events such as ‘government action,’ ‘labour shortages,’ ‘lock down’ and ‘national emergency’ which may be referred to specifically under the definition of force majeure.”
Kwaan and Tso says that general catch all wording such as “events outside the reasonable control of the parties” or “act of God” may also be construed to cover the current pandemic.
Whether or not your company’s contracts can be renegotiated as a result of the pandemic, they suggest that businesses who find themselves unable to fulfil their contractual obligations as a result of Covid-19 should first contact the other party to negotiate a compromise. “Most contracts provide a means for parties to vary or renegotiate terms,” they say.
Kwaan and Tso provide an analysis of when contracts may be able to be renegotiated, along with tips for renegotiation, in their client alert.
Gregory Glass
