Force Majeure, Contracts and COVID-19

COVID-19 was notified first of all to the World Health Organisation (WHO) in December
2019. It wasn’t declared a pandemic for a few weeks after and by that time it was wreaking
havoc in Italy to the horror of the world. Following this and after observing the effects of
the full force of it in Italy countries immediately adopted measures to limit the spread
globally. That has meant banning flights first of all from the countries reporting high levels
of infections and in some cases fatalities like China, South Korea, and Iran. It was even too
late for some countries which found cases of COVID-19 originating from Iran already
initiating clusters of the virus in their communities.

It wasn’t until mid-March that concerned countries began ramping up restrictions which
affected both domestic and international trade. This included only allowing entry to
citizens and permanent residents of a country and in the case of Australia banning
Australians from departing. This has resulted in many airlines coming to a complete
standstill.

What is the big unknown is what is called force majeure or the contractual rights of
companies when they are forced to cease trading and honour contractual agreements. The
world is interconnected in so many ways these days that closing borders can have a
profound effect on delivering products to countries many of which are essentials.

Tourism from China into Australia raises A$11.3 billion annually. International students
bring in A$32.4 billion, which calculated in export terms has a value equivalent to 8 per
cent of the country’s exports. This is just the tip of the iceberg. Force majeure is a
commercial agreement drawn up between contracting parties. Many contracts and the
majority of international trade contracts include a clause for force majeure. Typically, the
intention of the clause covering force majeure is to let off contracting parties from their
contractual obligations and any liabilities when they are unable to satisfy a contractual
obligation due to events often beyond their control.

Explaining force majeure clauses

Let’s use a simple example before going into the issue of COVID-19 and its effects on
contractual responsibilities. The recent summer bushfires in Australia have provided many
examples of situations in which existing contracts have been suspended because a
particular business has been burned down. Let’s say that a building firm has been given the
contract to erect a sports centre in a town somewhere in rural New South Wales. The
centre is half built when one of the season’s fires sweeps through destroying what has been
built together with materials stockpiled for completion. It’s no-one’s fault. It’s a force
majeure situation, which as long as there was a ‘force majeure’ clause in the contract,
basically suspends the contract without financial obligation by either party. Whether either
party gets their money back depends on their respective insurance policies, not on an
interpretation of the contract between them. If the builder had failed to complete the
centre by a date specified in the contract because of incompetence then this could hardly be considered a force majeure exclusion.

The effects of COVID-19 will have massive effects on legal contracts everywhere around the
world. The possibility that a pandemic of this widespread nature at this particular time
could have been predicted is small enough to say with some confidence that this is a force
majeure situation. The actual effect on individual contracts will depend on whether there is
a force majeure clause in those individual contracts and legislation in the jurisdictions
involved.

In conclusion, force majeure situations are very real, which is why they are commonly
included in a clause in a legal contract between two parties. Force majeure clauses allow
liability by one or another of the parties to be suspended if conditions exist which couldn’t
have been predicted in advance. In Australia, force majeure state legislation exists which
upholds the use of force majeure clauses when contracts are broken or suspended.