31/03/2020

There are a variety of contractual clauses that may give a contracting party relief from performance in the event they are affected by COVID-19.  This includes clauses relating to force majeure, extensions of time, service-level exceptions and service exclusions.  Typically, these clauses are designed to deal with external events which experience has taught may possibly arise, but are unknown at the time the contract is entered into.

But what happens if you enter into a contract after the relevant event has taken hold?  If you enter into a contract now, would you still be entitled to relief under the contract if you are affected by COVID-19?

As with most things contract-related, the drafting is key.  Although it may seem logical that if a party enters a new arrangement despite being aware of prevailing circumstances that it should be considered to have accepted any increased burden of performance, the courts have stated that there is no absolute rule to this effect.

So in Reardon Smith Line Ltd v Ministry of Agriculture1a party successfully invoked a port strike as a force majeure event despite the strike having begun prior to execution of the contract.  Here, the duration of the strike was unknown and could not be ascertained (even by informed observers), the court concluded that relief ought to be granted when the strike continued for longer than was ever anticipated.

Even though Reardon Smith was able to obtain relief, litigation may have been avoided entirely had the parties specifically addressed the on-going strike in their agreement 

What this means for contracts being entered into now?

Contracts that are being entered into now, which are at risk of being affected by COVID-19, ought to expressly deal with how COVID-19 caused delays / issues are to be addressed.  Some things to consider include:>

  1. What are the parameters under which relief will be granted for COVID-19 (for example, contractual relief only where the delay has continued beyond 3 months);

  2. Do you need to comply with ordinary notice requirements  (see our previous article on the importance of this); and

  3. When is termination because of COVID-19 permitted? This is significant both for suppliers who are hindered in performance but also customers who may need to cancel projects as a result of circumstances or changing business priorities.

Contracting parties ought to be aware that they may not be able to rely on generally expressed force majeure, extension of time or other clauses in contracts entered into from now on – the risk being that a court will find that the risks of COVID-19 have been factored into the commercial bargain, such that those kinds of clauses are not to apply.

Andrew Hii, Mark Ferguson, Bryce Craig


[1] Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1962] 1 QB 42.

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Our COVID-19 hub collates important articles and legal advice on various aspects of COVID-19 on how it may impact your business.