The Coronavirus (COVID-19): How the Pandemic may affect contracting and businesses

Nicole Flory, Lawyer MST Lawyers, Evelyn Marcou, Senior Associate, MST Lawyers and

 Philip Colman, Principal, MST Lawyers, Raynia Theodore, Principal, MST Lawyers

Introduction

On 11 March 2020, in an unprecedented move, the World Health Organisation (WHO) declared the Coronavirus (COVID-19) a pandemic. As COVID-19 continues to spread globally, governments, businesses and other organisations alike are racing to implement measures such as travel bans, trade restrictions, lock downs, social isolation and school and workplace closures in a bid to slow the transmission of the virus as numbers escalate.

Whilst the impacts of COVID-19 on businesses remain uncertain, businesses, landlords and tenants should be preparing for significant disruptions, cancellation of non-essential services and interruptions to supply chains. Accordingly, all businesses should be seeking advice and reviewing their commercial contracts to ensure they understand their rights and obligations.

Our firm has been receiving enquiries from businesses concerned with the effects of any actions taken in response to COVID-19 and seeking information about:

  • contractual rights under possible force majeure clauses contained in commercial contracts and franchise agreements;
  • common law/statutory rights (frustration, insurance);
  • commercial leasing provisions and rent abatements;
  • rights in relation to refunds; and
  • financial distress and the hardship provisions contained under the Banking Code of Conduct.

As such this article will attempt to deal with the key questions and provide a general overview of how your commercial contracts may be affected by the current Pandemic and what you should be doing to reduce its effects and risks to your business.

Commercial Contracting – Force Majeure Clauses

Force majeure clauses are included in contracts to provide for situations where a party is prevented from performing their contractual obligations due to events or circumstances beyond their control. Force majeure clauses differ from contract to contract and across all jurisdictions, therefore, you must always look to the specific terms and clauses in your contracts and seek legal advice before taking any action.  Many commercial contracts include force majeure provisions however, this is not always the case.  As a rule they will not be implied into contracts if they are not present.

The questions you should be asking are:

  1. Does my contract contain a force majeure clause and if so what does it say?
  2. If so, does COVID-19 fall within the definition of a force majeure event?
  3. If so, has the force majeure clause been triggered and what can I do about it?
  4. If no force majeure clause is included in your contract, does the contract provide any other rights?
  5. Can I rely on common law or a statutory provision to preserve or enforce my rights?

What is a force majeure triggering event?

Generally, a force majeure triggering event is defined either broadly as ‘an event beyond the reasonable control of the parties preventing performance’ or by reference to a specific exhaustive list of events such as floods, fires, acts of god, war etc. Other clauses may also provide for specific delays in supplies, increases to costs and or shortages and interruptions to supply chains, others may expressly exclude events that cause those types of events to a business. It ultimately depends on the nature and terms of your specific contract.

Is COVID-19 a force majeure event?

If your contract possesses a force majeure clause and performance of your contractual obligations becomes impossible (and not merely delayed) because of COVID-19, you will need to determine whether COVID-19 is a force majeure event and whether the clause has been triggered. 

For COVID-19 to be considered a force majeure a broad definition of a triggering event is required.  Therefore, you should look for terms in your contracts such as ‘epidemics’, ‘pandemics’, any health related events, ‘government actions’ or ‘acts of god’ as these would likely cover COVID-19 as a triggering event.

As a force majeure clause operates to relieve a party of its contractual obligations, you will need to determine the extent of your rights and obligations and any actions you are required to take.

How to enforce your rights under a force majeure clause

If the force majeure clause is triggered under your contract, you will need to comply with any requirements specified in your contract, in particular any terms surrounding the issuing of notices, the provision of supporting documentation and any attempts to mitigate or reduce loss and damage or the impacts upon your business.  Any party seeking to rely on a force majeure event including the effects of COVID-19 will have the burden of demonstrating the clause has been triggered.

Even if you are able to prove a force majeure event is triggered you will still need to comply with your contractual obligations. The payment of monies will not generally be excused by the occurrence of such an event alone.  Businesses who are required to make payments and whose cash flow may be readily affected by COVID-19, should review their contracts and force majeure clauses carefully, because any failure to pay may be determined to be a breach of contract unless you have reached an alternative arrangement with the other party. Businesses should also ensure any failure to perform contractual obligations does not extend to other obligations unaffected by COVID-19, as this will likely be considered a breach of contract.

What if your contract doesn’t cover COVID-19?

If your contract does not have a force majeure clause or the definitions are not sufficiently broad to cover COVID-19, parties may still be able to rely on a common law claim of frustration.

Frustration occurs where performance of obligations under the contract become impossible to perform.  In order to prove a claim for frustration, you must be able to demonstrate that the event was reasonably unforeseeable and it must prevent performance and not just cause a delay.

Where parties intend to rely only on a common law claim of frustration, the only remedy available will be termination of the contract. If a contract is frustrated both parties will be relieved of the obligations under it and may require return of monies paid or other actions to return the parties to the same situation they were in prior to entering into the contract.  

Rights to Refunds and other Remedies

Under the Australian Consumer Law (ACL) in almost all circumstances, customers are entitled to obtain a full refund where events, travel or products or services are cancelled or unavailable, even if they occur in relation to COVID-19.

On 18 March 2020 the ACCC established guidelines to assist parties to understand their rights in relation to the following matters:

Event Cancellation

Under current recommendations from Australia’s Chief Medical Officer, the Prime Minister together with state and territory leaders have advised that all non-essential gatherings of more than 100 people should be cancelled from 17 March 2020.

If your event is cancelled by organisers due to COVID-19 you are entitled to obtain a refund, credit note or voucher in most circumstances.

If the event is cancelled because of implemented government restrictions, this may impact your rights under consumer guarantees, especially where tickets to events have been purchased after knowing about COVID-19. However, you should be relying on the terms and conditions of your tickets where possible.  Consumers should be contact businesses or organisers directly to request refunds.

Under the new guidelines the ACCC is encouraging all businesses to act and treat consumers fairly.

Event related travel and accommodation expenses

If you have purchased tickets to an event that has now been cancelled and you have also purchased travel or accommodation as well, you may be entitled to a refund or other remedy where those services are prepared to offer a replacement service or refund.

You should first check with the travel or accommodation providers as to whether they will offer a refund and or replacement service.

You may also be entitled to compensation under the ACL but only in limited circumstances.  Given that many of the current event cancellations are due to government directed restrictions, it seems unlikely that compensation would be ordered.

Personal decision not to attend event because of COVID-19

If you decide not to attend an event that has not been ordered to cancel because you hold concerns about COVID-19, you may not be entitled to refund as this may be considered “a change of mind”.  If this is the case you should contact the event organiser to see if you are entitled to a refund or partial refund.

If you have a health condition that places you at a higher risk, then again you should contact organisers directly to see if they are willing to offer you a refund or if they can assist in another way.

Travel and Tour Cancellations

If your travel or tour is cancelled by the provider as a result of COVID-19 then you would ordinarily be entitled to a remedy under the ACL.

However, where the cancellation of travel is a result of governmental travel bans or directives you may not be entitled to a refund.  In most circumstances the decision to refund tickets will come directly from the airlines or travel provider who may choose to fully refund or offer alternative flexible ticketing options.  It is hoped that all businesses in the current exceptional circumstances will treat consumers fairly and offer refunds where appropriate.

Financial Distress and Hardship Provisions under the Australian Banking Code of Conduct

If you are currently experiencing financial distress and have commercial loans, lines of credit, overdrafts etc., you may be entitled to seek assistance from your financial institution under its ‘financial hardship provisions’ or through the relief package announced by the Australian Bankers Association for small business.

What is financial hardship?

Financial hardship is defined as occurring when a customer is willing and has the intention to pay, but is unable to meet their repayments or their existing financial obligations due to an event or particular circumstances. 

Financial hardship can include unforeseen circumstances or unexpected events such as:

  • unexpected changes to income or expenditure;
  • changes in employment status;
  • significant life events (relationship breakdown, illness, death);
  • Financial abuse where the liabilities arose as a result of either domestic or family violence;
  • Injury or illness;
  • Emergency event or natural disaster.

What arrangements are available to consumers of financial products under these provisions?

There are various types of hardship arrangements that you can seek from your financial institutions including:

  • Postponed or deferred payments;
  • Capitalising or capping – where arrears are added to the loan balance or the loan term is extended;
  • Loan restructure – often loans are extended out to full term to reduce repayment amounts;
  • Interest only repayments- which alters the loan to repaying the interest only for a specified period;
  • Temporary overdrafts or lines of credit – where a customer can meet required terms, this type of arrangement allows a customer access to additional credit in the short term.
  • Loan Freeze – depending on the circumstances a loan can be frozen and interest and fees do not accumulate, for a period of time to allow a customer to get their situation in order after a significant disruption (i.e. emergency event or natural disaster);
  • Offering other services of money management or banking arrangements – depending on a customer’s circumstances.

Small Business Relief Package

On 20 and 22 March 2020 the Federal Government announced 2 small business relief packages which would include an SME Guarantee Scheme and some cash payments.

The package will allow for the following to occur:

  1. Deferral of principal and interest repayments for all term loans and retail loans to small businesses in all sectors affected by COVID-19 for 6 months (for businesses with less than $3 million in total debt to credit providers);
  2. At the end of the deferral periods businesses will not be required to pay the deferred interest in a lump sum. Either the term of the loan will be extended or the level of loan repayments will be increased.
  3. Cash payments of up to $100,000 to keep employing staff, with the minimum eligible payment of $20,000. Businesses will be able to access the cash refunds from Friday 27 March 2020.

If you require further information about these packages please look at the Australian Banking Association announcement  and the ACCC announcement on this issue.

Corporate Relief Package

Directors of financially distressed businesses operating under company structures will also be comforted as a new proposed package seeking to assist corporate officeholders and reduce the threat of legal action and reduces the risks of insolvency and winding up during the current Pandemic.  The proposed measures include:

  • Temporarily increasing the creditors statutory demand threshold from $2,000 to $20,000;
  • Increasing the statutory demand respond time frame from 21 days to 6 months for companies;
  • Increasing the minimum amount of debt required for a creditor to initiate bankruptcy from $5,000 to $20,000;
  • Increasing the bankruptcy respond time frame from 21 days to 6 months for a debtor
  • Extension of period of protection a post declaration of intention to present a debtor’s petition from 21 days to 6 months; and
  • Temporary relief for directors from any personal liability for trading while insolvent with respect to debts incurred in the ordinary course of business.

The details of these measures are still being settled so seek advice if in any doubt.

Leasing and Rent Abatements

 As the forced closure of restaurants and bars, sporting arena’s, music and theatre events and even public spaces likes galleries public pools, gyms and library’s,  continue to impact commercial operations , businesses should be turning their minds to the key provisions in their commercial leases and be proactive in their response to the COVID-19 Pandemic.

Knowing your rights and Obligations – Existing Lease Arrangements

Parties should be looking at their current leases to determine their rights and obligations with respect to the following issues:

  1. What happens when premises need to be closed temporarily, following a confirmed case of COVID-19 or by forced government closure, which would mean that access to the premises is restricted?
  2. Does the lease provide for rent abatements and if not will the landlord agree to negotiate and mutually agree to abatement for a defined period?
  3. Will the parties agree to an assignment or subletting of the premises?
  4. Do a party’s insurance policies cover and indemnify the usual risks associated with damage, loss or injury caused by the COVID -19 Pandemic?
  5. Will the parties agree to terminate their lease for noncompliance or allow termination if the situation becomes untenable?

Obligations to remain open

Many standard retail and commercial leases contain provisions requiring businesses to remain open and trading during defined hours of operation. The force majeure provisions above, may allow closure where remaining open is no longer possible because of COVID -19, particularly where tenants have a duty to protect the health of staff.

Where the lease does not provide a force majeure clause, it would be particularly difficult to enforce a “remain open” clause or seek payment of a penalty clause against a tenant.   Landlords would be entitled to seek damages against a tenant for failing to remain open, however, a court would not likely enforce payment of any action or penalty, in circumstances where the closure is to protect the staff and community and/or the closure is directed by the Government.

Landlord closure centres of common areas of buildings

If a landlord closes a centre or any common parts of a building, you will need to determine the extent of landlord’s obligations to do so and any potential claims you may have.  If the lease permits a landlord to temporarily close a building and or access to common areas in the interests of public safety and or a government directive,  your rights will be governed by the contract and the force majeure clause(if any) and possibly retail lease laws. If not, you should attempt to negotiate an abatement of rent for the duration of the closed period.

Rental Concessions & Rent Abatements

In accordance with the terms of any lease agreement, the payment of rent is an essential and material term.  The non-payment of rent may have serious repercussions, as it is also common for commercial leases to expressly provide rights to the landlord to terminate the lease and re-enter the premises where any payments on account of rent are more than 14 days late.

Although force majeure clauses may be contained in your lease (the standard LIV Commercial lease does not contain one) it is unlikely that any suspension of payment of rent clause would directly cover this type of situation. As such any failure to pay rent may result in you being in breach of the lease agreement.

Parties should be considering the following matters:

  • how rental payments will be made by businesses if forced closures affect the ability of businesses to remain open and trading ;
  • whether landlords can accelerate payment obligations or draw down on security deposits/bank guarantees for non-payment;
  • whether landlords can enforce their rights for non-payment rent;
  • whether there is any accessible government assistance available to the business or its employees during the COVID-19 Pandemic  at either a federal, state or local level;

If you are finding it difficult to meet your rent and other obligations you should consider contacting your landlord and making a request for a rental concession or rent abatement from your landlord, even if there are no terms in your contract providing for that situation.

Rental Concessions

A rental concession is a compromise of the original rental amount between a landlord and tenant ultimately reducing or abating the rental amount for a period of time. They are often used in slow rental markets or in times of natural disaster or crisis.  Concessions can take the form of rent abatement or reduced rent, reduced security deposits, upgrades to rental property, free access to amenities, some other type of physical good or service arrangement. 

The purpose being that a landlord will agree to terms to entice a tenant to remain in a leased space, or entice a new tenant to enter a lease to attract renters to take up or remain in the property during times of uncertainty.

Therefore parties are advised to contact their landlords or tenants and discuss possible rental concessions. Parties should continue to act reasonably in all circumstances despite the status of the COVID 19 Pandemic.

Rental Abatements

Some commercial leases include clauses permitting tenants to receive rental reductions (and reductions to other payments required under lease) where a tenant cannot reasonably access or use its leased premises for the intended purpose for a period of time.  However, the extent to which a tenant can utilise such clauses because of COVID -19 will depend on the wording of each clause and on the type of contract.

In most cases, such clauses would likely only be relied on where tenants are unable to access their premises because a building or the leased space has sustained some type of damage making it unfit for occupation or use of any kind.   However in light of COVID -19, where buildings and retail spaces may need to be closed to prevent gatherings of more than 100 people and to allow for appropriate social distancing of 1.5 metres to reduce instances of community transmission, it seems unlikely that such clauses could be relied on to obtain occupancy cost relief or abatement.

Where a tenant decides to temporarily shut down its business due to COVID-19

Unless there are express provisions contained in a lease granting permission, tenants seeking to suspend or cease business operations as a direct result of the COVID -19 Pandemic would be required demonstrate to the landlord (prior to closing the doors) a right to do so by pointing to particular provisions in the lease or else the tenant may find themselves in breach of their obligations.

In the specific case of businesses operating within large shopping centres, if a tenant were to close its doors, it could be in breach of its obligations under the retail lease, which include being required to remain open for business during the centre’s ordinary hours of operation.

Where a landlord shuts the premises down

Where a landlord denies access to a building leased by a tenant and loss and damage occurs as a result to the tenant, a tenant is still required to meet its obligations to pay rent under the lease, however in some limited circumstances may be entitled to seek compensation from the landlord under retail lease laws such as section 54 of the Retail Leases Act 2003(Vic) for any loss and damage sustained as a result.

These are unprecedented times and as such landlords and tenants should be communicating with each other, if and as issues arise, so as to be proactive in reaching solutions before they escalate. 

Franchising Issues

The likely impact of COVID -19 on franchising will be seen in the areas of sales and supply chain disruptions.  Some franchisees may attempt to use force majeure clauses to abandon their franchises, especially where any downturn is significant and the situation may continue for extended periods.

If you are a Franchisor

If you are a franchisor, you should be prepared and be reasonable and responsible in dealing with your franchisees at this uncertain time.  In particular you should be:

  1. monitoring and communicating regularly with franchisees to ensure there are no health and welfare issues and ensure they can continue to carry out their franchise functions;
  2. monitoring supply chain networks and ensure all franchisees have sufficient stock and resources to adequately run their businesses;
  3. communicating with franchisees as to any financial concerns and contingency plans they may have;
  4. preparing and arranging a marketing response to the virus;
  5. reviewing any third party agreements with suppliers and prepare any contingency plans as required.

Force Majeure clauses in franchise contracts

Some suppliers may seek to invoke force majeure clauses to avoid fulfilling obligations to franchisors/franchisees. This may leave franchisors with a number of options including:

  1. agreeing and accepting the event and accept the consequences of that under your specific contract;
  2. argue that COVID-19 amounts to a force majeure event under your contract, which may result in litigation and not a timely outcome; or
  3. negotiate a workable solution with suppliers.

Other matters franchisors should consider

  1. making a claim with their insurer;
  2. reviewing contractual provisions and consider redrafting for future agreements;
  3. reviewing current contracts to determine if there are existing rights to credits or payment terms etc;
  4. taking advantage of the force majeure clauses if they are applicable to perhaps get a better deal from elsewhere.

If you are a Franchisee

If you are a franchisee, you should be monitoring and regularly communicating with franchisors and providing updates about your employees and the franchise with regards to the following matters:

  1. health and welfare issues of employees;
  2. stock and supplies to maintain business functions, you should be monitoring your supply chain to ensure you remain stocked and able to run the franchise, especially where you may be reliant on overseas stock to come into Australia;
  3. communicating any financial concerns and any contingency plans for the business you may have with the franchisors;
  4. assisting franchisors prepare and arrange a marketing response to the virus (if required);
  5. reviewing any third party agreements you may have in place.

Parties should continue to be reasonable in these uncertain times and not rush to enforce their rights, unless absolutely necessary.

What Next?

COVID-19’s global impact is uncertain, although it is already evident its impact will cause major disruptions to all business and commercial contracts which will in itself have long lasting effects.

Our Litigation, Property and Franchising teams are here to assist with all of your legal concerns, if you need assistance in asserting and enforcing your rights under your commercial agreements.  If you are considering claiming a force majeure event, you should consider speaking to our team directly before taking any action to ensure you understand your rights and obligations before taking any action.  We are also well equipped to assist you with holding any discussions or negotiations with contracting parties

Even if COVID-19 is not directly affecting your business at this point in time, now is a good time to review your existing agreements. Similarly, if you are considering entering into new contractual arrangements you should be prepared to negotiate and contract around COVID-19 accepting and allowing for potential disruptions to supply chains, markets or materials and we can assist you with those needs.

Contact us now on +61 3 8540 0200  for a discussion on how COVID-19 could affect your business or contract so we can give you a full assessment of your rights and obligations.