Coronavirus Legal Alert: Disruptions to Contracts and the METS industry
With the COVID-19 coronavirus outbreak continuing to unfold across the globe, the METS industry has not been invulnerable to the effects of the pandemic, as global supply chains and other commercial agreements are subject to great pressure. Many of our clients in the METS industry have already approached us regarding some of the potential legal impacts of the pandemic, with one of the key concerns that industry players have been raising is the impact on the performance of contracts. In today’s brief, we will discuss some of the key clauses to be aware of, and some practical solutions on how to deal with disruptions to the performance of contracts.
Disruptions to the Supply Chain
The kinds of disruptions that the METS industry will face will not be isolated to just sick staff. Many Australian companies are already having difficulty fulfilling business contracts. As one example, this has been seen with businesses trying to replace computer servers with companies like Intel, whose plants are partially closed across China meaning they are facing difficulties meeting orders on time. This has a flow-on effect to their Australian customers who may not be able to provide their own services if their IT systems aren’t functioning properly.
An industry like the METS industry, which is so tech-focused and furthermore often reliant on China, has the potential to be disproportionately affected by these kinds of issues in comparison to the average company. Disruptions to the supply chain are expected to continue for the foreseeable future, with lockdowns, quarantines, travel bans and a reduction in economic growth expected to combine to have a significant impact on the METS and mining industries.
Seeking Relief under a Contract – Force Majeure
When issues like coronavirus arise, what happens to business arrangements will depend a lot on the private contracts between the parties. Typically, contracts will provide for “acts of god” under the force majeure clause.
Now is the time to be reviewing contracts so companies know how force majeure may impact their rights and obligations under a contract. The following are some of the key questions to ask when reviewing your contract:
- Does it recognise the coronavirus as force majeure?The exact wording of force majeure provisions can vary a lot from contract to contract, sometimes being more generic in nature (such as “acts of God”) or perhaps giving a detailed list of possible scenarios. Typical disasters such as fires, floods, terrorist acts, and similar are typical items, while public health crises and virus outbreaks are far less common and careful attention will need to be paid to confirm that they are covered.
- What kind of notice is required?If a party does wish to seek relief under a force majeure provision, then it will subsequently need to comply with the notice requirements. Typically, it will need to provide details to the other side of how it is affected, what impacts this will have on performance, and the expected length of potential delays.
- What does it say about mitigating?Force majeure is not a get out of jail free card. Affected parties are generally expressly required by the contract to mitigate the impact of the event on its ability to perform the contract and meet its obligations.
- What options for relief and termination are available?While these clauses will vary depending on the exact nature of the contract, generally options for relief will last only for the time of the actual delay caused by the event. On the other hand, termination rights will likely be reserved for the most extreme circumstances where the event is of an ongoing nature (this will also depend on the nature of the contract).
What are the Solutions?
Our firm is all about achieving commercial legal outcomes for our clients. Firstly, for any business relationship where there is the potential for impact due to the coronavirus spread (particularly where you are relying on parts or services that may come or rely on aspects from abroad) you should already be dusting off your old contracts and getting your solicitor to look over them so you are prepared in case you can’t fulfil the contract as it is written, or alternatively if one of your contractors is unable to meet their own obligations. Depending on what the contract provides, you may have a range of options for relief, such as rescinding, delaying, or otherwise modifying the contract and its performance.
The worst-case scenario for most METS companies will be the possibility of contracts being terminated. In our experience, METS companies will favour trying to continue with business as normal as much as possible, preferring instead to manage compliance with contracts where they may be affected. In contracts that do not provide for force majeure due to a public health crisis, you will likely need to negotiate the issue with the other party to the contract. We recommend being proactive and reaching out to the other side early to work through any existing or expected issues with completing contracts, and that all business actors adopt an understanding attitude. Our team is “commercially minded” and very experienced in negotiating these kinds of situations, and have many times been able to avoid unnecessary litigation for our clients (which will regularly not only not be able to provide the best commercial solution, but will also likely be extremely costly and huge distraction). Litigation should be the absolute last option, not first or second…!
On the other hand, if you think you may be forced to breach the contract, it is important that you mitigate the breach and plan for the impacts this may have on contractual aspects such as bank guarantees, bonds and damages.
If your business is reliant on contractors and suppliers, it is a good idea to seek information from these parties and encourage open communication so you can prepare as much as possible for any delays or disruptions.
Finally, if your existing contracts haven’t adequately dealt with an event like coronavirus as part of force majeure, you should mitigate this issue when negotiating future contracts.
The potential for Coronavirus to cause significant disruption to METS industry should not be underestimated. It is important that the industry and all companies move immediately to prepare themselves and ensure they understand how their business and contracts may be affected. If you are concerned about the impact of coronavirus on your company and its contractual rights and obligations in Australia and globally, we encourage you to get in touch with our experienced team today.
Harris Gomez Group is an Australian law firm and Austmine member with 25 years experience based in Sydney, with sister offices in Santiago and Bogotá. We specialise in technology law, cross-border issues and corporations law. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.
To better understand how we can support your management team, please contact Harris Gomez at firstname.lastname@example.org
Our Sydney office is located at Level 7, 92 Pitt Street, Sydney NSW 2000