Have you got a COVID-19 clause in your commercial contracts?

What has become very obvious during the period the country has essentially been in lockdown mode as a result of the COVID-19 pandemic is that the pace of completing a business transaction in Australia has slowed considerably. This has led to a situation where delays are now more the rule rather than the exception.

While this is perhaps more evident in property sales and purchases, it also applies to other supply contracts, particularly where there is a financier involved in either approving funding for the buyer or releasing securities for the seller. Our recent experience is that instead of taking the usual 14-day period to approve finance for a buyer with completion of the contract taking place 14-days or so later, it is not uncommon now to see a finance approval period be more like 30-days with a further 30-days for the transaction to be completed. It is far too easy to say that banks and other financiers are the source of this problem because the reality is that all businesses, whether big or small, are operating in a completely unfamiliar and high risk environment.

The principal risk to the parties in a commercial transaction where time is usually expressed to be of the essence of the contract (meaning that time limits must be strictly observed, failing which the non-defaulting party can terminate the contract and retain any deposit moneys or other payments made) is as follows:

  • for the seller – where its bank or financier is unable to provide releases of its securities on the day completion of the contract is to take place; and
  • for the buyer – where its bank or financier is not in a position to provide the funds which have been approved on the completion date of the contract (usually because there has been a delay in having the buyer sign all the necessary security documents).

In order to avoid the prospect of a contract being terminated unilaterally in circumstances such as these while there are Government directives in place because of a declaration by a body such as the World Health Organization, it has become both common and important for a variety of commercial contracts to contain a provision stating that a party will be given a reasonable extension of time to comply with an obligation it has under the contract if the delay can be reasonably determined to have been caused by a Government directive.

While many standard contracts for the sale of land in Queensland contain a clause which provides for a reasonable extension of time to be given to a party which has failed to comply with an obligation within the nominated time frame because of what is commonly known as an “act of God”, our view is that the wording of the particular clause does not go far enough to protect someone who is delayed from doing something solely because of the current COVID-19 Government directives.

If you are in any doubt as to what protection you need to have in your commercial contracts at the present time, please contact Thynne + Macartney’s Agribusiness Group.

This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.

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