COVID-19 corporate update

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1. Does COVID-19 excuse non-performance under an agreement by either contracting party?

As the coronavirus continues to spread in Australia and worldwide and having been declared a “pandemic” by the World Health Organization (WHO), we’re beginning to witness the commercial effects, such as supply chain disruptions and cancellation of conferences and travel for business meetings. We’ve been counseling a number of clients who have been faced with these situations, and the question is always the same: Does the coronavirus excuse non-performance under the relevant agreement by either contracting party?

The short answer is that it depends on the specific terms of the agreement and the relevant facts. The first step is to review the terms of the relevant agreement. Does it contain a force majeure clause? This is a clause that excuses non-performance typically where circumstances make performance impossible. Depending on its extent, the force majeure clause could allow the parties to suspend performance or terminate the agreement where performance is affected by COVID-19 (for example, travel bans).

Australian Courts interpret force majeure clauses narrowly and in the event of any ambiguity, the court is likely to choose the interpretation that is less favourable to the party seeking to rely upon it. The party seeking to have its performance excused by force majeure must demonstrate the existence of a force majeure event and that it engaged in efforts to fulfil its contractual obligation but was unable to do so. Ordinarily, the force majeure clause must include the specific event that is claimed to have prevented performance. If the clause also includes a “catchall,” Australian courts generally confine it to mean only things of the same kind or nature as the particular matters listed in the agreement. In addition, force majeure clauses apply only to events that neither party could reasonably foresee or guard against in the agreement. In Australia the mere fact that performance may be uneconomical is not likely to be sufficient to give rise to a successful claim for force majeure.

If your agreement does not contain a force majeure clause, or the clause is too one-sided, or for some other reason is not triggered by the coronavirus, that should not end the analysis. The law provides additional defences to non-performance, namely frustration of purpose of the contract.

Finally, you should consider whether your company’s commercial insurance may apply and then provide timely notice to your insurer or broker that you will be making a claim.

Invoking a force majeure clause or the defence of frustration requires careful analysis. We recommend that you seek legal advice, as improperly invoking the force majeure clause or another defense to non-performance could itself amount to a breach of contract, potentially entitling the other party to damages or the right to terminate the contact.

2. Who may be considered an Officer – High Court provides clarification on test - ASIC v King

The High Court has provided clarification that even if a person does not have a formal title of an “office holder” or if they do not have a function role or position in within the management of the company they may still be considered to be an officer of a company and have corresponding duties and responsibilities.

In determining who is an officer, the court will apply a test of fact and degree, and will not construe the matter narrowly. Those who actually determine the course of a company’s financial affairs will not be able to avoid responsibility for their conduct by simply deliberately avoiding any formal title. This has particular relevance for corporate groups.

The High Court also clarified that external consultants and advisors, or bankers will likely only be considered officers if they are in fact involved in the management of the corporation and are able to ensure that the advice will be implemented. This means that lenders who are actively managing the way a company attempts to work its way out of financial distress should take care to ensure that they are not inadvertently captured as officers of a company.

In King, the CEO of the MFS Group of companies (King) directed an entity of which he was not a director to borrow AU$147.5 million which was subsequently used to pay debts owed by other entities in the MFS Group. The MFS Group subsequently entered into administration and collapsed. King was found to be an officer of the borrowing entity.

We expect that as a result of this decision, ASIC and other regulators will more aggressively pursue potential breaches of directors’ duties under s180 or s601FD of the Corporations Act in respect of individuals within a corporate group and/or those who may have influence over a company’s affairs.

3. FIRB Regulatory development – Higher thresholds for private investors from Hong Kong and Peru

Following the coming into force of Australia-Hong Kong and Peru-Australia free trade agreements, privately owned investors from Hong Kong and Peru acquiring non-sensitive businesses or developed commercial land will now be subject to the higher threshold of AU$1.192 billion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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