Contractual Obligations in the wake of Covid-19
The coronavirus (COVID-19) presents numerous challenges for individuals and businesses, amongst them, the legal rights and responsibilities under existing contracts during a pandemic such as this.
Parties to a contract that are facing difficulties in meeting their obligations may be anxious about their legal position in such circumstances.
Some contracts may provide specific rights for parties to delay performance of their obligations or terminate a contract due to certain conditions, however, these must be carefully scrutinised before taking such action.
The individual circumstances of each case and the law at the relevant time must be considered before an informed decision can be made.
Below we discuss the concepts of Force Majeure and Frustration. Force majeure is a contractual right which essentially frees the parties from liability, or an obligation under a contract, should an event (such as war, acts of god and/or a government action) occur which is completely out of the parties control. Frustration however is not a contractual right; it is a concept recognised by common law and operates to bring a contract to an end.
Commercial agreements may include 'force majeure' clauses which operate to suspend a contract and / or eventually bring it to an end if a specified situation occurs, and continues to occur, that is out of the parties' control.
Specified events may include things such as natural disasters, war or public emergency. The words used in such a clause will determine whether a pandemic like the coronavirus will constitute a force majeure event enabling the contract to be suspended or terminated.
Many standard contracts would not specifically include the word ‘pandemic’ as a force majeure event and each contract must be assessed in light of the provisions, the surrounding circumstances and with reference to case law.
Failing the inclusion of specific clauses, general contract law (and legislation in some states) provides that a contract may be 'frustrated' by events beyond the parties' control which make its performance impossible or makes the contractual obligations fundamentally different. Examples include changes in the law that make performance of the contract illegal or physical destruction of the subject matter.
The doctrine of frustration operates when events occurring subsequent to the contract's formation render the agreement 'radically and fundamentally' different to the parties' expectations. The frustrating event must occur through no fault of the parties who, because of it, are now unable to perform their obligations.
Case law provides examples of frustration, however, traditionally, the doctrine operates in very limited circumstances and can be difficult to establish. The doctrine will not apply in circumstances where performance of the contract is merely more expensive or onerous than originally anticipated - performance of the contract must become literally impossible. Given these limitations and the uncertainty of establishing frustration, it is preferable to rely on express contractual rights to delay or terminate a contract, if applicable.
What should you do?
If you are having difficulty performing your obligations under a contract, or are considering terminating a contract, you should obtain urgent advice regarding your legal rights and the ramifications of termination.
Threatening to terminate a contract without sufficient legal cause may be considered wrongful termination and constitute a repudiation of the contract. Repudiation occurs when a party to the contract shows an intention to no longer perform its obligations, the result being that the other party may be in a position to claim compensation for loss and damage.
Contracts should be reviewed to determine whether performance can be delayed, or termination rights are available, and advice provided regarding the correct process to follow in these circumstances. The contract will usually specify strict notice requirements or the use of prescribed forms and specific conditions for valid service of a notice.
The consequences of termination and the parties’ respective rights will generally be determined by the contract itself and whether some of the obligations under the contract have already been performed.
If you or someone you know wants more information or needs help or advice, call us on 61 2 9212 1099 or email us email@example.com for more information.