CONTACT PHONEDo you have a contract that has not been able to be performed or come to an end due to COVID-19?
Has shut down or related COVID-19 action prevented you from delivering on a contract or from someone else performing what you agreed they would? Maybe your supply chain is locked down, maybe you are unable to hold your wedding reception (because you invited more than 20 people) or maybe you can’t attend a client site due to being immunocompromised? If so, these are examples of ways that the contract that you made was unable to be fulfilled (performed) and the bargain that you struck is different from that in your initial contemplation.
Does the contract have a termination and breach clause?
Are you (or the other party) able to terminate the contract properly? Did you want the agreement to be cancelled?
As a business, you must consider your ongoing professional relationships and whether there are any penalties for breach or termination. You may be at risk of ‘repudiation’ and liable for damages if you incorrectly, or inappropriately terminate your contracts.
Does the contract have a force majeure clause?
A force majeure clause is the name for a term that may bring a contract to an end where a certain event or circumstance arises that makes performance of the contract commercially impracticable, illegal or impossible. Force majeure events are required to be outside the reasonable control of a party claiming the event has occurred.
Once activated, a force majeure clause will allow the affected party to be relieved from its obligation to perform, or extend the timeframe for performance. A force majeure clause will likely have a list of specific triggering events (a narrow clause), but may also contain a ‘catch-all’ provision such as ‘and any causes beyond the reasonable control of the party’ (a wide clause).
Is the force majeure clause narrow or wide in your contract?
A narrow clause may have a list of triggering events. This may include acts of God (earthquakes, storms, flood, and lightning strikes), war, terrorism, riot, insurrection and (sometimes) industrial action. A force majeure clause that would apply could include terminology such as ‘infectious disease’, ‘epidemic’, ‘pandemic’ or similar. Government responses to COVID-19 could also be classified as ‘government action’ or ‘national emergency’. They could have also rendered performance of the contract illegal.
A wide clause may contain a provision that includes ‘any other event outside the control of the parties’ or ‘including, but not limited to,…’, which case law supports as including pandemics.[1]
What options does the force majeure clause have? Termination? Delay? Step-in?
The party who is seeking to rely on the force majeure clause will have the clause strictly construed against them. Therefore, it is important to determine whether the clause relieves the party from their obligations for merely requires them to delay or make alternative arrangements. Parties should consider in activation of the force majeure clause relieves all o9bligations or only some certain ones.
Some force majeure clauses have a step through process that allows one party to “step-in” and fulfil the breach or take some other action to ameliorate the situation.
Read the clause very carefully and understand exactly what obligations would be relieved by a force majeure events and what actions you can take in that case.
Does the force majeure clause have notification requirements or time frames?
Sometimes there are additional requirements negotiated between the parties, including exclusions for the acts or omissions of subcontractors as well as exclusions where the affected party could have taken reasonable steps to mitigate against the event.
Once invoked, the clause will provide that the parties’ obligations under the contract will be suspended until the force majeure event (and its direct effects) have ceased to prevent performance of the contract. The party claiming force majeure often has to notify the other party and enumerate what actions they are taking to remedy the force majeure event.
Most clauses will provide that if the force majeure event is not resolved within a certain time, for example 60 days, then the parties will have the right to terminate the contract or perhaps to agree to a contract variation. Only once the time period has elapsed can the contract be terminated.
The parties should consider the flow on effect on other provisions under the contract. For example, it may be appropriate to provide that the term of the contract will be extended by the duration of the force majeure event.
Could the contract be considered “frustrated”?
Frustration operates to bring a contract to an end in circumstances where an intervening, post-contract event has occurred through no fault of the parties, which makes a contractual obligation impossible to perform or transforms a contractual obligation into a fundamentally different obligation. Frustration applies to both parties in a contract, ending obligations on both sides. “..frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.”[2] Frustration is typically not easy to establish and has a narrow scope. For example, the total destruction of the subject matter of a contract would be a frustrating event.
Importantly, it must not be an event that could have been foreseen. In Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) VSCA 116, the Court found that a contract is not frustrated unless a supervening event:
- confounds a mistaken common assumption that some particular thing or state of affairs essential to the performance of the contract will continue to exist or be available, neither party undertaking responsibility in that regard; and
- in so doing has the effect that, without default of either party, a contractual obligation becomes incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.
It is possible that government intervention, such as a COVID-19 shutdown could be considered a frustrating event (see Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337) but this remains to be tested.
A contract will generally not be frustrated if it has an operative force majeure clause that can deal with the relevant issue.
Further, a contract will not be frustrated if the change is only temporary or transient. To demonstrate this, we can look at a Hong Kong case arising from the SARS epidemic illustrates this issue. In Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754, Mr Wing was subjected to a 10-day isolation order due to SARS. He was the time was 13 months into a 24-month lease. He claimed that the lease had been frustrated because he was unable to go out and enjoy the lease. However, the court rejected this argument because the isolation order was of a short duration in the context of the entire lease.
Does the Australian Consumer Law and Fair Trading Act 2012 (Vic) apply to your contract?
Generally, in the common law, frustration allows for the losses to lie where they fall. However, in Victoria, (and NSW and SA) legislation has been created to reduce this severitys, and aims to provide a fairer result. For example, had you rented a hall which burned down before you used it, under common law frustration, your deposit would be forfeited. Under the ACLFTA, this deposit ought be returned to you.
So, what next?
If your contract has been affected by COVID-19, get it out. Read it thoroughly.
Get in contact with us if there is anything you don’t understand, and then take action according to what is available to you under the contract.
For example, in shipping contracts, requirements for quarantine on arrival have been deemed as force majeure events (see Ambatielos v Anton Jurgens Margarine Works [1923] AC 175).
Davis Contractors Ltd v Fareham Urban DC [1956] AC 696 at [729].