30 Mar Contract Relief in the Face of COVID-19
In light of the World Health Organization declaring COVID-19 a global pandemic on 11 March 2020, many businesses and individuals will encounter issues complying with, or fulfilling, their contractual obligations. This begs the all-important question of “What are my rights, and what are my obligations, during these unsettling times?”.
Contractual Rights and Obligations
Whilst the Federal and State governments are encouraging everyone to be reasonable during this time and try to reach agreements between one another, it is inevitable that disputes will ultimately arise.
In these unprecedented times, it is normal for there to be anxiety and uncertainty around the extent of the effects of this pandemic, including the economic impacts it will have. However, one thing that clients have already been questioning is whether there is any relief available from their strict compliance with one or more of their contracts.
Where you are unable to reach direct agreement with the other party/parties to your contract, there are a limited number of remedies available under Australian law. Where a contract becomes difficult or impossible to perform, your legal recourse will usually arise from one of the following:
- the common law doctrine of frustration; and
- the presence of a contractual force majeure clause.
What is the doctrine of frustration?
From the outset, it is important for us to stress that the circumstances in which the doctrine of frustration can be enlivened are limited. However, it will apply regardless of whether or not the contract specifically provides for its application.
One may argue that a contract has become ‘frustrated’ where an event that is not the fault of either party, significantly changes the nature of the contractual rights and/or obligations and makes it unjust to hold the parties to the contract.
The doctrine itself originates from common law but has been legislated in three states around Australia (New South Wales, South Australia and Victoria).
The leading case on the doctrine, the case of Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, defined frustration as a contractual obligation that is:
“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”.
To determine whether the doctrine applies to your contract, a careful analysis of the contractual terms and the “frustrating” event (in terms of the impact it has on your contract) must be carried out. Different contracts will be frustrated by different events and each event and contract must be assessed on an individual basis
Importantly, the following will not amount to enlivening the doctrine of frustration:
- an event that merely makes performance more difficult or costly (see the case of Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696); and
- minor events of a temporary nature (see the case of FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products & Co Ltd [1916] 2 NSWLR 540, 557).
Thus, it is clear that the threshold to be met for the purposes of this doctrine are extremely high. For example, a mere inconvenience is unlikely to be enough to amount to frustration.
When might the doctrine apply in the context of COVID-19?
There are numerous situations in which the doctrine might apply in the case of COVID-19.
Take for example the Federal Government’s recent limit on the number of people at a wedding to be a maximum of 5. If you are no longer able to hold your wedding and therefore your caterer will not be required, it is arguable that the contract has been frustrated.
What about the concept of ‘force majeure’?
A ‘force majeure’ clause (translated as meaning “superior force” in French) may relieve a party from liability arising from their inability to fulfil their contractual obligations due to circumstances beyond their reasonable control.
The concept is one that is governed by the terms of the individual contract so there is no hard and fast rule that can be applied to all agreements. This means that if your contract does not contain a specific ‘force majeure’ clause, there is no remedy available to you (compare to the doctrine of frustration that applies to all contracts).
Lawyers will often prepare carefully drafted ‘force majeure’ clauses to avoid the difficult threshold of proving that a contract has been frustrated. Provided that the elements of the clause are met, then compliance with the obligations may be dispensed (either wholly or partly).
A standard ‘force majeure’ clause will specify when the clause will be enlivened; for example, floods, hurricanes, energy blackouts, strikes… and more importantly in this case, pandemics.
If your contract does contain a ‘force majeure’ clause, it is imperative that you seek legal advice as to whether COVID-19 might enliven that clause and provide you with relief, particularly before you take any action.
In circumstances where no such clause exists, and the doctrine of frustration is not enlivened, we recommend approaching the other party/parties to your contract as early as possible to discuss alternative arrangements.
In these uncertain times, it is important to obtain sensible legal advice with your commercial objectives in mind. The team at Distinction Legal are experienced when it comes to contract drafting, interpretation, advice and disputes. Contact us today to discuss how we can protect your interests.