Many business and individuals who have signed contracts are finding it increasingly difficult to continue to meet their obligations in light of the COVID-19 restraints which have been implemented by various Governments. Those measures are impacting contracts in Australia and around the world. As a result, it may become necessary to consider the legal principles which apply to those agreements.
Parties should also be carefully reviewing the terms of any contract which they enter into and that includes considering whether their standard terms and conditions are adequate.
Existing contracts
Some contracts contain a mechanism for review, or to allow either party to delay performance.
Force majeure
The most common form is a force majeure clause which can be included as an express term of a contract. Force majeure clauses often relieve a party from liability arising from their inability to fulfil their contractual obligations due to circumstances beyond their reasonable control. That means performance can be suspended for a short period until the cause of the delay passes. As an example, that could assist a supplier whose supply chain has been temporarily affected, to keep a contract on foot for when product becomes available again.
The clause may often also allow a party to terminate the contract if the delay becomes prolonged or permanent.
The circumstance must be unforeseeable, unavoidable and must make performance impossible for the duration of the event.
Contracts also sometimes contain clauses which allow for review or variation in the event that certain events occur. Clauses of that nature are usually quite specific to the circumstances of the contract.
Frustration
Where an agreement doesn’t contain any clauses along those lines, it may be possible for a party to argue that the contract has become ‘frustrated’.
Frustration may occur where the following three criteria are met:
- Through no fault of either party;
- An unforeseen event occurs; and
- The event renders performance of a contract impossible or radically different from that originally contemplated by the parties (which may also deprive a party from the benefit of the contract which was anticipated).
If the event makes it impossible to perform or radically changes the nature of any obligations under a contract, a party may in some cases be relieved from the performance of the contract (or perhaps some of the contractual obligations). Increasing levels of restriction on trade, including those now imposed by Government, can impact on the performance of contracts and/or make it illegal to continue to perform the contract.
For example:
- Restrictions imposed on “non-essential” gatherings could mean that it is impossible to continue to offer a group training course, venue hire agreement or private bus service contract.
- Where a contract specifies a method of performance (which is essential to the contract), restrictions which make that method impossible may amount to frustration.
- Similarly, where key personnel become unavailable or essential timeframes cannot be met, that may also frustrate the contract.
If a party is only temporarily unable to perform, say through a 14 day isolation order, then it is unlikely that the contract will be frustrated if the obligations can be performed at the completion of the 14 day period. However, that may depend on the nature of the agreement and any time restraints.
Whether or not a contract has been frustrated depends on the facts (in the context of the entire agreement) and on the drafting of that contract.
Inconvenience or an increased difficulty in performance is not sufficient. Even where performance may be substantially more difficult or costly, if the agreement can still be performed (even at a loss) then it is unlikely to be frustrated.
If a contract has been part performed and/or part payment has been made in advance, generally that work/fees can’t subsequently be recovered. However, New South Wales, Victoria and South Australia have specific legislation in place which address the potential recovery of money paid under some contracts. It may also be possible to assert that the other party has been “unjustly enriched” and to try to recover monies paid on that basis.
If a party can establish that a contract has been frustrated, the remedies could include:
- The contract may be terminated; and/or
- The parties are discharged from performing future obligations.
- In some cases, monies paid may be recoverable.
Careful analysis is required to avoid the risks involved in improperly purporting to terminate a contract where there are no reasonable grounds for termination. That could lead to claims for repudiation and breach of contract against the party who purports to terminate without proper basis.
Future contracts
It is vital to review contracts which are not yet signed. An event which frustrates an agreement can’t be foreseeable when the parties enter into a contract. If the event can be anticipated, then parties should address it specifically in the agreement and are unlikely to be able to rely on a claim that the contract is frustrated.
Where parties have included a force majeure clause, they are generally presumed to have considered what the positon should be in the event the contract can’t be performed and are less likely to be able to argue that the contract is frustrated.
Those issues will now be assessed in light of the level of knowledge that the parties had regarding the potential impact of COVID-19 at the point in time when they entered the agreement.
Key Takeaways
It is prudent to seek advice regarding the status of any contracts that have been or may be impacted by COVID-19 events, including to address the risk of potential liability for improperly purporting to terminate a contract which can’t be performed.
If a contract is frustrated, it is necessary to consider which obligations are to be discharged and whether there is any scope to recover monies already paid.
For those businesses fortunate enough to still be trading and entering into contracts, they should be providing for contingencies in relation to COVID-19 and include provisions which address the position in the event that one or more parties is unable to perform an essential term of the agreement. Parties should also be considering their ability to perform (and for the other party to comply with) future contracts, even where those may be impacted through no fault of their own.
Parties who are relying on standard terms and conditions should be reviewing those when they are sent to customers (including those terms which are accepted or agreed to by customers) if there are questions over performance and, if necessary, provision should be made.
As the effects of COVID-19 may continue for some time, it would also be wise to make provision in future agreements to cover both COVID-19 disruptions and similar events into the foreseeable future.
If you would like to discuss the details of any current agreements or impending contracts, please feel free to contact me on 07 3224 0261.
