The Coronavirus (‘COVID-19’) pandemic has caused an unprecedented impact on society and the economy. Extensive protective measures implemented by Governments across the world include lockdowns and restrictions on gatherings and travel. These measures have created an increased burden for businesses and individuals to fulfil contractual obligations. Many of the things which people had planned to do they simply cannot do anymore, even if they want to, due to government restrictions and safety considerations. At Andersons, we have many clients seeking advice on contracts which cannot be carried out in the current circumstances.
Contracts which cannot be carried out due to Coronavirus:
- contracts for the sale of land or businesses which have now stalled,
- building and construction contracts
- travel contracts or travel arrangements which cannot now be carried out resulting in cancellation of flights, holiday itinerary’s and accommodation.
There are two legal concepts that should be considered for business owners or individuals whose contractual obligations may be affected by an event that threatens the performance of a contract.
- Force Majeure; and
What is the Doctrine of Frustration?
The concept of Frustration began in common law, and was subsequently codified in South Australia by way of the Frustrated Contracts Act 1988 (SA).
Frustration of a contract occurs whenever the law recognises that without the fault of either party a contractual obligation has become unable to be performed because circumstances in which performance would occur are radically different from that which was contemplated by the contract.
Criteria that must be met for a contract to be considered ‘frustrated':
- Supervening event: There must be a supervening event that ‘significantly changes the nature of the outstanding contractual rights.
- No fault: Frustrating event must have occurred entirely without fault of either party.
- Unjust: It must be unjust to hold the parties to the original contract.
- Not foreseeable: The purported frustrating event must not be one which the parties could reasonably be thought to have foreseen, anticipated or contemplated at the time of the contract.
- Risk wasn’t provided: The risk of the frustrating event must not have been provided by the parties in the contract.
Frustration automatically discharges the contract (neither party has to take any specific steps to bring it to an end) and both parties are excused from further performance as from the time of frustration of the contract occurring. Obviously, one of the parties might argue that the contract is not frustrated, in which case a declaration of the Court is sometimes required.
Where a contract is frustrated, there will usually be an adjustment between the parties so that no party is unfairly advantaged or disadvantaged in consequence of the frustration.
What is a Force Majeure Clause?
Force Majeure is a clause that must be contained within a contract which is not implied at law. This clause comes into effect when unforeseeable circumstances occur, preventing parties to a contract from fulfilling their contractual obligations. Essentially, a Force Majeure event is a contractual term which has the effect of “softening” of what might otherwise be a frustration of contract and attempts to bridge the time between the contract not being able to be performed to a later date on which it can be performed.
A Force Majeure event may therefore;
- extend the time in which the parties have to comply with contractual obligations;
- temporarily allow the parties to cease performing the active contractual obligations; or
- relieve the parties from their contractual obligations entirely, or in part.
Can COVID-19 be considered to invoke a force majeure clause?
Whether COVID-19 can be considered to invoke a force majeure clause will depend on whether a contract identifies various circumstances in which it may be enforced. For example, a force majeure clause may identify war, riots, earthquakes, hurricanes, lightning, energy blackouts, unexpected legislation, strikes and pandemics.
It is important to note that the ability to invoke the clause is of course not restricted to events in Australia.
What to do if your contract can no longer be performed because of COVID-19?
Many contracts will be terminated, whether by the doctrine of frustration or via a force majeure clause, because of COVID-19.
It is important that all consumers understand their contractual rights, and all businesses consider how best to draft or amend the force majeure clause depending on their circumstances.