Con­tracts in the time of the Coro­n­avirus (COVID-19)

There has been unprece­dent­ed dis­rup­tions to busi­ness­es and the econ­o­my with the cur­rent coro­n­avirus (COVID-19) pan­dem­ic. With the restric­tions being placed on the move­ment of peo­ple and gath­er­ings, COVID could have very real impli­ca­tions for a range of indus­tries like con­struc­tion, which require a large work­force to be mobilised to work on projects and which depend on the time­ly deliv­ery of goods. The dis­rup­tion has also affect­ed small busi­ness­es such as wed­ding pho­tog­ra­phers and ven­dors, where wed­dings are being post­poned or can­celled. COVID is also start­ing to have impacts on leas­ing and rental, where ten­ants are unable to return the Aus­tralia and do not pay rent, or if a sit­u­a­tion aris­es where build­ings or stores will have to be closed, impact­ing busi­ness­es that oper­ate out from those stores. 

With parts of the world being brought to a near stand­still as gov­ern­ments and busi­ness­es wres­tle with COVID, we look at some pos­si­ble impli­ca­tions COVID could have on busi­ness­es and con­tracts, exam­in­ing the role of force majeure claus­es and the doc­trine of frus­tra­tion in contracts.

What is a force majeure clause and how does it work?

A force majeure clause is a type of clause that express­ly pro­vides for par­ties to be relieved of their con­trac­tu­al oblig­a­tions in cer­tain sit­u­a­tions that are beyond their con­trol. There is no stan­dard” force majeure clause in Aus­tralia, it varies from con­tract to contract. 

A force majeure clause can pro­vide for cer­tain oblig­a­tions of par­ties to be sus­pend­ed or a con­tract to be ter­mi­nat­ed by ref­er­ence to a list of events or a gen­er­al descrip­tion of types of events. Some exam­ples of these type of events a force majeure clause may include are out­break of war, acts of ter­ror­ism, indus­tri­al strikes, nat­ur­al dis­as­ters (earth­quake, fire, flood) or out­break of infec­tious diseases.

A force majeure clause can also exclude a par­ty from some oblig­a­tions, and at the same time ensure that oth­er oblig­a­tions con­tin­ue. For instance, a force majeure clause may waive or put on hold oblig­a­tions for a cer­tain peri­od, but stip­u­late that par­ties still have an oblig­a­tion to make cer­tain payments.

In the above case, some oblig­a­tions are waived or put on hold for a cer­tain peri­od, but the pay­ing par­ty still has an oblig­a­tion to make payments.

Force majeure claus­es and COVID

As the World Health Organ­i­sa­tion has declared COVID as a glob­al pan­dem­ic, if the con­tract has a force majeure clause that includes the out­break of an infec­tious dis­ease, the cur­rent sit­u­a­tion may be suf­fi­cient to trig­ger the force majeure clause. 

As gov­ern­ments are imple­ment­ing a suite of leg­is­la­tion to try to com­bat COVID, if a force majeure clause includes or makes ref­er­ence to gov­ern­ment reg­u­la­tion, this may also acti­vate a force majeure clause. Cur­rent­ly, the Aus­tralian gov­ern­ment has enact­ed guide­lines restrict­ing the move­ment of peo­ple, with a lim­it of no more than 100 peo­ple for non-essen­tial indoor gath­er­ings and a lim­it of no more than 500 peo­ple for out­door gath­er­ings, and a restric­tion on Aus­tralians trav­el­ling overseas.

If gov­ern­ment reg­u­la­tion increas­es to extend to the move­ment of goods, this could have a fur­ther impact on busi­ness­es and breach­es of contract.

What if I don’t have a force majeure clause in my contracts?

What then hap­pens if your con­tract does not have a force majeure clause or if your force majeure clause does not cov­er a sit­u­a­tion such as COVID? Par­ties may then be able to rely on the doc­trine of frus­tra­tion in con­tracts. The doc­trine of frus­tra­tion applies when an event beyond the con­trol of both par­ties occurs after the con­tract is entered into, and which makes per­for­mance of the con­tract impos­si­ble or sub­stan­tial­ly dif­fer­ent to what the par­ties have agreed upon. 

Frus­tra­tion is a nar­row com­mon law doc­trine. It may not be as broad as the force majeure claus­es dis­cussed above may be. While par­ties may agree and pro­vide for events that are cov­ered by a force majeure clause, whether an event frus­trates a con­tract will have to be deter­mined by the Court (unless the par­ties reach an agree­ment on that point after enter­ing into the con­tract). It is also more dif­fi­cult to define in each sit­u­a­tion. For instance, while there have been major dis­rup­tions due to COVID, this in itself may not mean a con­tract is frustrated.

Impor­tant­ly, all rights, duties and lia­bil­i­ties before the frus­trat­ing event con­tin­ue, and may form the basis for any claim in dam­ages. The con­tract is not void ab ini­tio (from the begin­ning), but a frus­trat­ing event may only dis­charge future respon­si­bil­i­ties and oblig­a­tions of parties.

An exam­ple of where the Court has held a con­tract was frus­trat­ed is Codelfa Con­struc­tion Pty Ltd v State Rail Author­i­ty (NSW) (1982) 149 CLR 337. In that case, Codelfa Con­struc­tion Pty Ltd (Codelfa) and the State Rail Author­i­ty entered into a con­struc­tion con­tract in rela­tion to the East­ern Sub­urbs Rail­way. Codelfa agreed to do cer­tain works in a par­tic­u­lar peri­od of time. How­ev­er, after Codelfa began exca­va­tion works, com­plaints were made about noise and an injunc­tion was grant­ed restrict­ing Codelfa’s abil­i­ty to work to more lim­it­ed hours than the par­ties had orig­i­nal­ly antic­i­pat­ed. As a result of the injunc­tion and oth­er restric­tions imposed on Codelfa, there was a delay in Codelfa per­form­ing the work and in those cir­cum­stances, Codelfa claimed the con­tract was frus­trat­ed. The High Court held the con­tract was frus­trat­ed as per­for­mance of the con­tract by the par­ties was rad­i­cal­ly dif­fer­ent from per­for­mance of the con­tract that the par­ties ini­tial­ly contemplated. 

In New South Wales and South Aus­tralia, par­ties also need to keep in mind the Frus­trat­ed Con­tracts Act 1978 (NSW) and the Frus­trat­ed Con­tract Act 1988 (SA). The leg­is­la­tion does not apply to all contracts.

What next?

With the uncer­tain­ty with COVID, par­ties may try to get out of con­tracts or put their oblig­a­tions on hold. You need to be care­ful in doing so, as a par­ty may inevitably end up breach­ing or wrong­ly repu­di­at­ing a con­tract. If a par­ty wrong­ly repu­di­ates or breach­es a con­tract, it may find itself on the receiv­ing end of a claim for dam­ages, or oth­er reme­dies to enforce the contract.