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.
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.