Over the past week, Stone Group Lawyers have received a number of enquiries from existing and new clients regarding the enforceability of their commercial contracts where the performance of those contracts is impacted by COVID-19.
Typically, the questions are:
1. Can I get out of a contract?
2. Do I have to perform my obligations? or
3. Can I walk away if the other party can’t perform their obligations?
From a legal point of view, what we are being asked to consider is whether you can suspend or terminate a contract because of the impact of COVID-19
The short answer is…. It depends on the terms of the Contract.
There are a number of issues that are relevant to determining a party’s right to suspend or terminate a contract, including:
1. Does the Contract contain a force majeure clause and if it does, does that clause provide exercisable rights?
2. Has the contract been frustrated?
If the contract has an exercisable force majeure clause, or the contract has been frustrated, then a party may be able to terminate or suspend the contract.
Force majeure arises where unforeseeable circumstances prevent a party from fulfilling their obligations under a contract.
Commonly, commercial contracts will contain a force majeure clause which outlines the rights and remedies that arise when an event occurs that is outside the party’s control. The common law does not recognise the doctrine of force majeure and therefore a clause of this nature is an important inclusion in commercial contracts. If the force majeure clause has not been expressly provided in the contract then the parties cannot rely on it for relief.
As we are seeing at the moment, an event outside the party’s control, such as a pandemic or epidemic can be disruptive to a party’s contractual performance. However, not all force majeure clauses were created equally. When assessing force majeure clauses, there are two considerations:
1. Does the clause cover the event; and
2. Is that event materially relevant to the performance of the contractual obligations?
If the answers to both of those questions are not ‘yes’, then a party risks wrongfully repudiating a contract if the purport to suspend or terminate the contract.
The party exercising its rights under a force majeure clause bears the onus in proving that its contractual performance is significantly impeded.
The doctrine of frustration can occur when a contract is ended due to an event that is beyond the control of the parties, thereby frustrating the performance of the contract.
Unlike force majeure, as the doctrine of frustration is contained in the common law it can apply where there is no express provision written into the contract.
However, like force majeure, the doctrine of frustration applies only in a limited range of circumstances, where the event renders the performance of the contract to be something fundamentally different from what was anticipated by the parties at the time of contract.
Practically, where COVID-19 has caused the fundamental commercial purpose of the contract to be negated, the contract may be considered frustrated. However, it requires more than just a more onerous obligation upon one or both of the parties. A mere delay in performance will not be enough to enliven frustration and Courts are generally reluctant to apply the doctrine of frustration to a commercial contract.
As the trade and movement restrictions and regulations arising from current COVID-19 crisis are changing on a daily basis, businesses and consumers need to be acutely aware of how their contractual obligations are being effected, and whether they can gain some relief through frustration or force majeure. Each case will depend on the individual circumstances and the terms of the contract.
However, parties must be careful when exercising their perceived rights under the contract. If a party wrongly suspends or terminates a contract, this can lead to a claim for damages against that party for wrongful repudiation.
It is therefore of utmost importance that businesses and individuals obtain legal advice prior to exercising any rights to ensure they avoid the pitfalls of a wrongful termination and repudiation of the contract.
Stone Group Lawyers have also fielded enquiries from businesses who are not looking to terminate their contractual relationships, but rather seeking other commercial avenues to navigate through the uncertainty that exists at the current time.
As with termination rights, these commercial law solutions are dependent on the individual circumstances of the parties, however these solutions could include:
1. Suspension rights which enable the contract to continue, albeit with a delay to the performance of the obligations;
2. A variation to the contract to reduce volumes or quantities of the goods and/services provided;
3. Step in rights which may enable a party to seek alternate suppliers during a time where one party cannot perform its obligations; and
4. Any other commercial resolutions that can be agreed to between the parties.
If COVID-19 has you questioning whether you or another party can perform its obligations under a contract, then you should immediately review your contracts to see whether a force majeure clause can be relied upon. You may find that performance has been so fundamentally altered that the contract has been frustrated.
You should then seek legal advice to assist you in the exercise of those rights.
Dan Birch, along with the Team at Stone Group Lawyers, are ready to provide you with advice and guidance to assist you with your commercial contracts during this challenging time. Stone Group Lawyers are offering consultations via phone, Skype, Facetime and Whatsapp – call 1300 088 440 to arrange a time to discuss your contract.