Is the COVID-19 pandemic frustrating you (and your contractual relationships)?

In an effort to slow the spread of the COVID-19 pandemic, the Commonwealth and State Governments have severely restricted the operations of a diverse range of Australian businesses, including restaurants and cafes, licenced bars and hotels, gyms, airlines and travel agents and most retailers.

Although necessary for public health purposes, the inevitable result of these restrictions is that many Australian businesses will experience severe disruption to their business operations and financial hardship.  It is also inevitable that many legal disputes will arise due to the subsequent inability of individuals and businesses to fulfil their contractual obligations.  

A party who has breached a contract is liable to compensate the innocent party for any loss and damage which the innocent party has suffered as a result of the breach of contract. However, where the party who has breached the contract can argue that the breach was caused by matters outside of their control, the COVID-19 pandemic for example, then they may be able to avoid paying damages through the operation of a force majeure clause or pursuant to the legal doctrine of frustration.

Force Majeure Clauses

Force majeure clauses are a common feature of many contracts and have the effect of altering or releasing the parties obligations under that contract when an extraordinary event or circumstance beyond their control prevents one or both parties from fulfilling those obligations.

Because force majeure causes are a contractual provision, the scope and effect of each clause will be different depending on the way in which it was drafted, with some clauses covering a wide range of triggering events and others only providing for a narrow range of events. Similarly, some force majeure clauses may allow the parties to terminate a contract whilst others only allow the parties to suspend the contract during the duration of the force majeure event.

Each force majeure clause needs to be individually examined to determine the interpretation and scope of the clause.

Generally, a party who seeks to rely on a force majeure clause will bear the burden of proving the occurrence of an event within the clause ¹.   A force majeure clause may also set out a process that needs to be followed to invoke its effects, such as formally notifying the other party.

Frustration

Frustration is a common law doctrine that applies to all contracts regardless of whether or not they include a force majeure clause.

Frustration occurs where, through no fault of the parties themselves, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract². 

Whether an event constitutes a ‘frustrating’ event depends on the specific terms of each contract and the circumstances of each particular matter. However, the event must have severe consequences and result in ‘radical’ change, it cannot merely alter the circumstances in which performance is called for³.

If a party can prove that a contract has been frustrated then it may be possible for them to terminate the contract without having to pay damages.

The main practical differences between the doctrine of frustration and a force majeure clause are that:

1. the standard of proof required to prove that a contract has been frustrated is much higher than the standard required for a force majeure clause to come into effect; and
2. the only remedy available under the doctrine of frustration is the automatic termination of the contract at the time it became frustrated, whereas a force majeure clause may potentially allow for a much wider range of remedies to occur, such as the temporary suspension of the contract or the alteration of certain terms.

Lavan comment

The current economic pain caused by the COVID-19 pandemic will inevitably result in a multitude of legal disputes over the coming months as businesses seek to recover the losses that they have incurred because another party has been unable to satisfy its contractual obligations.

Where a defendant is able to show that their inability to complete their contractual obligations was due to COVID-19 pandemic or the associated government restrictions then they may have a potential defence to a claim for breach of contract. 

However, each case will be different depending on the specific terms of the relevant contract and it is very important that you obtain legal advice before you seek to excuse a breach and/or termination of  a contract on the basis of a force majeure clause or frustration.

Lavan has extensive experience in helping clients navigate contractual claims. Please contact us if you wish to discuss the effect that the COVID-19 pandemic and the associated government restrictions will have on your business’s contractual rights and obligations.