The impact of COVID-19 on contracts
COVID-19 has come unexpectedly and caused global disruption. This once in a lifetime event has had a huge impact on individuals, families, businesses, and the national and global economy. This is an occurrence that has devastated many and caused high levels of uncertainty and stress.
There are many business owners and startup founders who are unsure of what to do and how to respond to such an extraordinary event. What do you need to do to protect yourself, your business, and your livelihood?
While we know that COVID-19 will come to an end and our lives will stabilise once again, it’s important to understand, and be aware of, as business owners, any foreseen issues that you can overcome today, and put in place protection measures to sustain your business until normality is restored.
AMK Law has been responding to many clients, concerned about immediate issues to tackle and consider, and to manage the impact this will have in the short, medium and long term to their business.
One issue business owners are forced to consider at this time is contractual obligations. Here we raise some factors that business owners should be aware of when it comes to contracts, possible and foreseeable breaches, and reading the fine print.
Force majeure clauses
The force majeure clause is a common clause contained in commercial agreements, but its interpretation and circumstances differ from contract to contract.
The general intention of the force majeure clause is to define events which are beyond the reasonable control of the contracting parties that have the effect of limiting the parties’ abilities to perform their contractual obligations, and then to define the consequences of the event occurring.
So, does COVID-19 fall under the force majeure clause? It will depend on the interpretation of the contract, the definition of the ‘event’, and the factual circumstances. It’s worthwhile reviewing the clause in your commercial agreement and if needed, seek advice.
What also needs to be considered are the consequences. If COVID-19 did fall under the definition of a force majeure event in a contract, how would this impact the business arrangement and operations, long term?
The doctrine of frustration
If a contract doesn’t have a force majeure clause or COVID-19 does not fall within the force majeure definition, the doctrine of frustration may be considered.
The doctrine of frustration is recognised under common law, and in particular states in Australia, by statute. Frustration occurs after a contract has been entered into and an event occurs, through no fault of either contracting party, which makes the performance of the contract impossible or fundamentally different.
So, when an event occurs through no fault of either party, and the performance of the contract becomes different or impossible than what was originally contemplated, then this is considered a ‘frustrated contract.’ When a contract is deemed frustrated, no further obligations are enforceable, the contract is automatically terminated, and the loss lies wherever it falls.
That seems like there is potential for unfairness, so there is legislation relating to frustrated contracts in New South Wales, Victoria, and South Australia with the purpose of producing fairer outcomes and reducing the harshness of ‘the loss lies wherever it falls.’
If an event makes the performance of the contract difficult, such as more expensive, then the court may not consider that enough to find the contract to be frustrated. Equally, a contract isn’t frustrated if either party is at fault.
While, on the surface, it may seem that COVID-19 would render a contract frustrated, every situation should be reviewed on its facts, and assumptions can’t be made.
Entering into, and drafting new contracts
When drafting new agreements today and in the near future, COVID-19 and its impacts should be carefully considered.
As we are now at pandemic levels of COVID-19, there may be arguments for it being deemed a force majeure event and causing a contract to be frustrated, however, interpretation of the contract, the facts, and the relevant definitions will need to be considered.
At this point in time, business owners should be carefully reviewing existing arrangements and clauses. And, moving forward, will need to review future agreements.
By understanding your current position, and identifying risks and opportunities, you are on more solid footing in creating a path forward.
AMK Law’s aim is to support and assist business owners through this time by navigating difficult legal issues and breaking down various challenges you may be experiencing now, are soon to experience, or are worried about.
You might like to see these useful government links for additional information in regards to how the Caronavirs (COVID-19) is impacting Australian’s and their businesses: