Force Majeure….breach of contract….termination of contract….performance of contract. Suppliers and service providers alike in industries as diverse as manufacturing and financial services, travel and engineering to marketing and dentistry are feeling the effect of COVID-19 and to a wider extent dispute over contractual obligations.
The unprecedented event of the COVID-19 pandemic continues to place stress on businesses and contracts. This uncertainty has led to businesses reassessing their contractual obligations.
Doctrine of Frustration
Frustration of contract is a legal doctrine that terminates a contract where performance of the contract has become impossible. For example, this may occur where a contract is incapable of being performed or the nature of the contract obligations are now radically different to what the parties contracted to do. In addition, a contract may be frustrated if the subject matter of the contract becomes:
- does not exist, or
- is completely destroyed.
Where a contract is frustrated, it is in effect terminated at the point of frustration automatically by operation of law.
Frustration, however, is not mere hardship or inconvenience of circumstance. Risks that are reasonably foreseeable cannot frustrate a contract, despite their severity.
Whether the effects of COVID-19 can be argued to cause a contract to be frustrated will heavily depend on the nature of the contract. The main consideration is whether effects of the virus have made performance under the contract impossible and not merely difficult or unprofitable.
With recent measures taken by the government to shut down select non-essential services, it may be the case that those engaged to receive such services directly or in connection to a contract may have their contract frustrated. However, this is not definitive for every contract in connection with such affected services. The scope of application of frustration is narrow and will vary depending on the subject matter of each contract.
Contracts may contain within their terms and conditions a ‘force majeure clause’. This clause may sometimes be present in contracts for the purpose of alleviating liability of a party for unforeseen circumstances that may affect performance under the contract. Although similar in operation, force majeure clauses do not usually result in the contract being terminated, rather a party is released from liability while a prescribed event occurs. Although force majeure clauses do not necessarily require that the contract be terminated, sometimes the clause will state the contract can be terminated if the force majeure event is protracted.
Unlike the doctrine of frustration, force majeure can only apply if specifically stipulated in the terms of a contract and even then, its effect is dependent on the interpretation of the contract.
Force majeure clauses generally stipulate very specific events that constitute a force majeure event. This may (for example) include a pandemic, epidemic or health risks amongst the list of events. Whether COVID-19 is a force majeure event will firstly depend on whether this clause is present in the terms of the contract.
Secondly, COVID-19 related shutdowns or health directions must be specifically stated, or capable of being included in one of the listed events. Whether this clause will apply to the current circumstances will depend on the drafting of the clause and the subject matter of the contract.
The current commercial climate has, understandably, created a unique and unfamiliar strain on the ability of parties to fulfill their obligations under certain contracts. Parties to a contract wishing to terminate or suspend their obligations by application of either of the above principles must be cautious of doing so. If applied incorrectly to the circumstances of the contract, parties may find themselves in breach of that contract and potentially liable for damages or other remedies.
NB Lawyers – Lawyers for Employers offer an obligation free consultation for all employers and are happy to discuss issues regarding termination or frustration of contract. Please call us on +61 (07) 3876 5111.
About the Authors
Jonathan Mamaril leads a team of handpicked experts in the areas of employment law and commercial law who focus on educating clients to avoid headaches, provide advice on issues before they fester and when action needs to be taken and there is a problem mitigate risk and liability.
Daniel Dash and Zahra Rashedi are part of the commercial law team at NB Lawyers, the lawyers for employers working with individuals and business owners on a range of matters including business sales, property disputes, estate disputes, commercial contract advice, shareholder agreements, intellectual property, litigation and taxation matters.