COVID-19 and Contracts
With unprecedented uncertainty in the current business landscape, you may be wondering: what happens to your contractual commitments?
As demand in numerous sectors plummets and public health mandates become ever tighter in an attempt to restrict the reach of COVID-19, companies need to revisit and actively manage their contractual rights and obligations.
You have a written contract?
If you have a contract that is in writing, read it to see the provisions relating to delay or force majeure and termination.
Contracts routinely deal with events that allow a party to be excused from performing their obligations or that contemplate circumstances in which delayed performance is permissible or that even allow for termination for convenience.
If there is something to this effect in a contract, the words used will be paramount. That is what the courts will use to base their decisions on - not any application of fairness. While these are often seen as “standard” clauses we see a wide variety of actual words used.
So, check the exact wording of the clause and determine whether your circumstances allow you to activate it.
For example, an agreement might refer to an act of God, but there is no clear authority for the proposition that confirms whether disease is or is not an act of God. Therefore, unless the force majeure or delay clause specifically refers to an epidemic or a pandemic, then it may not assist.
No relevant clauses in your written contract? No written contract at all?
If you do not have a written contract (or you have one, but it does not deal with delay or external events preventing performance) you will have to fall back on the common law doctrine of frustration. The common law is law that is made by judges and evolves as cases are heard in the courts.
The doctrine of frustration was developed to release parties from their contract where events arise that result in a situation fundamentally or radically different from that in contemplation when that contract was made AND as a result of that situation, the contract cannot be performed.
It is not easy to bring your contract within the scope of this doctrine, but if you can the contract is automatically terminated, and future rights and obligations are at end.
You would need to demonstrate the COVID-19 pandemic, and events resulting from it - such as government directions and restriction, create a situation that is fundamentally or radically different from that in contemplation when the contract was made and the changed situation means that the contract can no longer be performed as intended.
Mere hardship or inconvenience or even material loss caused by the change of the situation will not be sufficient – the events must actually mean that it is impossible to perform the contract as a whole.
Some examples of frustration
The following cases illustrate the difficulty of relying on this doctrine:
In a Hong Kong lawsuit arising from the 2003 SARS outbreak, some residential tenants tried to terminate their lease on the basis that a 10-day isolation order (which meant they could not return to their flats for 10 days) due to SARS had frustrated their tenancy agreement. This argument did not succeed. The court found that a 10-day isolation order was not, in the context of a 24-month lease, sufficient to frustrate the performance of that lease.
In Australia in 1943, during a period in which neon advertising signs were being hired to Tooheys, orders were made under the National Security Act 1939 (Cth) which prohibited the illumination of the signs. Looking at the nature and terms of the contracts relating to the signs (which included their supply, installation and hire) and the surrounding circumstances, the contracts were not frustrated, and the hirer was required to continue to pay rent.
Rooms on Pall Mall were rented for purpose of viewing King Edward VII’s coronation. Due to the King’s illness, the parade was cancelled. There was nothing in the contract itself to identify the purpose of the hire, but the hirer’s intention was admitted as part the factual matrix and the contract was found to have been frustrated.
A lease was granted for a warehouse for ten-year term but, in the fifth year, the local authority closed the street that gave the only vehicular access to the warehouse. The closure of the street prevented the lessee from using the warehouse for the only purpose contemplated by lease so the lessee stopped paying rent, arguing that the lease was frustrated by the closure. This argument failed because the closure was not sufficiently grave to amount to frustration since there was three years of lease remaining after access was re-established.
In 1956 a ship was blocked in the Suez Canal when the Canal was closed. The ship’s charterer claimed that the shipping contract had been frustrated by the blocking of the Canal. The ship’s owners denied that there had been a frustration. The ships owners treated the conduct of the charterer (in asserting frustration) as repudiation of the shipping contract. The court found that the charterer was not able rely on the ship’s delay in the Canal because that delay was caused by the charterer’s own conduct (by electing to enter Port Said which was known to be dangerous). The court said that even if the ship had not entered Port Said it would not have been reasonable to relieve parties of their obligations under the shipping contract because the ship could have sailed via Cape of Good Hope. To succeed in a claim of frustration the court required that the contract must have become more than simply onerous and expensive to perform.
We strongly recommend that legal advice be sought before exercising any termination rights under a contract especially reliance on the doctrine of frustration to ensure that all consequences have been thought through.
If you assert frustration, and later you find that you are not able to rely on the doctrine of frustration, it may very well put you, inadvertently, in breach of the contract.
Is there another approach?
Everyone in the business environment is affected by the current situation so is anything going to be gained by insisting on strict performance of contracts?
We think it will be better to find creative (or even common sense!) solutions that will allow business relationships to be maintained, a greater number of businesses to remain solvent and a greater number of workers’ employment to continue.
In the case of a lease, for example, a landlord may be willing to reduce rent for a period rather than run the risk of having empty premises that may not be easily re-let when the current restrictions and uncertainty end. Customers may be willing to tolerate delay in completion of projects, particularly if they are facing similar issues upstream.
Finding a collaborative solution that assists all parties to stay afloat may, in the end, be more productive. Care needs to be taken to ensure that any new arrangement or temporary variation is properly, accurately and completely recorded – particularly if the situation does not get better in the time expected.
Aperion is offering a free 30-minute consultation to existing clients who might want to know - or get a second opinion - about their particular contractual situation and want to discuss options available.
If you want to take advantage of this invitation, please call:
Mark Allen on 0417 251 354 or email@example.com.
Peter Lightbody on 0419 166 828 or firstname.lastname@example.org.
Ashley Cheng on 0408 176 489 or email@example.com.
Aperion Law is responding to the current situation by maintaining a roster under which one of us will be on duty at our office each day with the remainder of us working at home. For the time being it would be best to contact us via email or via mobile phone.