Coronavirus and Commercial Contracts

Coronavirus commercial contractsThe novel coronavirus / COVID-19 pandemic continues to cause mass disruption across the globe, with the extent of the damage yet to be understood.  It has led to businesses examining their business models, cutting expenses and re-negotiating contractual relationships.  It is hoped that, in this time, people and entities try to work together for general survival, rather than focussing on black letter law.  However it is important to know how your contracts work, and your potential options.  It is also important to prepare, commercially and legally, for the next black swan event. 

There has been much discussion in legal circles around the applicability of “force majeure” clauses within contracts to present circumstances.  A “force majeure” clause refers to a contractual term that allows a party to suspend the performance, or extend the time for performance, of an obligation of the party under a contract following the happening of an event, or events, beyond its control.  In certain circumstances it may allow for the termination of a contract if the event(s) exceeds the duration specified in the clause, where applicable.  However, such clauses are not always present in contracts and in any event may be narrowly construed by the courts so as not to apply to govern the rights and obligations of parties in the context of an outbreak of a contagion of global proportions.  Further requirements may need to be satisfied before the clause takes effect, for example, if the clause does not specifically make mention of an epidemic, will the event come within the general wording of the clause?  Alternatively, does the clause exclude the event on an objective test of reasonable foreseeability of actions taken by government (including in light of the SARS epidemic of 2003)?  If the party seeking to rely on the clause is unable to establish that the intervening event has made the performance of the contract by that party impossible (depending on the precise wording of the clause), and that steps may not be taken to avoid its effects, the party may not be able to obtain the benefit of the clause.  It is worth noting that generally it is not enough that the benefit bargained for will now be derived at greater cost to the party seeking to rely on the clause because of the purported “force majeure”.

This article, while not intended to constitute legal advice, considers whether the common law doctrine of frustration applies to commercial contracts in Western Australia by reason of the various measures taken by authorities to contain the spread of the virus and the corresponding, rapidly deteriorating business conditions which accompany those measures.  Perhaps the most succinct summation of the doctrine was that given by Lord Reid in Davis Contractors, where he described frustration as “the termination of the contract by operation of law on the emergence of a fundamentally different situation” [emphasis added].  Frustration, where established, results in the automatic termination of the contract.

Coronavirus: A Frustrating Event?

For the parties’ obligations under a contract to be discharged under the doctrine of frustration, there must be some supervening event which makes the performance of the contract impossible or pointless.  That supervening event cannot have been contemplated by the parties at the time of formation of the contract, and must prevent the substance of the contract (i.e. the assumption, condition or state of things necessary for the fulfilment of the contract) from being able to be performed in the same manner as before.  The question therefore becomes one of degree; just how dramatic must the supervening event be?  To what extent must the event affect the foundation upon which the parties have contracted?  How radically different to the originally envisaged situation must the performance of the contract have become?  The answers to such questions depend upon the facts of the particular case, and it is hardly surprising that given the tendency toward judicial restraint in common law jurisdictions, cases where the performance of the contract has been found to have been rendered either impossible or pointless are few and far between.  This goes some way to ameliorating the harsh consequences of frustration, however the legislatures in other jurisdictions have sought to go further in an attempt to distribute the burden of the cost for the parties where the common law would otherwise apply (notably in New South Wales, South Australia and Victoria).

In the context of the coronavirus pandemic, the time for the performance of obligations under a contract will likely determine whether a contract has been frustrated in the circumstances.  Again, this will be a question of degree; if a contract involves, for example, ongoing payments under a supply contract for goods which can no longer be delivered on usual terms for a period of say 2 weeks, where payments are made monthly and that contract has been on foot for up to 2 years, a court will be unlikely to find that the contract has been frustrated and the buyer discharged from their obligations as a consequence.  The case may be different where a particular item specified under the contract is unable to be delivered due to a prohibition on its import outside of the control of the parties (although this would potentially result in partial frustration of the contract, preserving the balance of contractual duties of the parties intact).  However, if there is a time for performance under the contract and time is of the essence, the contract will be frustrated if it cannot be performed according to its terms (the classic case being a booking or performance contract where the artist has been made the subject of a quarantine under the appropriate legislation, for example a public health order under the Public Health Act 2016 (WA), and is unable to perform on the relevant date of a tour).

Likely Outcome

Given the way the pandemic has evolved so far in Western Australia, the more likely outcome in many cases will be that of the temporary suspension of performance under the relevant contract.  This may be seen as an intermediate step that sits between the contract continuing in full force and effect, and termination for frustration.  For example, in the case of Carmichael v Colonial Sugar Refining Co Ltd it was held that the parties to the contract of employment were able to suspend their respective contractual obligations for a time due to the injury of the employee, and would have been entitled to termination of the contract for frustration had the injury proven to be of long duration.

Please contact us should you wish to discuss how your rights and obligations under a contract may be affected by the novel coronavirus, and the options available your business.

Fletcher Law is a boutique commercial law firm in Perth’s CBD.  We are specialists in the areas of front-end commercial work and back-end litigation, and set ourselves apart by aiming to achieve the strategic objectives of our clients.

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