As the pandemic starts to subside in Western Australia, many businesses are still shut and the damage to our economy (and society) is unclear. It is likely that recovery will be gradual, and that commercial, legal, logistical and human challenges will need to be dealt with patiently.
It may be a simple matter to shelve decisions as to future transactions where possible, however complexity increases where commercial negotiations are ongoing. Care must be taken to ensure that promises are not made which cannot be kept. Obvious examples in the commercial contracts space include supply chain-related considerations where time is of the essence, or where staff shortages may result in the inability to meet deadlines. Primary obligations under a contract must therefore be made conditional upon a company’s ability to perform as impacted by such factors outside of its control, and the length of any likely delay will require attention from the point of view of penalties, severability and termination. This could lead to a consideration of whether the contract can be performed at all, which is ultimately a commercial decision for directors.
However, the question of contracts already agreed raises different considerations.
Negotiation and ADR
Opening communication channels with counterparties to agreements is the obvious starting point for any business facing headwinds in present circumstances. Can performance under a contract be agreed to be temporarily suspended without the party or parties seeking suspension potentially repudiating (or breaching) the contract? If so, what can be done to confirm the arrangement in concrete terms? The drafting of a deed of settlement as a cost-effective alternative to litigation may be appropriate to deal with particular matters. Mediation of disputes which may arise on a without prejudice basis is also a worthwhile approach.
Agreements should be carefully reviewed to ascertain the rights and obligations of parties and the applicability of clauses to intervening business conditions. For example, a contract may contain force majeure (or similar) clauses, and/or clauses which contemplate matters extraneous to the contract such as steps by government of the nature of a new law(s) regulating the relationship between the parties as to claims and costs. Compliance with requirements as to notice is especially important where a party is required to bring a change in some aspect of the subject matter of the contract to a counterparty’s attention, as such provisions are narrowly construed by the courts. Finally, and quite aside from questions relating to termination and breach, it is recommended to check for anything which would limit (or exclude) liability under the contract, for example a liquidated damages clause. It is worthwhile mentioning here that such a clause will be unenforceable if it is properly characterised as a penalty clause by a court.
The doctrines of frustration and illegality may have some applicability where government decree radically changes the state of play in a crisis like this coronavirus pandemic. For example, if it reaches the point where a particular worksite is required to be closed by the government whether on account of public policy announcements or subsequent legislation (both of which are within executive power pursuant to the Constitution: see Pape v Commissioner of Taxation (2009) 257 ALR 1 which considered executive power in the context of the last global crisis, namely the GFC), the doctrine of illegality may operate to release a party from its obligations under the relevant contract due to there being no justiciable cause of action arising from non-performance. Similarly, if for the same reason the contract is incapable of performance by reason of said government measures, the doctrine of frustration may apply at general law due to the substance of the contract being radically different from that originally contemplated by the parties at contract formation.
In summary, not all is lost and action can be taken to ameliorate the harsh economic realities facing many businesses at this time. In addition to the above, attention should be given to checking and complying with insurance policies at this time.
Fletcher Law is a boutique commercial law firm in Perth’s CBD. We are contract law and litigation specialists, and set ourselves apart by achieving the strategic aims of our clients. Please contact us to discuss how we can assist you and your business to safeguard against counterparty risk at this time.