Contracts in the time of COVID19 – Dealing with contractual rights and responsibilities during the COVID-19 Pandemic

Many businesses are currently dealing with the fallout from the COVID-19 pandemic, including restrictions placed by the State and Federal Governments, as well as measures taken by businesses to protect their staff and customers.

At Bailiwick Legal we have had many conversations over the last few weeks with business operators impacted by the current circumstances, relating to their rights and responsibilities under their contracts with customers, suppliers, employees and other parties.

A few examples include:

In this article we provide a brief look at:

  1. Considering the terms of your contract;
  2. ‘Force Majeure’ provisions; and
  3. The doctrine of frustration of contract.

This information may assist you where you and or another party are unable to perform under your contract, and in reviewing your contractual arrangements to assess your rights and responsibilities.

Terms of the Contract

Many business transactions will be based on a contract, even if this is not reduced to written form. Such contractual relationships occur between customers and clients, suppliers and contractors, employees, and for property owners (such as in relation to lease agreements).

Although all these relationships may be very different in nature, they are based around some common contractual principles.

Some of the terms of your contracts may be express written terms. These are sometimes included in quotes, invoices, or even exchanges of communications, such as emails and texts.

However, some terms will not be expressly laid out, such as terms that are implied into the contract. These implied terms may be a result of legislative requirements, or may be implied by common law, such as where terms are necessary to enable the parties to comply with their contractual duties.

We note that there are only limited circumstances in which a term will be implied into a contract by law. At common law terms are generally implied where it is necessary to give full effect to the intention of the parties.

The Courts have established relevant criteria to imply a term in a contract[1]. These are, that the term:

  1. must be reasonable and equitable;
  2. must be necessary to give business efficacy to the contract (so that no term will be implied if the contract is effective without it);
  3. must be so obvious that it goes without saying;
  4. must be capable of clear expression; and
  5. must not contradict an express term in the contract.

So where there is a dispute, potential dispute, or even where you just want to consider your rights and responsibilities, our recommendation is for you to first carefully review and consider the contractual terms that apply, both express and implied.

The written terms may have different provisions providing for different situations (including the operation of a force majeure clause which is discussed below). When considering options available to you under the contract, consider first the express terms to see whether these terms facilitate that which you wish to do. For example, if you are to consider terminating the contract, some of the issues that you would review include:

  1. In what circumstances does the contract provide a right to terminate?
  2. What notice must be provided to terminate?
  3. What happens with any work performed or monies paid so far?
  4. What happens to any expenses or loss incurred by each party as a result of a termination?

Force Majeure

The Covid-19 situation provides unique and unprecedented circumstances, where the inability of many parties to perform under a contract is not within their control and could not have been anticipated. As such, there has been a lot of discussion about the application of ‘force majeure’ provisions.

Force majeure is a legal construct designed to provide relief to parties affected by an unavoidable or unforeseeable event. Literally translated ‘force majeure’ means ‘superior strength’.

In general, a force majeure clause in a contract enlivens when a party or parties cannot perform, or are practically hindered from performing, their contractual obligation. Each force majeure provision may be different, however, there are usually some common elements which include:

  1. the event must be beyond the reasonable control of the affected party;
  2.  the affected party’s ability to perform its obligations under the contract must have been prevented or adversely affected by the event; and
  3. the affected party must have taken all reasonable steps to reduce or avoid the event or its consequences.

There are two key aspects of a force majeure clause to consider:

  1. The definition of force majeure events (which must be included in the contract as there is no common law definition that can be applied); and
  2. The effect on the parties’ rights and obligations if a force majeure event occurs.

It is important to note that force majeure provisions typically suspend the need to perform under a contract, however, there may be the ability for a party to terminate the contract, including after a defined period.

It is important to review the actual terms of any force majeure clause to ensure that it applies in your current circumstances, and ascertain the impact these provisions have on your rights and obligations under the contract.

If you are unable to fulfil your obligations and your contract contains a suitable force majeure provision, then there is usually a requirement for you to give notice to the other party that the force majeure provision has been invoked.

Possible Problems of a Force Majeure Clause

If a force majeure clause does not provide a detailed definition of what constitutes a ‘force majeure event’ or the definition is not wide enough to include Covid-19 related events or is ambiguous, it may be that you cannot rely on the clause.

Frustration

Where the terms (express or implied) of your contract do not deal with the Covid-19 circumstances prevailing, and the contract is unable to be performed, it may be that the contract has been frustrated.

The doctrine of frustration may apply where:

Courts generally do not like to release parties from a contractual bargain, and frustration is not an option to be relied on lightly.  Use of this complex doctrine in the current situation is largely untested, and it is important to appreciate that ‘impossible to perform’ is a high bar to meet. However, we are of the view that the doctrine may well apply in a number of situations that we have recently reviewed.

The doctrine of frustration results in the contract automatically coming to an end.  In such an event, the parties to the contract will no longer be bound to perform their future obligations, which may itself result in some unintended consequences, particularly where monies may have been prepaid under the contract.

Conclusion

The purpose of this article is to provide some background information to assist you in dealing with contractual issues resulting from COVID-19, specifically where there is, or there is a perception of, an inability to perform under the contract.

In unprecedented times such as those we are currently experiencing, uncertainty can increase (as many legal principles have not been properly explored by the courts in these circumstances) and all businesses are facing high levels of stress.

We understand that every situation is unique and, whilst it is very helpful to understand your legal position, it is also important to consider how you can practically resolve any disputes that arise. Each business will have its own financial constraints and different solutions may need to be tailored to suit the particular and prevailing circumstances at any one time.

For further information in relation to the contractual rights and responsibilities of your business or other assistance with COVID-19 related matters, please contact us on (08) 9321 5451 or by email at kim@bailiwicklegal.com.au.  For further information about our legal services, please visit our website: https://www.bailiwicklegal.com.au.

[1] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, per Justice Mason.

The above information is a summary and overview of the matters discussed. This publication does not constitute legal advice and you should seek legal or other professional advice before acting or relying on this information.

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