COVID-19’s impact on contract law

COVID-19 – How can I get out of my contract?

COVID-19, commonly referred to as ‘the coronavirus’, has caused disruption to many of Australia’s large corporate sectors, including tourism, hospitality, education, property and resources, as well as our international supply chains.

Thousands of local businesses that are affected by these unprecedented times are all looking for answers on what assistance, financial support or contractual terminations can be put in place to help their workplace survive this crisis.

So what does this crisis mean for businesses and individuals that are locked into contracts?

The simple answer is that there is no blanket response. The ramifications of this are individual, unique and personal, but here are a few tips that might help you to identify any opportunities to further explore.

Understand terms and conditions of your contact

The first thing that all businesses and consumers should look at is the terms and conditions of their contract. The contract may have items that covers an epidemic or pandemic event, while others may contain a ‘force majeure’ clause.

‘Force majeure’ is a well-known French term that means ‘greater force’. This refers to extraordinary events that have occurred outside of the control of the parties and impacts their ability to deliver goods or services under the contractual obligations under the agreement.

If there is no such clause in the contract terms, it is possible in some cases that a breach of contract will arise if one party cannot meet its obligations – which might give rise to a right to terminate the agreement. For example, you could consider whether the doctrine of frustration may apply to your contractual obligations, making it impossible to comply with the contractual terms, or changes the obligations so significantly that it would be unjust to continue. This means that all rights, duties and liabilities before the frustrating event continue, and may form the basis for any claim in damages. The contract is not void from the beginning, but a frustrating event may only discharge future responsibilities and obligations of parties.

Alternatively, some contracts include a clause requiring a party to carry insurance that could cover one or both parties’ losses if contract performance becomes impossible – this could be an alternative fall-back.

It’s important you take the time to read and understand your contractual clauses, and if you are unsure, seek the necessary legal advice to assist you.

Language used is key

If ‘force majeure’ is part of the contract, it doesn’t necessarily mean this is an out for you. The language used is absolutely key and needs to be checked carefully to determine if the force majeure event ‘prevents’ or simply ‘hinders’ the performance of the contract. An experienced contracts lawyer will be able to assist you with this.

As well as this, when considering the contingency and language of a contract, you should consider whether a reasonable extension of time would make it possible for the parties to perform. While this can be quite complicated, parties are generally required to act in good faith and take steps to minimise the losses associated with a breach of contract and this could be a good resolution for all – but communication is crucial!

What about payment obligations?

You will find that the obligation to pay money will often be excluded under force majeure clauses. Essentially, this means that you will still need to pay any money owned as a result of a force majeure event.

Does this mean suspension or termination of a contract?

In most instances, force majeure will only suspend or delay it for the duration of the force majeure rather than excuse one party from non-performance entirely. Contract termination is usually reserved for one-off supply or purchase arrangements.

More information and legal advice

COVID-19 is resulting in a lot of uncertainty for individuals and businesses. It is extremely important to get legal advice if you are unable to perform your contractual obligations directly due to COVID-19.

With many parties trying to get out of contracts or put their obligations on hold, it can be quite risky without experienced legal advice. A party may inevitably end up breaching or wrongly repudiating a contract, finding themselves liable for damages, or other remedies to enforce the contract.

Some of the key takeaways from this unprecedented global event include:

  • Check your contract clauses carefully, looking for force majeure clauses, and seek legal advice in line with your particular circumstances to see whether it may permit you to suspend or terminate your contractual obligations.
  • Pay special attention if you are in the process of drafting and negotiating force majeure clauses in a future contract as these can expose you to enormous risk.
  • Get legal advice about the doctrine of frustration or other legal remedies may apply to your circumstances.
  • Consider whether you have alternative ways of complying with your contractual obligations, including an extension of time.
  • Take advice to determine ways in which losses may be mitigated or deferred, including engaging with your counterparty, if practical.

Our team can provide you with advice regarding whether terminating a contract as a result of COVID-19. Get in touch with our experienced team today!