News | 18/05/2020

Breaking Contracts due to COVID-19

As Australia fights to contain and mitigate COVID-19, the economic impact for many small businesses is dire. Travel bans, forced closure of certain industries, self-isolation and restriction on movement are all significantly impacting the supply chain resulting in many businesses being unable to fulfill their contractual obligations.

So what’s the solution? Can a business break a contract because of the impacts of COVID-19? The answer is it depends on the wording of the contract and the circumstances.

Force Majeure

“Force majeure” refers to an unforeseeable circumstance that prevents someone from fulfilling an obligation, and enables that party to escape liability for failing to fulfil that obligation. 

Many commercial contracts contain a Force Majeure clause, which provides the parties with a right to end the contract should a Force Majeure event occur. Usual Force Majeure events that are expressly drafted into a contract include: acts of God (extreme natural occurrences such as floods, tsunamis, fires, lightning and earthquakes), strikes, riots, war and pandemics.

It is important to note that Force Majeure is not currently recognised in common law. This means if the clause has not sufficiently defined the event, scope and consequence then it is unlikely a court will recognise the clause as a valid reason to end a contract.

For this reason, if a party is seeking to end its contractual obligations due to COVID-19, then its Force Majeure clause should at least include “pandemic” as one of the many listed Force Majeure events. However, this alone is not enough to end a contract. A party seeking relief under a Force Majeure clause must also establish there is a connection between the Force Majeure event and their ability (or lack thereof) to perform their contractual obligations.

Doctrine of Frustration

If a contract does not contain a Force Majeure clause or the clause does not extend to include a pandemic then a party may still be able to end the contract by relying on the Doctrine of Frustration.

This is a common law principle, which may be applied where it is impossible for a party to fulfil their obligations under the contract due to some unforeseen supervening event that is not caused by the default of either party. However, the party seeking relief must prove a causative link between the supervening event and the impossibility for them to meet their obligations under the contract.

The Doctrine of Frustration cannot be applied to situations of mere commercial impracticability or where performance has simply become more onerous. The courts take a very narrow interpretation when applying the Doctrine of Frustration.

What’s Next?

Given the long-term economic impact of COVID-19, it is unclear how the courts will interpret the circumstances that give rise to parties seeking contractual relief under Force Majeure clauses and the Doctrine of Frustration.

If you plan to enter into a commercial contract in the future ensure you have a well-defined Force Majeure clause or consider including a COVID-19 clause that will allow the parties to end the contract due to disruptions caused by COVID-19.

If you would like any assistance with drafting your commercial contracts or need advice regarding your rights under your existing contract then contact us on 89416355 to book an appointment or email the writer at shauna@bowden-mccormack.com.au.