Commercial Law: How COVID-19 can impact on contractual performance
COVID-19 has more or less put the whole world at a standstill. Individuals and businesses alike need to follow government policies and regulations, which are subject to change at any time, as more information about the virus comes to light.
But what if you are an event coordinator and the ban on large gatherings means your upcoming event has to be cancelled? What happens to all the contracts you entered into for the event? This could include contracts with ticket-holders, food and drink suppliers, performers, security, medical staff and the list, no doubt, goes on.
There are a few options available in this sort of scenario. The first is to speak with the other party to the contract and try to work out a compromise. This may not be possible in some cases, however, – for example, an event coordinator cannot speak to every tick-holder. Contracts can be varied with the consent of both parties. If you choose to do this, and you manage to come to an agreement with the other party, make sure you get it all written down in case you need it for future reference.
The other two options open to you are called ‘force majeure’ and ‘frustration’. Force majeure is a clause that may be in your contract already, and frustration is a common law principle. This article will explain these two concepts of contract law with reference to contracts potentially affected by COVID-19.
Force majeure is a clause that is found in many contracts. It sets up a “way out” if a party is unable to perform their contractual obligations because of an event out of their control.
Force majeure events can be categorised as events that:
- Prevent a party from performing some or all their contractual obligations;
- Is reasonably unforeseeable and out of the party’s control; and
- The party could not find another way to perform the contract.
Some contracts will stipulate specific events that give rise to force majeure, so it’s important to check what yours says, if you have one. For example, a contract may say that for the force majeure clause to take effect, there must be a natural disaster, riot or war.
If the force majeure clause in your contract stipulates what sort of event needs to occur for the clause to take effect, and it does not include something like a pandemic or sickness, it probably won’t apply if you are unable to perform the contract due to COVID-19. If the clause includes an event such as government bans and lockdowns, and that’s the reason why you can’t perform your obligations, you might be in luck, though.
Force majeure clauses exist to prevent the need to make a contract void. They can be simple or comprehensive – simple clauses relieve the parties of their obligations if a force majeure event takes place, and comprehensive clauses set out what the parties need to do if a force majeure event occurs.
If your contract does not have a force majeure clause, or if COVID-19 is not something that is covered by your force majeure clause, frustration may apply. Ultimately, frustration makes a contract void from the point of frustration (not retrospectively).
Frustration occurs when a supervening event that is beyond the control of the parties makes the contract incapable of being performed, or makes performance of the contract radically different from anything contemplated by the parties when they made it.
There’s a bit to unpack when assessing whether an event constitutes frustration of a contract. The important things to consider are:
- Before the contract and unforeseeable: If you made the contract after COVID-19 became a known event, (late January 2020) the contract may not be frustrated by any impacts following from COVID-19. Further, for an event to give rise to frustration, it must have been reasonably unforeseeable. There has not been a court case involving COVID-19 at this stage, so we cannot know for sure how it will be dealt with, but it is highly likely COVID-19 will be deemed an unforeseeable event.
- Risk not provided for in the contract: This is where force majeure clauses come into play. If a contract stipulates what is to happen if an intervening event unfolds, frustration will not apply.
- Without fault of either party and outside parties’ control: The frustrating event needs to be outside the parties’ control and cannot be the fault of either party. It goes without saying that COVID-19 is out of anyone’s control and not anyone’s fault, (although, again, we have not had a court decision confirming this).
- Impossible or radically different: For frustration to apply, performance of the contract must be either impossible, or radically different to what the parties intended. To take the example from the beginning of this article, if a ban on public gatherings of more than 500 people means that a planned event cannot go ahead at all, it will fall under the category of ‘impossible to perform’. Similarly, if the event was supposed to host 10,000 people and can now only hold 400 people, it may be considered radically different from what was contemplated by the parties.
Legal consequences of frustration
Unlike force majeure, frustration automatically makes the contract void from the time of frustration, whether the parties want that to happen or not. Any obligations due prior to the time of frustration will still need to be performed, (and if they’re not, the party that fails to perform will be liable).
If your contract is void, it means that neither party is required to perform their obligations under the contract anymore.
If a contract is frustrated and parties no longer have to perform their contractual obligations, it’s possible that one party may suffer a loss. For example, if an event coordinator has pre-paid all the food suppliers they contracted for their event, they will be left out of pocket if the event cannot go ahead. In this situation, the event coordinator has performed their obligations (i.e. payment), but the food suppliers have not performed theirs (supplying food at the event).
If you’re left worse-off because of a frustrated contract, it is possible to claim relief in the form of restitution. Restitution is a remedy which seeks to protect people from unjust enrichment at their expense, (as seen in the example above). It is important to note that partial performance will prevent a claim for restitution. Restitution can only be claimed if there has been no performance at all by the other party.
For the opposite situation – where one party performs their obligations, but do not receive payment (and payment was not due until after frustration occurred), they will be entitled to compensation at an amount to be agreed on or determined by count.
Legal decisions are determined on a case by case basis and no two sets of facts are exactly the same. For this reason, we cannot tell you for sure whether frustration will apply to your contract or not, but given the severity and unprecedented nature of COVID-19, it’s likely that frustration (or force majeure) will apply.
We anticipate that COVID-19 will impact the performance of lots of contracts. If your contract has already been affected, or if you are concerned about how COVID-19 might impact on any contracts you have in place, do not hesitate to contact Lynn & Brown Lawyers for expert legal advice or 9375 3411.
About the authors:
This article has been co-authored by Chelsea McNeill and Steven Brown at Lynn & Brown Lawyers. Chelsea is in her fifth year of studying Law at Murdoch University. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.