The COVID-19 pandemic is currently having an unprecedented impact on domestic and international trade and commerce. The pandemic has caused major disruption to commercial activity and is impacting the ability for many businesses to comply with their contractual obligations. We have already had a number of clients contact us for advice on their rights to suspend or terminate commercial contracts due to the impacts of COVID-19. The purpose of this article is to consider how force majeure provisions and the doctrine of frustration may be engaged in the context of the COVID-19 pandemic.
A force majeure clause is a contractual provision which may allow a party to suspend its contractual obligations or terminate the contract when certain circumstances beyond its control arise and make performance of the contract commercially impracticable or impossible. Force majeure clauses are often found in major commercial contracts but are by no means universal.
As there is no common law principle of force majeure, a contracting party’s ability to claim force majeure relief will depend on whether the contract contains a force majeure clause, and the specific terms of the clause. If a contract does not contain a force majeure clause, force majeure relief will not be available.
If a contract does include force majeure provisions, an affected party needs to consider:
The first step in determining if force majeure relief is available under a contract containing a force majeure clause is to consider the definition of ‘force majeure event’ or ‘force majeure’. These vary considerably in scope. Some definitions are quite broad and contain a non-exhaustive list of qualifying events, while others are narrow and limit the operation of the force majeure clause to a closed list of occurrences.
The application of a force majeure clause in the current COVID-19 crisis may raise the issue of what exactly is the force majeure event – is it the first outbreak of the virus, is it the declaration of a pandemic by the World Health Organisation or is it a specific directive by a particular government, for example to close borders or to order the closure of businesses or the cancellation of events. This characterisation may be important for the purpose of determining if the affected party has met any required timeframe for the giving of notice, which is often a pre-condition to any entitlement to relief.
Force majeure clauses will often include specific conditions and procedural requirements, with which the affected party must strictly comply in order to obtain relief. These may include the giving of notices within prescribed time limits and taking all reasonable steps to overcome the effects of the force majeure event. Failure to strictly comply may result in the loss of entitlement to relief.
If a force majeure clause is successfully invoked, the impact on the affected party’s obligations will again depend on the drafting of the contract. Usually there will be a suspension of the affected party’s obligations to the extent they are affected by the force majeure event, and often there will be a right for either one or any party to terminate the contract without penalty if the force majeure event continues to prevent performance for a designated period of time.
If a contract does not include a force majeure clause, a party may instead be able to rely on the doctrine of frustration to avoid its obligations under the contract. The doctrine of frustration is a concept recognised at common law and also in legislation in various States (including the Frustrated Contracts Act 1978 (NSW) (NSW Act)). Unlike force majeure, the doctrine of frustration will apply, if the required conditions are met, regardless of whether a contract expressly provides for its application.
The doctrine of frustration only applies in very limited circumstances and can be difficult to establish. A frustrated contract is a contract that, subsequent to its formation and without fault of either party, is incapable of being performed due to an unforeseen event, resulting in the obligations under the contract being radically different from those contemplated by the parties at the time of entering the contract. Importantly, an event which merely makes performance more difficult or costly will not render the contract frustrated.
If a contract is frustrated, the contract will be automatically discharged so that the parties are no longer bound to perform their respective obligations. The NSW Act varies this position slightly so that where an obligation under a frustrated contract was due to be, but was not performed, before the time of frustration, the obligation will be discharged except to the extent necessary to support a claim for damages for breach of the obligation before the time of frustration. Importantly, the NSW Act does not apply to certain contracts, including contracts of insurance, contracts for the carriage of goods by sea and contracts which expressly ‘contract-out’ of the operation of the legislation.
It is possible that, in the context of COVID-19, the doctrine of frustration may apply to contracts with event organisers that have had their events cancelled due to restrictions set by the Government, or similar circumstances.
Frustration is something of a blunt instrument and its invocation by a party, whether correctly or otherwise, can have significant consequences, so it is important to exercise caution before doing so. We recommend seeking advice before claiming that your contract has been ‘frustrated’.
As the commercial impacts of COVID-19 continue to grow, it is important that businesses make sure they are aware of, and understand, any force majeure clauses in their contracts and whether, when, how and by whom they may be triggered. Businesses should not only be aware of the circumstances in which they may be able to claim force majeure relief for their own benefit, but also be alive to the possibility and consequences of a force majeure claim by a contractual counterparty. It is also important to understand how and when the doctrine of frustration may apply.
The current crisis is also a timely reminder of the importance of carefully considering the inclusion of properly drafted force majeure clauses in future contracts.
If you have any queries, please contact us for tailored advice.
This article was co-written by Laura Bain, Lawyer.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.