The pandemic of COVID-19 has caused major disruption to the global economy at an unprecedented pace. As a result, businesses are struggling to meet contractual obligations, causing a harmful domino effect. You do not need to look far to see the widespread effects of COVID-19. Whether it be to your local coffee shop, favourite clothing store or regularly frequented restaurant, businesses are being forced to think innovatively. This is especially the case for small businesses, who are having to devise new strategies that will allow them to continue operating, whilst also ensuring compliance with the restrictions implemented by the Federal and State governments.
As a law firm specialising in commercial advisory, disputes, restructuring, insolvency, construction and crisis management our purpose is to assist businesses in navigating the challenges of COVID-19. We offer legal solutions that will help to alleviate the financial pressure on business owners, as we face the reality that the adverse economic effects of COVID-19 may endure long after the outbreak ends.
Force majeure is a legal term and contractual concept meaning “superior force”. It extends to occurrences that are considered to be ‘acts of God’ (i.e. – events that are unavoidable or beyond control). These can be described as a force majeure ‘event’. The COVID-19 pandemic fits well within this classification.
The purpose of a force majeure clause in a contract is to set out how the contract will proceed if a force majeure event occurs and how this will impact upon the obligations of each party. If properly drafted and invoked, force majeure clauses can excuse certain obligations under the contract and allow parties to avoid liability in relation to any breach of contract that may arise as a result.
In order to be legally enforceable, force majeure clauses should define the scope of the clause and specify the types of events that would trigger its applicability. Typically, a party will seek to rely on a force majeure clause when they realise that they are unable to fulfill their obligations under the contract, as a direct result of a force majeure event.
For example, the government has recently introduced new laws which mandates that all gyms must close. Consequently, gym owners are now no longer receiving income in the form of membership or personal trainer fees. However, despite being closed, gym owners are still required to pay rent under their lease agreements and other mandatory outgoings. If a force majeure clause was drafted into the lease in this circumstance, a gym owner may be able to rely on the clause to avoid the continued payment of rent throughout the period of time that the gym remains closed or even seek to avoid the lease completely (depending on the nature of the clause).
A party that seeks to rely on a force majeure clause to excuse its contractual obligations bears the onus of proving that the particular event was contemplated at the time the contract was drafted and that it falls within the scope of the force majeure clause. In addition, a party seeking to rely on this clause must prove that they have taken steps to mitigate their loss and that they have made reasonable attempts to continue to perform their obligations under the contract. In practical terms for businesses this will mean minimising expenses and maximizing cash flow, to prevent unnecessary outgoings and to ensure that all debts continue to be paid by the business as and when they fall due.
If a contract does not contain a force majeure clause, another legal option that may be available to businesses is the common law doctrine of Frustration.
Frustration of Contract
When a contract does not contain a force majeure clause, the doctrine of frustration may be applicable. Frustration is a concept arising out of common law and occurs when the terms or of a contract cannot be fulfilled or completed due to unforeseen circumstances. Frustrations affords parties the right to automatically discharge a contract when they are unable to perform their obligations. However, the courts have set a high bar for parties seeking to rely on the doctrine of frustration and as such, there are number of factors the court will consider, including the following:-
- The reason behind a party’s inability to perform its contractual obligations. There must have been a ‘radical’ change in circumstance;
- The change in circumstance must create a profoundly different situation for the parties, preventing them from performing their obligations;
- The change in circumstance must not have been contemplated by the parties at the time the contract was entered into; and
- The change in circumstance must be without fault of either party
The doctrine of frustration has been found to apply to some contracts of our clients and has provided them with various options.
A contract that is frustrated will be considered terminated at the time of frustration.
What are your options?
We have been assisting a lot of clients in relation to Force Majeure and Frustration positions regarding various contracts. We can provide advice to clients, and also assist them to negotiate an outcome against the other side to the contract.
Phone one of our experts today for an obligation free confidential discussion.