By Hugo Prescott (Associate) and Dylan Steel (Partner)
Dated: 27 March 2020
COVID-19 could be described as many things, not least of them frustrating.
The latest round of measures implemented by the Federal Government have included the forced closure of a wide range of business, including pubs, bars, beauty salons, tattoo parlors… the list goes on and on (and then some).
Barring a miracle, it seems inevitable that further, more draconian measures will be introduced sooner rather than later.
Not only have these measures affected the way we go about our personal lives, but also the way in which we carry out business.
Many of the consequences of COVID-19 are tangible – for instance, our inability to enjoy a drink at the local pub after work. Others are perhaps less tangible. One of those less tangible consequences is the impact on commercial contracts, which is the subject of this article.
What is the doctrine of ‘frustration’?
Frustration is a creature of the common law, and which has subsequently been codified in South Australia by way of the Frustrated Contracts Act 1988 (SA).
Put simply, a contract is said to be frustrated where an event neither party is responsible for occurs after the commencement of the contract and which either:
- Makes that contract impossible to perform; or
- Substantially changes the contractual rights/responsibilities.
If a contract is held to have been frustrated, it is immediately voided.
If the parties have sustained any losses, the parties must wear those losses (given frustration means that neither party is at fault) and otherwise cannot claim those losses against one another.
It is only in very rare circumstances that a contract will be found to be frustrated.
The classic example of frustration is where a law is introduced that renders the relevant contractual activity illegal or unlawful.
The leading authority on the doctrine of frustration can be found in the decision in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales  HCA 51 (Codelfa Case).
In this case, Codelfa Construction was contracted by the State Rail Authority to excavate for a series of tunnels in Sydney’s Eastern suburbs, with work to be conducted around the clock around the clock, 7 days a week, for over 2 years.
The legal advice both parties received ahead of the commencement of the contract was that this project would be exempt from restrictions around noise creation, on the basis the State Rail Authority was a government entity and was therefore not bound by such restrictions.
However, a group of locals, who quickly tired of the extraordinary noise created by the excavating, successfully obtained an injunction against Codelfa Construction from performing the works seemingly non-stop. As a result, it became impossible for the works to be completed within the contractual time frame.
Codelfa Constructions later sought to recover the additional costs in incurred as a result of the project taking considerably longer than anticipated to complete against the State Rail Authority (which maintained it was liable only for payment of the sums stipulated in the contract).
In the course of doing so, amongst various other legal arguments, Codelfa Constructions argued that because of the unanticipated event (i.e. the injunction), the contract had been frustrated (which the State Rail Authority disputed).
After many years of hearings, the High Court of Australia ultimately held that because of the restrictions imposed by virtue of the injunction, which neither party had anticipated, the contract had indeed been frustrated.
Frustration is difficult to establish, even in what otherwise might seem to be clear circumstances. Additionally, it is invariably a costly and difficult process, as is highlighted by the Codelfa Case going all the way to the High Court.
It is highly likely the outbreak of COVID-19 will lead to the frustration of commercial contracts, particularly in light of the Federal Government’s forced shut-down and the prospect of a nation-wide lockdown.
There are many ways in which COVID-19 could frustrate commercial contracts, either directly or indirectly.
One example might be where a business had been hired to cater for a wedding of 100 people for the coming weekend.
Given the Federal Government’s recent ban on weddings of 5 people of more (which realistically is going to be just about every wedding, or at almost every wedding in need of a private catering company), it is arguable that the contract has been frustrated, i.e. because the terms of any the contract have so substantially changed or indeed its performance been rendered impossible.
However, there are ways which can be used to overcome the difficulties associated with enforcing frustration, which we discuss below.
What is a Force Majeure clause?
You may have seen the words force majeure in a contract before.
Lawyers commonly include force majeure clauses to minimise, so far as possible, the complexities involved in proving frustration.
If a force majeure clause is enlivened, the parties may be entitled to ‘walk away’ from the contract (either in part or in full).
The onus is on the party seeking to rely on the force majeure clause to demonstrate it has indeed be enlivened.
Force majeure clauses generally identify the various circumstances in which it may be enlivened – for example, it may identify war, riots, earthquakes, hurricanes, lightning, energy blackouts, unexpected legislation, strikes… and pandemics.
These kinds of clauses are commonly found in commercial contracts, although their construction is widely varied. That is, although they may all share the same overarching purpose, the circumstances in which they may be relied on must be assessed on a case by case basis.
It is entirely possible that a force majeure clause may be enlivened by the COVID-19 pandemic. However, it will ultimately turn on the construction of that clause as to whether it applies or not.
To revert to our example of the caterers at the wedding – if their standard terms & conditions included a force majeure clause, which expressly refers to pandemics, it may be arguable the contract could be terminated by either party. It is relevant in this case to note that the World Health Organisation, as we all know, has declared COVID-19 a pandemic – something which will assist the party seeking to terminate the contract by virtue of that clause.
Having a force majeure clause in place is invariably preferable to having to rely on the doctrine of frustration, particularly if that force majeure clause has been well drafted and provides an exhaustive list of events.
So what can you do if your contract can no longer be performed because of COVID-19?
Governments at all levels – Local, State and Federal – are encouraging business and consumers alike to work together and co-operate during these difficult times to promote as much economic activity as possible.
Realistically, there can be virtually no doubt that there will be many, many contracts terminated, whether by the doctrine of frustration or via a force majeure clause, because of COVID-19.
This will inevitably result in contractual disputes arising – at least some of which would likely be avoidable had those parties obtained qualified legal advice before relying on COVID-19 as a means to terminate a contract.
It is crucial at this time that we all have a complete understanding of our contractual rights. A failure to appreciate and understand those rights could result in protracted legal difficulties, which we should all be trying to avoid as we approach even more difficult times.
Where possible, it is always best to try and negotiate a commercially appropriate resolution to any dispute, particularly where a dispute means walking away from a contract altogether.
At this point in time, no-one knows when this crisis will end – but we do know that, one day (hopefully soon), it will do just that.
It is as important as ever to ensure that you understand your contractual rights and how you may be able to rely on your contractual rights to ensure the survival of your business.
For further advice and assistance in relation to the impact of COVID-19 and commercial contracts, please contact Hugo Prescott on 08 8216 3304.
Disclaimer: This article provides a summary of the subject matter only. The information contained within is not intended as advice, legal or otherwise, and should not be relied upon as such. Please contact us should you wish to discuss the subject of matter of this article or to obtain professional advice on the same.