Could the coronavirus pandemic be classified as an event so unforeseeable and so unavoidable as to allow parties to negate their duties under a contract?
Further, how can you best prepare your business to ensure that you are protected if a similar event occurs in the future? We outline below what constitutes a ‘force majeure’ event and other factors to consider when examining contracts under these circumstances.
Originating from civil law systems, the term 'force majeure', or ‘legal force’, is a construct usually seen in contracts that govern the relationship of businesses or individuals over a long period of time. This is because these clauses allow for parties to free themselves from obligations under the contract if certain unforeseeable and unavoidable events take place. It is not uncommon for various events to be specified under these provisions such as natural disasters or strikes, the prevailing factor being that it is ‘beyond all reasonable control of the parties’.
These provisions in a contract require the failure of one or both parties in fulfilling their usual obligations because such an event has prohibited them from doing so. It is very likely that if a contract includes a clause that refers to pandemics, it would cover the recent coronavirus outbreak. However, it is still important to consider each contract and each business relationship on a case-by-case basis.
If there is no force majeure clause, can the contract be classified as 'frustrated'?
In Australia, if there is no provision made for force majeure events, a Court may decide that the contract has become ‘frustrated’. This doctrine stems from High Court cases such as Brisbane City Council v Group Projects Proprietary Limits  HCA 54 and Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales  HCA 24. These cases note that the critical issue is whether a certain event has resulted in a situation that is fundamentally or radically different from the situation first contemplated when the contract was entered into.
However, frustration is often difficult to establish. There must be severe impacts and failure by one or both parties to fulfil their obligations, and thus it is unlikely that a delay or an increase in expense will rise to such threshold.
What can businesses do now?
We suggest that businesses retain all documents relating to the impact of the COVID-19 pandemic so far, and keep a record of various factors including, bu tnot limited to:
- any measures taken by the business;
- the consequences on profits;
- services delivered; and
- employment impacts.
How can Sharrock Pitman Legal assist?
If you have any further queries, please do not hesitate to contact us on 1300 205 506 or by email at email@example.com. If you have any queries regarding the impact of COVID-19 on your business operations, please see our COVID-19 resources page on our website or contact a member of our Commercial Litigation or Commercial Law teams.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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For further information contact
Nicola Voss is a lawyer at Sharrock Pitman Legal.
She is a lawyer in our Litigation practice. For further information, contact Nicola on her direct line (03) 8561 3315.