Terminating your contract in the Wake of Covid-19

Terminating your contract in the Wake of Covid-19
Posted on 20 Apr 2020

Terminating your contract:  is Covid-19 a ‘Frustrating Event’

As we continue to explore uncharted territories with the spread of Covid-19, many clients are wondering whether or not they can terminate their contracts as a result of inability, or even just difficulty, in performing their contractual obligations.

Whether it is suppliers to the building and hospitality industries, maintenance service providers or property developers, performance of contractual obligations in the wake of the coronavirus has become increasingly difficult, if not impossible.

So where do you stand?

If your contract does not contain a force majeure clause, consideration needs to be given to whether or not the current pandemic constitutes a frustrating event.  In circumstances where the doctrine of frustration does apply then the pandemic may be relied upon to legitimately terminate a contract.

But be careful, because as with most areas of law the devil is in the detail. Do not rush in and terminate contracts, or even threaten to do so, without first obtaining legal advice. Unlawfully terminating your contract may expose you to a claim for damages by the other party to the contract for wrongful termination or an action for specific performance (a court order requiring you to perform the contract), inviting lengthy and costly court proceedings.

In the meantime, some points to remember are as follows:

  1. The contract is your starting point : what are the obligations of the parties ?
  2. Performance of your obligations : impossible or just compromised?
  3. The outcome : if the contract is performed, is it required to be performed in a radically different way, or lead to a radically different outcome, to that contemplated at the time of entering the contract.

A simple blog is not going to give you all the answers you need, but we explain some key components here.

What is a force majeure provision?

A force majeure clause will usually detail a series of events which are identified by the parties at the creation of the contract as events or circumstances which will enable the parties to terminate the contract. 

Each force majeure clause is different depending on the way in which the contract has been drafted.  You should look to the specific clause to see what events have been defined and if you have a clause which includes words such as “pandemic” or “act of God” you should contact your lawyer to see whether or not it is appropriate to terminate the contract. 

In short, consider in relation to your force majeure clause:

  • what does it say and what are the defined events;
  • how do you properly invoke that clause; and
  • in circumstances where you are required to give notice, how is that notice effectively given.

If you are going to rely on one of these clauses to terminate a contract, be sure that you firstly have the right to do so, and secondly do it effectively.

Doctrine of Frustration

If there is no force majeure clause within the contract, the parties may consider whether or not the doctrine of frustration applies to discharge their obligations. 

It is important to acknowledge and understand that if there is a force majeure provision within the contract which, upon analysis of the circumstances arising from Covid-19 is found not to apply, it may impact upon the success of establishing whether the doctrine of frustration applies.  That is because consideration by the parties at the time of entry into the contract as to what events would trigger a right of termination, may undermine the application of the doctrine.

Relevantly, frustration will only occur if the circumstances in which performance of the obligations required under the contract has been radically changed as a consequence of the Covid-19 pandemic.

What is a frustrating event?

In short, a frustrating event is any event which radically impacts upon the parties’ ability to perform the contract. 

The parties need to consider whether or not the impact of Covid-19 upon their contractual obligations is rendering it difficult to perform or completely impossible.

If the contract is frustrated, it is automatically terminated, releasing you from your obligations to perform your contractual promise.

However, the above needs to be considered not just in the context of the individual contracts, but with regard to the relevant legislation (which varies from state to state) and other rights available to the parties such as restitution.

Key takeaways

  • Covid-19 is not an opportunity to ‘get out of’ a contract you are no longer happy with. There must be a radical difference to the way in which the contract is to be performed.
  • Lawful termination of your contract may be an option for you but start with a review of your contract terms, and seek legal advice.
  • Do not rush in. Mistakenly relying on Covid-19 as a ‘frustrating event’ to terminate a contract could lead to litigation.

If you are concerned about your ability to complete obligations pursuant to a current contract, or whether the other party to a current contract may be relying upon Covid-19 to seek to terminate the contract, then contact any member of our team and we can assist you moving forward. 

 

Contact Us

T: 07 5592 6633

E: info@croninmiller.com.au

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