Covid-19 and contractual relationships in Australia
The disruption to a party’s ability to perform its contractual obligations as a result of Covid-19 is generally being dealt with in Australia through consideration of the doctrine of Frustration, Force Majeure clauses within contracts themselves, and temporary measures being introduced by the Australian Government (a recent example of this is the Commercial Leasing Code of Conduct).
Reliance on the doctrine of Frustration, a Force Majeure clause, or temporary government measures may provide an immediate fix, but parties should consider the long-term commercial fallout from relying on legal protections in the first instance. Without waiving their legal rights, parties should consider whether temporary amendments to contracts will achieve the same outcome as relying on their legal rights, but better preserve the commercial relationship between the parties.
Can the doctrine of Frustration apply to Covid-19?
The doctrine of Frustration looks at whether an event has arisen since the formation of the contract without fault of either party that makes a contractual obligation incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. If the doctrine is satisfied, then the contract will be deemed to have been terminated, and the parties will be released from obligations due to be performed after the event that causes the contract to be frustrated.
The test for frustration can be difficult to satisfy. The mere fact that an event has occurred that makes certain obligations more onerous or expensive to perform will itself not be enough. Whether the doctrine of frustration will apply as a result of Covid-19 will require an analysis of the contractual obligations of a specific contract and the circumstances that surround the relevant parties.
For example, XYZ Pty Ltd is a food service business that provides food and beverage solutions to functions and events. Oz Events Pty Ltd organises and manages an annual fun festival that attracts over 50,000 people. XYZ Pty Ltd has entered into a contract with Oz Events Pty Ltd to provide food and beverage services at the festival. The Australian Government has introduced a number of measures to flatten the Covid-19 curve in Australia, including the banning of all outdoor festivals. In this circumstance the contract between XYZ Pty Ltd and Oz Events Pty Ltd would be frustrated as a result of the Government’s actions because the festival cannot now legally take place. However, the contract may not be frustrated if instead of banning all outdoor festivals the Australian Government only introduced new regulations requiring XYZ Pty Ltd to implement more hygiene and safety measures at XYZ Pty Ltd’s cost.
Reliance on the doctrine of frustration is not without risk. If the requirements for frustration are not met, then the party seeking to rely on it for not performing their contractual obligation may be deemed to have repudiated the contract, and enable the other party to terminate the contract and seek damages. Further, it may be difficult to assert the contract has been frustrated if the contract has a Force Majeure clause that applies in the case of Covid-19, as it would demonstrate that the parties had considered the situation and have included a mechanism to enable the contract to continue.
Will a Force Majeure clause apply to Covid-19?
It is common for many contracts (but not all) to include a Force Majeure clause that deals with circumstances or events beyond the control of the parties that may impact or prevent the performance of certain obligations under the contract.
Not all Force Majeure clauses are created equal, and whether a Force Majeure clause will apply in relation to Covid-19 will depend on the drafting of the clause within a contract. When looking at a contract you should consider:
- the definition of a Force Majeure event;
- if the Force Majeure event impacts the performance of contractual obligations, and threshold for such impacts in the contract;
- the consequences of a Force Majeure event arising; and
- the process for giving notice in relation to a Force Majeure event.
A Force Majeure clause will list the events the parties agree are beyond their control and may impact the performance of obligations under the contract. For Covid-19 to be directly covered by a Force Majeure clause, then a reference to infectious disease, virus, pandemic, or something similar should be included in the definition of Force Majeure event. However, a Force Majeure clause may still apply if the definition of a Force Majeure event in the contract doesn’t specifically include reference to infectious disease, but includes a reference to change in law or government direction.
If a Force Majeure event has occurred, consideration should be given to the language of the contract and what is required before a party can give notice that they seek to rely on the Force Majeure clause. The mere occurrence of a Force Majeure event does not necessarily mean that a party is prevented from performing their contractual obligations. Consideration should be given to a party’s specific contractual obligations and how they are impacted by the Force Majeure event.
If a Force Majeure event has occurred that impacts or prevents the performance of certain obligations under the contract, the Force Majeure clause will generally allow contractual obligations to be suspended but not permit a party to immediately terminate the contract. For example, a Force Majeure clause may require an event to prevent the performance of contractual obligation for more than 30 or 60 days before the contract can be terminated, but even then the right to terminate will not generally be for the benefit of the party that is unable to perform.
If a Force Majeure clause is not applied correctly by the party seeking to rely on it, then the other party may assert that they have breached the contract, and seek damages or other legal remedies.
What is the best course of action recommended in case either party issues a notice of Force Majeure?
All parties should ensure that they follow the procedure outlined in the contract for dealing with a Force Majeure event, with specific attention given to the notice requirements.
The party seeking to rely on a Force Majeure clause should document the basis for relying on the clause. If the giving of the notice is likely to be contentious, then the party should seek advice about protecting certain documents and opinions under legal professional privilege.
The recipient of a Force Majeure notice should consider:
- if they are willing to accept the notice;
- any additional information they may require for their consideration of the notice;
- interim measures they can implement to manage the impact of the Force Majeure event, and alternative long term arrangements if the Force Majeure event continues and they wish to terminate the contract (subject to the requirements of the contract); and
- how they will test whether the Force Majeure event continues to prevent the other party from performing their contractual obligations.
Australian Government Response to Covid-19
The Australian Government has implemented a number of measures to support Australian businesses during the health crisis. Such measures include but are not limited to wage subsidies to keep people employed, extension of tax incentives to encourage capital expenditure, and other temporary measures to ‘hibernate’ businesses impacted by Covid-19 and limit the number of businesses that are wound up due to restrictions put in place by the Government to protect the health and wellbeing of Australians. Foreign companies with operations in Australia may be able to benefit from some of these measures.
The Australian Government has also put in place temporary measures to protect Australian companies from foreign takeovers. Temporary amendments have been made to Australia’s foreign investment rules. The amendments do not prohibit foreign companies from acquiring Australian assets, they simply reduce the threshold of the value of acquisitions (i.e. threshold is now $0) that require an application to and approval by the Foreign Investment Review Board. The Foreign Investment Review Board may take several months to consider an application, so any application should be made sooner rather than later.
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