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LEGAL UPDATE: COVID-19 AND CONTRACTS Featured
31 August 2020 Posted by 

LEGAL UPDATE: COVID-19 AND CONTRACTS

When things come out of the blue.....
PHILLIP BROPHY
WHEN times are good often there is no need to look at the fine print of contracts as the job gets done and people get paid.

However, as we all know things can come out of the blue and the latest example of that is COVID-19. 

Matthews Folbigg Lawyers has been receiving a lot of enquiries from clients seeking advice in relation to contracts with a view to either getting out of their contracts or alternatively, seeking to enforce their contracts. 

Contracts can be oral (the main exception being that land contracts must be in writing) or written but in both cases the questions are what are the terms of the contract and, if there is any ambiguity or uncertainty, what did the parties intend when they were negotiating the contract?

The impact of COVID-19 has meant a lot of contracts cannot be performed or there is a significant delay in performance. 

Often in these situations a deposit has been paid and there is a supplier who needs the work and a frustrated customer who wants to get out of the deal. Alternatively, the customer may not have the money or loan finance to pay for the goods or service.

So that is why the terms of the contract are critical. What does the contract say about timeframes for performance and payment? Often a refund of deposit to the customer or forfeiture of deposit to the supplier will be dependent on the termination of the contract by one party because of default by the other party. 

In the absence of clear terms, two relevant legal concepts are force majeure and frustration.

Force Majeure

Force majeure is a French term meaning “superior force”. Many contracts contain a force majeure clause, the key features being:

•A set of defined events referred to as an “event of force majeure” – this could include war, terrorism or natural disasters, but could also include events relevant to COVID-19, such as epidemic, pandemic, or acts or restraints by government authorities.

•Typically, the force majeure clause will provide that where a force majeure event is preventing, restricting or delaying performance under the contract, the parties that are affected by the force majeure event will be excused from performing under the contract for the duration of the force majeure event.

•In some cases, the force majeure clause will allow an affected party to terminate the contract if the force majeure event continues for a certain period of time (eg, 3 months).

•The parties are usually required to take steps to mitigate the effects of the force majeure event.

It is important to note that a force majeure clause is a creature of contract – it must be expressly written in the contract to be binding (and will be construed according to those express terms).  Force majeure clauses are not implied.

Frustration

By contrast, frustration is a common law doctrine – it arises by operation of the law and is not based on the express terms of the contract.  Frustration has three key elements:

•A supervening event occurs.

•Which was not caused by the parties and which is outside of their control, and

•Which renders performance of the contractual obligations impossible in the circumstances (such circumstances being radically different from those contemplated by the parties when they first entered into the contract).

The consequence of frustration is that the contract automatically comes to an end upon the happening of the frustrating event, with the parties discharged from further performance.  In New South Wales, the Frustrated Contracts Act 1978 deals with the financial implications of frustration (for example, adjusting any payments already made under a frustrated contract). 

Words of warning

It is vital that you seek legal advice before varying or terminating a contract or walking away from your obligations.

Unlawful termination of a contract could amount to repudiation and may expose you to a damages claim.

The individual circumstances of each matter must be looked at. We see that many contracts have been prepared by parties with little attention to formal or standard type clauses such as the force majeure clause which are usually found towards the end of the contract. 

Whilst it is understandable that people pay more attention to the clauses that reflect the commercial deal, these difficult and unusual times should remind us that all of the contract should be carefully prepared and reviewed before signing.

More information

Please contact our commercial law team at Matthews Folbigg Lawyers on 9635 7966 if you would like our advice regarding your contractual rights and obligations or for contract preparation or review before signing.

Phillip Brophy is senior commercial lawyer at Matthews Folbigg. Visit: www.matthewsfolbigg.com.au

Disclaimer: This article is provided to readers for their general information and on a complimentary basis. It contains a summary only and should not be relied upon or used as a definitive or complete statement of the relevant law. Liability limited by a scheme approved under Professional Standards Legislation.

 

 

 



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