Coronavirus and commercial contracts: What happens if you can’t meet your obligations?

The coronavirus has thrown Australians into uncharted territory with the implications of the outbreak still a major unknown with the effect on our economy remaining to be seen.   

The ability for businesses and individuals to hold up or enforce contracts has become a major focal point in recent weeks. So it is important to consider some of the legal problems stemming from the virus and its effects on businesses, to shine light on the issues we will likely face in the coming weeks.  

This article looks at the implications of the coronavirus on commercial contracts. 

What if I can’t meet my obligations under a contract because of the coronavirus?

There are a number of legal concepts that may assist.

The first is force majeure:

• Force majeure is the legal principle used where there are unforeseen consequences that prevents someone from fulfilling their obligations under a contract;
• It can only be used if the contract contains a “force majeure” clause – they usually deal with acts of God (such as an earthquake), war, riots, government intervention and extreme weather; and
• The exact wording of the clause is relevant as to whether it will cover a public health crisis; even if a pandemic isn’t explicitly contemplated, it may be arguable that other phrases used in the clause are relevant.

Warning

Incorrectly claiming force majeure when the contract doesn’t contemplate the current situation may be considered repudiation of the contract and result in the other party seeking damages from you. 

Tip

Seek legal advice as to whether your contract covers the coronavirus outbreak. 

If a force majeure clause is not applicable, the second option to consider is the legal concept of frustration:

• Frustration is when the contract cannot be completed because of an unforeseen and uncontrollable event which is beyond the control of the parties;
• Frustration results in the termination of the contract; and
• Obligations prior to the frustrating event remain enforceable.  

Warning

If a force majeure clause contemplates the coronavirus outbreak, then you cannot use the doctrine of frustration as the contract already contemplates the current events.

Tip

There is a large body of case law which deals with the doctrine of frustration — so seek expert legal advice before attempting to terminate your contract because of frustration.   

What you need to know

The courts will soon be dealing with the interpretation of force majeure clauses and the legal concept of frustration based on the outbreak of the COVID-19 virus. It is extremely important to get legal advice if you are unable to perform your contractual obligations directly due to the coronavirus outbreak.

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