Contracts affected by COVID-19

Memberships, travel and accommodation bookings, events, product price increases and changes to services are all covered by contracts. The Australian Competition and Consumer Commission is providing more information for people who have questions about any contracts that may be affected by COVID-19.

The Australian Consumer Law prohibits businesses from taking payments for goods or services when there are reasonable grounds to believe the services won’t be supplied. This applies whether or not your contract allows you to suspend payments.

The following provides some general information about specific aspects of contracts.

Does COVID-19 affect my rights under a contract?

COVID-19 may change how the law will treat some existing contracts. Questions such as whether someone who has signed a contract can get out of it because of the impact of COVID-19, and whether there will there be any consequence for doing this (“breaching the contract”) will depend upon the terms of the contract and the individual circumstances.

It is crucial that you obtain legal advice before, for example, seeking to postpone or refusing to perform your contractual obligations.

If a party wrongly refuses to perform their contractual obligations or incorrectly terminate a contract, the other side may take advantage of this and seek to sue you. This could potentially occur even where the other party could not perform themselves or wanted to escape the contract for other reasons.

Each case will depend upon the terms of the contract and specific circumstances.

Typically, relevant issues include the following:

  • Does the contract include a clause that responds to the circumstances?
  • Has the contract been frustrated?
  • Can you or the other party rely upon a term or frustration to terminate the contract?
  • What are the consequences if you wrongly refuse to perform your contractual obligations or incorrectly terminate the contract?
  • Can the other party take advantage of the wrongful refusal to perform or improperly terminate?

What if my contract has a “force majeure clause”?

The contract may include a force majeure clause which refers to unforeseeable circumstances that arise, which prevents the performance of a contract.

Commercial contracts commonly include force majeure clauses outlining the rights and remedies of the parties when certain extreme events occur outside of their control. Depending upon the express wording of the clause, a party may be able to rely upon the clause to justify delay, temporarily suspend the performance of the contract, or even to terminate.

Force majeure clauses are very important when it comes to the allocation of risk when an event, like a pandemic or epidemic occurs, due to its ability to significantly disrupt due performance.

Whether COVID-19 will constitute a force majeure event will depend on the express terms of the contract, particularly the meaning attributed to ‘force majeure’ in the contract, as well as the specific circumstances.

Where the contract contains a force majeure clause, it is crucial to make sure that the clause covers the intervening event and that the event is materially relevant to the performance of your contractual obligations.

The party seeking to rely on the force majeure clause will bear the onus of proving that the force majeure event has occurred to the extent that performance is significantly delayed or altered (depending on the wording of the clause).

An attempt to trigger force majeure only to have the clause not cover, for example, COVID-19 and the performance of the contractual obligations, may constitute a repudiation of the contract by you, allowing the other party to terminate the contract and to claim damages.

What if COVID-19 has caused “frustration” to my contract?

Depending on the contractual obligations, the coronavirus may constitute an unforeseeable change of situation that has occurred through no fault of either party which ‘frustrates’ the contract; that is, it makes performance of the contract impossible or radically different.

Frustration can potentially operate where there is no express term, like a force majeure clause, in the contract to deal with the intervening event.

Where frustration occurs, it will discharge the parties from their future obligations; however, it will not discharge them for obligations accrued before the event in question.

Where the effect of COVID-19 defeats, for example, the fundamental commercial purpose underlying the contract, the agreement may be considered frustrated. However, contracts will typically not be frustrated where the contract simply becomes more onerous for one party. The fact that an event not contemplated by the parties also causes some delay in performance will not amount to frustration, unless that delay radically alters the performance of the contract. Essentially, courts will typically require that the contract be impossible to perform such that, in practice, frustration is rarely established.

Risks with termination - it is clear that there is legal uncertainty concerning the effect of COVID-19 upon the performance of contractual obligations.

Each case will depend upon the terms of the contract and the individual circumstances.

Last updated: 6-April-2020