Coronavirus support: understanding Force Majeure Clauses and the Doctrine of Frustration

Coronavirus support: understanding Force Majeure Clauses and the Doctrine of Frustration

As services continue to close and restrictions tighten due to COVID-19, the risk that parties will be unable to meet a contractual promise has dramatically increased.

Where the terms of an agreement cannot be renegotiated the law provides two possible avenues for a contracting party to avoid their obligations under the contract as originally agreed.

These are the operation of a force majeure clause in the contract and the doctrine of frustration.

The Force Majeure Clause

A force majeure clause is a term of a contract which modifies the obligations of one or more parties on the occurrence of a specified event.

Such clauses may be included in contracts as a safeguard against events which, while unlikely would, if they occurred, severely jeopardise performance of the contract or some part of it.

Force majeure clauses are always construed on their terms by reference to the objective intentions of the parties at the time of contracting.

As such, whether a force majeure clause can be invoked and the effect of reliance on such a term is always a question to be determined in view of the expression of the clause and the circumstances of the case.

For this reason, whether a force majeure clause will be effective for a party to avoid an obligation due to the effects of COVID-19 can only assessed by reference to the terms of the contract and the consequences COVID-19 has had on the performance of the contract.

Anyone concerned about theirs or another party’s performance of a contract in view of COVID-19, or any other circumstance that did not have effect when the contract was made, should seek legal advice as to the potential effect of a force majeure clause as a matter of urgency.

The Doctrine of Frustration

Where contracts do not include a force majeure clause, parties may seek to rely on the common law doctrine of frustration.

The doctrine, where established, permits a contract to be terminated where an event occurs, after the contract was entered, which causes a fundamental change to the circumstances in which the contract takes place.

Although a finding of frustration depends on the circumstances in question and their effect on performance of the contract, common examples of termination for frustration include where the subject matter of the contract is destroyed or where a party who is required to personally perform a contractual obligation dies.

Frustration is traditionally not an easy doctrine to establish. In principle, the courts are minded enforcing the bargains struck between parties and will only intervene to undo commitments made in circumstances where a situation so radically different from that contemplated at the time of contracting arises.

Generally, a contract will not be frustrated when it contains a force majeure clause that deals with the relevant issue.

Further, the states of Victoria, New South Wales and South Australia have enacted legislation that modifies the common law doctrine of frustration.  The combination of these issues makes careful legal advice a must where a party thinks a contract may have been frustrated by some unforeseen event.

How should business approach these issues in view of COVID-19?

In the first instance, businesses should always seek to renegotiate contracts where performance is likely to be impeded by COVID-19.

If done successfully renegotiation can avoid lengthy, costly and uncertain legal proceedings while also preserving the ongoing business relationship at the heart of the contract.

Where it is apparent renegotiation cannot be achieved the concerned party should immediately seek legal advice to determine whether some reliance may be placed on a force majeure clause, the doctrine of frustration, or some other remedy to mitigate the damage caused by COVID-19.

Contracting parties should always bear in mind that, absent proper reliance on such legal remedies, they remain obligated to fulfil their contractual obligations.

A failure to do such may result in a party being sued for damages or other forms of compensation by another party lawfully entitled to rely on their performance of the contract.

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