Force Majeure and Frustration: legal remedies for businesses unable to fulfil their contractual obligations due to COVID-19

COVID-19 has certainly thrown everyone’s lives around. From banning mass gathering to lockdowns to new social distancing measures, it’s a heck of a lot to get used to.  But how does our legal system react in times like these?

At Green & Associates we understand that as the going gets tough, more and more people will be seeking to rely upon legal rights and remedies that may provide some relief. In this post we’re discussing how COVID-19 can interact with existing laws regarding force majeure and frustration – which may provide relief for parties who are no longer able to fulfil their contractual obligations in the face of a global pandemic.

 

But firstly: what exactly are we dealing with? 

You’d have to be living under a rock to not have heard of COVID-19. Or on a meditation retreat like Jared Leto. In case you missed it, here’s a recap…

COVID-19 is a respiratory illness caused by a group of viruses. Since its outbreak in China in 2019, COVID-19 has spread to over 30 countries.  The virus poses a significant death threat to the elderly,  those with underlying health conditions and those living in rural or regional areas. 

On March 11 2020 the World Health Organization declared the outbreak of COVID-19 a pandemic. 

To slow the virus’ spread, countries have closed borders, enacted travel bans and advised social distancing and isolation. The impact to domestic and international trade and commerce, tourism, capital flows and migration is (and will continue to be) particularly extensive. 

How can force majeure help? 

Force majeure comes into play upon unforeseeable circumstances arising which prevent parties from fulfilling their contractual obligations. 

In Australia, force majeure is not a stand-alone concept but is the product of a commercial agreement between contracting parties. Many contracts, particularly international contracts, will contain a force majeure clause. Some force majeure clauses will also include a contractual termination right. 

On 30 January 2020, the China Council for the Promotion of International Trade announced that Chinese entities can apply for force majeure certificates for disputes with foreign trading partners emerging from COVID-19 control measures. 

But: the presence of a force majeure clause does not mean that parties will be automatically excused from their contractual obligations due to COVID-19. The scope and effect of force majeure clauses is determined on a case-by-case basis, pursuant to the clause’s wording and any relevant factors. Even if COVID-19 is considered a force majeure event, the protection afforded by a clause will depend on its exact wording.

 

So, when can a party argue force majeure as a result of COVID-19?

Some force majeure clauses will apply in events such as epidemics, quarantine, biological contamination or entry and exit restrictions. These contracts make the issue simple to resolve. Other contracts may be more broadly worded; for example, clauses that stipulate ‘natural disasters’ as force majeure events may (arguably) capture COVID-19. 

Importantly, coronavirus itself does not need to be the direct cause of a force majeure event – the event may be triggered tangentially as a result of new living and working conditions, such as the impossibility of receiving international commerce.

Also, force majeure cannot apply retroactively. If performance was due prior to the force majeure event and was not completed, force majeure is unlikely to apply. Parties need to show a specific event that prevented performance of the contractual obligation as opposed to generally refer to the outbreak of COVID-19 .

Note that the party relying on force majeure bears the onus of proof – and in the event of ambiguity, the clause will be interpreted against the party relying on it. 

 

What about frustration?

If a party cannot rely on force majeure they may argue frustration. Frustration occurs where, through no fault of the parties, an intervening, post-contract event: 

  • makes a contractual obligation impossible to perform; or
  • transforms a contractual obligation into a fundamentally different obligation.

 

This sounds broad, but in reality, frustration is difficult to prove. Frustration will not apply where: 

  • The parties have contractually agreed to the consequences of the event (including by way of a force majeure clause);
  • An alternate method of performance is available, even if this performance is more onerous or expensive; and
  • A party has been let down by one or more of its suppliers.

A temporary or transient change will not suffice, either.  In the case of Ching Wing v Xuan Yi Xiong, a tenant argued frustration to discharge a lease to which he was a party. The tenant was the subject of a 10-day isolation order due to SARS and was 13 months into a 24-month lease. Because the isolation order was for a short duration compared to the length of the lease, the court held the contract was not frustrated.

Where a contract is frustrated, it is automatically terminated upon the occurrence of the frustrating event. Because neither party is at fault, neither can claim damages for non-performance – which may result in a harsh economic outcome. 

If you find yourself seeking advice based on this article, or for a criminal law matter, contact Green & Associates on (02) 8080 7585.

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