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Covid-19 : Am I Compelled to Perform My Obligations Under an Agreement Now That Coronavirus Has Shut the World Down?

by | Mar 30, 2020 | Corporate & Business

The government has introduced sweeping restrictions on social behaviours which are having devastating economic effects on businesses which rely on gatherings (or even the previously fundamental right of a person to leave home for reasons other than shopping for survival).

What if you are a buyer who has signed a or contract to purchase goods or property or other commercial agreement and the coronavirus has impacted your financial position or has otherwise affected the subject matter of the agreement?

What about a tenant who is renting property from a landlord under a commercial tenancy agreement and the government has told you that you must shut your doors?

Force Majeure

A “Force majeure” clause is a condition found in some agreements which usually states that, in certain defined circumstances which were not foreseen and which are outside a party’s control, the party may be prevented from performing their obligations and so in those defined circumstances may be relieved of some or all of their obligations under the agreement. Note that the performance must not simply be inconvenient or more costly, but impossible.

The types of things that normally would comprise a force majeure are wars, natural disasters, government action, industrial strikes etc. To determine whether you are entitled to relief requires a close examination of the specific clause and the cause of the inability to perform.

Unfortunately, force majeure is not an implied term in Australian contracts (the principle in fact arose out of the development and codification of the French civil law and is enshrined as an implied contractual principle that jurisdiction – hence the French term, which means “superior force”).

Other Relief

In some circumstances, the lease or agreement itself may contain sufficiently wide provisions to entitle the tenant or relevant party to some relief, but whether such options available will depend on the specific wording of the documents.

In Australia, the separate but similar doctrine of frustration may be the only alternative, which is an implied contractual/common law principle which basically provides that, where for reasons which were unforeseen and without fault of either party, it is not possible for the contract to be performed or the contract has become radically different to what was originally agreed, the contract may be terminated.

Note that this principle is limited in its application in Australia and it is difficult to establish.

In some contexts, relief may also be available because it has become illegal to perform the contract. This area resembles frustration and may apply where the nature of the performance of the contract would be unlawful under the government’s directives. Again, there are limits on its application.

Exercise Care to Avoid Unlawful Repudiation

A person seeking to terminate a contract must be very careful in giving any indication that the person does not intend to perform the obligations, as such conduct can be treated as unlawful repudiation and, instead of providing relief, may in fact expose that party to an action for breach of contract and all that entails, including liability for damages and court action.

What Are the Practical Solutions?

In practical terms, it is in our view more constructive to negotiate with the other party to seek to arrive at an arrangement that will keep both parties afloat whilst the storm blows over.  It is likely to be a challenge for many landlords to find a replacement tenant, and many tenants may be able to trade through if given some relief for a period until the customers return, which would be the preferable path for both parties.

We recommend that you seek advice to understand your position before you take any steps to resile or seek relief from your obligations under the contract.  We can assist you to know your rights and to negotiate to strategically map out a position appropriate to treat the circumstances which works for the parties. 

We would be happy to give you an opinion and guidance on your options. Please contact us at 03 9614 7111 or commercial@nevettford.com.au.

*Important Note – this article does not purport to give a comprehensive treatment of the concepts described, but only to identify broad conceptual principles.  Each individual set of circumstances must be assessed on its own facts and merits.