COVID-19 is wreaking carnage in our society, making those infected either somewhat or significantly ill and sometimes even dying. The government is endeavouring to limit the contagion in a bid to limit the number of people infected, as a desirable objective in itself, and so that our health facilities are not overwhelmed. The Australian government has banned non-essential outdoor meetings of greater than 500 people and non-essential meetings indoors of greater than 100 people. It has also issued travel advisories for Australians not to travel overseas and for Australians overseas to return home. Music festivals and concerts are being cancelled. International visitors need to self-isolate for 14 days and will be banned from this Friday. Sporting events are being cancelled or being played in empty stadiums. People are stockpiling perceived essentials like canned food and toilet paper, leaving supermarket shelves empty.
We have never had to deal with a pandemic in our lifetime and this uncertainty breeds anxiety and fear. We are fearful for our health and the health of our family and friends, particularly the elderly. We are also fearful of the potential economic consequences. Concerts, sporting events, airlines and hotels are all being significantly and negatively impacted. There are lay-offs and suspensions (Qantas standing down 2/3rds of its 30,000 workforce). There are knock on effects for others, such as food producers, linen suppliers and taxi and Uber drivers as international tourism dwindles. People are seeking to minimise their public interactions, so they are eating at home more and not frequenting cinemas.
So, what if you are party to a contractual commitment and this new environment makes that contract unprofitable and untenable. Can you get out of it?
The starting point is that a contract is a contract. You are legally bound by it and must continue to honour it.
However, contract law has a doctrine of frustration that has the effect of terminating a frustrated contract. This isn’t easy to establish. Two requirements must be met. First, there must be a radical change of circumstances such that the environment in which the contract is now to be performed is fundamentally different to when the contract was made. Second, that fundamental change of circumstances must result in one party being incapable of performing its obligations (i.e. performance is impossible, or performance would be radically different from that which was originally undertaken).
Note the high thresholds here: “radical change”, “fundamentally different” and “incapable of performance”.
The test will not be satisfied if it makes one contractual party’s performance more difficult, or the result of the contract less profitable (or even unprofitable), or if it makes performance of a long-term contract impossible for only a short time.
Broadly speaking, the COVID-19 pandemic and the consequent restrictions of the government has resulted in a radical change of circumstances. So, the first limb of the test will likely be satisfied.
But has that radical change of circumstances resulted in contractual performance becoming impossible (or radically different)? As us lawyers are wont to say, that will depend on all the circumstances. Take the case of someone renting a 140-seat capacity hall:
|The terms of the hall rental are:||Contractual impossibility?|
|For a one day hire for a wedding in a week’s time for 140 people.||Yes, because of the government banning gatherings of more than 100 people indoors.|
|For a one month hire with no designated purpose.||Uncertain, but likely no.|
|For 3 months for a band practice.||No, the band can still practice (even if it was relying on gigs that are now cancelled to be able to pay the rent).|
|For 3 months to conduct functions.||Possibly not, because functions for 90 people could still occur.|
|For 5 years to conduct functions.||Unlikely, because COVID-19 bans are unlikely to be in place for 5 years or anything approaching 5 years.|
If a contract is frustrated, then it is terminated. The parties are released from their obligations. In some States, notable NSW, Victoria and South Australia, there is specific legislation that regulates the outcome of a frustrated contract, largely spreading the loss between the parties to it.
If you are party to a contract significantly impacted by COVID-19, it is worth considering if the negative financial consequences of that contract can be avoided by resort to the doctrine of frustration. As noted above, that will depend on all the circumstances and there are high thresholds.