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The Effect of Coronavirus on Contracts. Who bears the risk?

1. I have been inundated with phone calls from business clients seeking advice on contractual obligations during shutdown. Panicked business owners have not been provided with any certainty as to shutdown time frame and it appears the measures imposed by governments are likely to become more restrictive.

2. If both contracting parties are innocent, who should bare the loss?

3. The law recognises that disruptive events outside of the control of the parties may prevent them from performing obligations under a contract. For example a ship’s cargo may be delayed by a cyclone or the government might subsequently impose restrictions on imports.

4. Some contracts have expressed terms dealing with the consequences of disruptive events. These are called “force majeure” clauses.

5. However, the catastrophic event might be of such magnitude that the parties could never have anticipated it at the time of making the contract. In those cases, the law can excuse non-performance of a contract. This is known as the doctrine of frustration.

6. Simply put, the catastrophic event frustrates the performance of the contract. If that occurs the contract can be brought to an end and future performance may be discharged.

7. It would be trite to say that the unleashing of the coronavirus into the world is a catastrophic event that was not anticipated by parties to a contract.

8. The steps governments have taken to contain the virus could also not have been reasonably anticipated. This is evident from the shocking speed government regulations have descended upon businesses preventing some from operating. Businesses have been forced to shut their doors, and let go of staff leaving stakeholders with no or a substantially reduced incomes.

9. The High Court of Australia has approved the doctrine of frustration in the case known as Codelfa Construction Pty Limited V State Rail Authority of New South Wales (1982) 149 CLR 337.

10. Examples of frustrated contract have included wartime prohibitions on contracts with the enemy, hurricanes delaying arrival of cargo, changes in laws preventing performance, the destruction of a concert hall before a concert was given. If the “state of affairs” essential to performance also disappears, then this may also be grounds for operation of the doctrine.

11. The doctrine of frustration has applied to leases but these have been rare. It has been suggested that a lease contract would be frustrated if “some vast convulsion of nature swallowed up the property altogether or buried it in the depths of the sea” . Cricklewood Property and Investments Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221.

12. It is a complex area of contract law that requires a review of the specific contractual arrangements. Individual circumstances may apply. It is important to get specific legal advice.

For more information contact Evan Sarinas

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