If you have a written contract, it will often contain a clause that allows either side to terminate the agreement if a specific condition is not met, usually the supply of goods and services or payment by some particular date. If the condition is not met by the other party, you can choose to terminate the contract under that clause, though you may choose not to. The COVID-19 pandemic may have expanded your options for terminating a contract early.
If you are in a position with a commercial contract where you are considering terminating or where the other party is misbehaving or breaching the contract, you should consult a business contracts lawyer immediately. Commercial litigation over contracts is surprisingly tricky because courts also consider what each party has done since signing. It could be, for example, that if you overlook some breach, you may not be able to terminate for that same type of breach further down the track. Or, if you end a commercial contract without good reason, you might be held to have ‘repudiated’ the contract and be up for damages.
If the written contract has no termination clause, the courts will still read into it the right to terminate the contract on the breach, or if the other party repudiates or renunciates the contract. ‘Repudiating’ a contract is where you do or say things which show you will not carry out your side of the contract. The court can also declare the contract to be terminated because it is ‘frustrated,’ which is where something not the fault of either party prevents the contract from being carried out. Every natural disaster produces a long list of frustrated contracts!
Even if you only have a verbal agreement or a series of letters or emails which show you making an agreement, the law still calls that a contract. If you go to court in a situation like that, the court will apply the old ‘common law’ and any relevant Acts of Parliament to the situation. Basically, they will call something a contract if there is an offer to do something in exchange for money or something else, and that offer is accepted. And, as usual, the courts are quite pushy and nosey with this stuff and will always be considering the reasonableness of your conduct and whether the breach you are citing to terminate is really bad enough to end the contract.
So What Are the Most Common Traps?
- Terminating without sufficient reason: You may be very upset with what the other party has done, or not done. You may be quite certain that they have breached the contract, but is that breach bad enough to terminate? If something is expressly stated in a written contract to be good cause to terminate, a court will usually agree. Otherwise, if it’s a breach of the written contract and the court thinks it is not a matter which is ‘essential to the contract’, then it may decide you had no good reason to terminate. If the court decides that, it may also decide that you have repudiated the contract by wrongly terminating it and it may make you pay damages for that.
- Terminating sloppily: You must specify exactly what the breach is, referring to the written contract if there is one. If the contract lays out a procedure for termination, like giving notice etc., be careful to follow it to the letter. Although a court may not knock out a sloppy termination if it basically identifies the situation, even so it will only lead to greater costs of legal advice or commercial litigation if it is not precise.
- Waiving the right to terminate: The law calls overlooking a breach and continuing with the contract, ‘waiver’. Sometimes you may be happy to waive your right to terminate because you think that the other party won’t provide red cars next time when you stipulated white cars. However, be very careful with this one, as sometimes waiving your right to terminate for that reason once may be interpreted by a court as waiving your right to terminate over red cars for ever. In this case, you should have a contract lawyer draft something saying you do still demand white cars from now on.
‘Frustration’ of Contracts and Force Majeure
Sometimes history or nature make it impossible to perform a contract. Wars can break out very suddenly, as can civil unrest or riots. Earthquake, flood, or fire don’t usually give us much advance notice either! If, say, you sell a car to somebody, and it is destroyed by a bushfire the night before you deliver it. The common law deems that contract ‘frustrated’ and terminated from the time that it became impossible to complete, i.e., when the car was destroyed. In a more complicated contract than that, say for delivery of ten cars, then only the delivery of that one car will be frustrated, and the parties are still bound to carry out other contractual obligations as ‘part performance.’
The judge-made common law was a little harsh regarding where damage fell in such cases. For instance, in our example, if the buyer had already paid for the car and it hadn’t been deliberately torched by the seller, the old common law might have allowed the seller to keep the money. The NSW Frustrated Contracts Act 1978 has overridden the common law of frustration, at least regarding apportionment of loss or damages, to more fairly clean up after frustration of a contract.
The COVID-19 pandemic is not a blanket excuse which frustrates every contract. However, the inability to complete part or all of a contract directly because of the virus itself or because of restrictions imposed by the government will constitute frustration.
Because frustrated contracts present huge risks and the legal options were often not favourable, it became common to include force majeure clauses in commercial contracts. The phrase simply means ‘overwhelming force,’ and these clauses allow for suspension or termination of contracts when war, insurrection, or natural disaster render their performance impossible. Maritime law has, for centuries, had its own quite detailed legal regime covering frustration and force majeure because of the routine nature of shipwreck.
Undoubtedly, from 2020 on, most commercial contracts will have ‘epidemic clauses’ which explicitly name infectious disease emergencies, or will include infectious disease in the list of natural and civil disasters in their force majeure clauses.
Whether or not situations arising from the COVID 19 pandemic is a force majeure event justifying suspension or termination of your contract will depend on the specifics of the wording of the force majeure clause in the contract. It may be that the oft-used blanket term ‘natural disaster’ will be sufficient in some circumstances to cover an infectious disease, but not always. Similarly, the oft-used term ‘acts of government’ may cover all the lockdown and border-closure measures that are directly affecting business during the pandemic. Still, such words will not necessarily cover all the flow-on consequences of the government shutdown. If you do have a force majeure clause, you may need to invoke it by notifying other parties within a stipulated time period of say 14 days.
Nevertheless, many legal options are available even where a disease pandemic is not explicitly mentioned in contracts, and there is no force majeure clause. Termination of commercial contracts is quite a tricky area of law and should be approached with great caution. You should never try to terminate a commercial contract without comprehensive legal advice, which takes the whole situation into account. In some cases, if you terminate without just cause, you may be held to have repudiated the contract and be liable for damages.
Contact us for a free no-obligation assessment of your needs in this area.