Termination of a Contract or Agreement, including your COVID-19 pandemic options

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 other party does not meet the requirement, 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.

Suppose 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. In that case, 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, a Court might hold you to have ‘repudiated’ the agreement and be up for damages.

If the written contract has no termination clause, the courts will still read the right to terminate the agreement on the breach or if the other party repudiates or renunciates the contract. The court can also declare the contract to be terminated because it is ‘frustrated,’ where something not the fault of either party prevents the agreement from being carried out. Every natural disaster produces a long list of frustrated contracts! ‘Repudiating’ a contract is where you do or say things that show you will not carry out your side of the contract.

Even if you only have a verbal agreement or a series of letters or emails showing you agree, 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 problem. They will call 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 pretty 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 appalling enough to end the contract.

So What Are the Most Common Traps?

  1. Terminating without sufficient reason: You may be very upset with what the other party has done or not done. You may be quite sure they have breached the contract, but is that violation terrible enough to terminate? A court will usually agree if something is expressly stated in a written contract to be a good cause to terminate. Otherwise, if it’s a breach of the written agreement and the court thinks it is not a matter that is ‘essential to the contract’, it may decide you had no good reason to terminate. If the court determines that, it may also determine that you have repudiated the contract by wrongly terminating it, and it may make you pay damages for that.
  2. 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. However, a court may not knock out a sloppy ending if it identifies the situation; even so, it will only lead to higher costs of legal advice or commercial litigation if it is not precise.
  3. You are waiving the right to terminate: The law calls to overlook a breach and continue with the contract’ waiver’. Sometimes you may be happy to waive your right to end because you think the other party won’t provide red cars next time you stipulated white vehicles. 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 legal right to terminate over red cars forever. In this case, you should have a contract lawyer draft something saying you do still demand white vehicles from now on.

‘Frustration’ of Contracts and Force Majeure

Sometimes history or nature makes it impossible to perform a contract. Wars can break out very suddenly, as can civil unrest or riots. Earthquakes, floods, or fire doesn’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 when it became impossible to complete, i.e., when the car was destroyed. In a more complicated contract than that, say for delivering ten vehicles, delivery of only one vehicle’s delivery will ‘frustrate’ that part of the contract. 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, if the buyer had already paid for the car and the seller hadn’t deliberately torched it in our example, 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 regarding apportionment of loss or damages to clean up after a contract’s frustration.

The COVID-19 pandemic is not a blanket excuse that 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 contractual 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 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’ that explicitly name infectious disease emergencies or include contagious 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 infectious disease, but not always. Similarly, the oft-used phrase ‘acts of government’ may cover all the lockdown and border-closure measures 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 period of, say, 14 days.

Termination of commercial contracts is quite a tricky area of law, and you should approach the situation with great caution. It would be best never to terminate a commercial agreement without comprehensive legal advice, which takes the whole situation into account. In some cases, if you terminate without just cause, a Court may hold you to have repudiated the contract and be liable for damages. Nevertheless, many legal options are available even where a disease pandemic is not explicitly mentioned in an agreement, and there is no force majeure clause.

Contact us for a free no-obligation assessment of your needs in this area.