Contracts: your questions answered about frustration and force majeure

 

Thinking | 23 March 2020

By Kathryn Howard

What is frustration and when does it operate?

Frustration is a doctrine developed by the common law to deal with situations where:

  • an event or series of events
  • that are not foreseeable
  • occur without breach by either party
  • that make performance of the contract radically changed

Ask yourself: does the event that your business is facing satisfy each of the criteria above in the context of your particular contract? Do the terms of the contract mean that the parties have allocated the risk? The doctrine of frustration will not operate to ‘undo’ the contractual allocation of risk.

If a contract is frustrated, what happens then?

The contract is discharged, that is, it comes to an end. Loss generally lies where it falls.

However, if there has been a complete failure of consideration, pre- or part-payments may be recoverable.

The position may also be altered by local legislation. For example, in Victoria, South Australia and New South Wales, legislation provides for money to be paid or recovered reflective of contribution if a contract is frustrated.

What is force majeure and when does it operate?

Force majeure is contract’s answer to the imperfect doctrine of frustration.

Check your contract carefully and ask yourself does it identify:

  • specific event(s) that excuse a party from performance
  • what rights occurrence of that event gives rise to

There must be a causal link between the event and the obligation from which you are seeking to be excused.

Be careful not to break the causal chain with your business choices. For example, if you have limited supply and choose to supply a favoured customer over other customer(s), it may be your business choice and not the virus that means you fail to supply another customer.

If a force majeure event occurs, what happens then?

If an event of force majeure occurs, the contract will generally provide for what happens, such as:

  • extensions of time for performance
  • suspension of obligations
  • discharge of the contract

Top tips

  • Read your contract carefully: don’t assume what it means.
  • Understand how Government directions affect performance of your contract.
  • Make every effort to perform; eg, look at alternative supply.
  • If you have limited supply, be careful how you allocate resources so as not to break the chain of causation.
  • If you want to rely on frustration or force majeure, you will have to prove it so gather now contemporaneous evidence of the event, the effect on performance and what efforts you have made to perform.
  • Comply with contractual notice provisions.
  • Take care not to inadvertently breach or repudiate your contracts.
  • Negotiate with your suppliers and customers.
  • Document any negotiated arrangements, and what comes after the virus passes.

Contact

Kathryn Howard

Kathryn leads the Public Sector industry group at Hall & Wilcox, and is a commercial dispute resolution practice partner.

You might be also interested in...

Insolvency & Reconstruction | 23 Mar 2020

COVID-19 update: Temporary relief for financially distressed businesses – changes to the Corporations Act 2001 (Cth)

The Federal Government has announced a package of changes to Australian insolvency and bankruptcy laws to provide some relief to businesses and individuals who may face financial distress from the economic impacts of the current health crisis.

Insolvency & Reconstruction | 25 Mar 2020

Stimulus packages and economic response to the coronavirus (COVID-19) to assist Australian businesses

With COVID-19 impacting all areas of life, the Federal Government has announced its second economic stimulus package, bringing the total economic value to $189 billion. Our Commercial Dispute Resolution team explains what this means. In addition, we look at initiatives announced by State governments and what steps the four major banks have recently announced.