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Can I get out of my contract because of COVID-19?

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As the devastating effect of the coronavirus makes it way through our community and economy, some parties to contracts for sale of land have been asking whether an event of this magnitude could be grounds for either party being excused from performing their obligations under the contract.

While there are a couple of legal principles that may be relevant, the general answer is that neither the Australian common law nor our standard contracts for sale of land presently excuse parties from performing their obligations under contracts for sale of land in these circumstances, as drastic as they are. 

There may be some special conditions that evolve over the coming weeks that could alter this position.

Force Majeure

Force majeure or ‘act of god’ is a legal concept which excuses a party from performing its contractual obligations due to an event outside the reasonable control of the affected party. In practice these events typically include ‘natural disasters’, ‘government action or interference’, ‘labour shortages’, ‘national emergencies’, ‘acts of war’ and, relevantly, ‘pandemics’. However, in Australia, force majeure is not generally recognised in common law, rather it is a contractual concept – in other words it needs to be explicitly incorporated into a contract to be effective.

Pre-COVID-19, it was extremely rare to see a force majeure clause incorporated in a standard contract for sale in NSW. In the last few weeks, we have seen a variety of force majeure and semi-force majeure clauses proposed and, on occasions, implemented. One example we have seen agreed is the following:

In the event either party is unable to perform its obligations under the terms of this contract during the period of the Covid-19 outbreak, despite having taken commercially reasonable precautions, because the usual banking facilities necessary to effect financial settlements is not available during the outbreak, such party shall not be liable to the other for any damages resulting from such failure to perform or otherwise from such causes. The party seeking to rely on this clause shall notify the other as soon as reasonably possible following the occurrence of an event described in this subsection.

This is not a true force majeure clause as is it does not excuse the party from performing altogether, only mitigates the sanctions against them that may apply. The ‘act of god’ is also restricted to a disruption in banking facilities rather than the broader notion of force majeure.

We expect to see these clauses negotiated more intensely in the coming weeks.

Doctrine of frustration

If a contract does not include an operative force majeure clause, then a party may look to the doctrine of frustration to see if the contract has been terminated for frustration.

Frustration is a common law concept and occurs when circumstances have arisen, by no fault of either party, which result in the obligations under the contract becoming incapable of being performed “because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract” (Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729).

Frustration may be established in an instance where it is impossible to perform an obligation, for example, if performance becomes unlawful. An obvious example which comes to mind is the vendor’s obligation to give vacant possession in circumstances where there is ‘complete lock-down’. Whether or not a vendor’s inability to perform this particular obligation could give rise to an event of frustration (effectively terminating the contract) is not certain. In order to make out frustration it needs to be shown that the situation in which performance of the contract was originally contemplated has been rendered radically different. The standard of proof is very high, and typically higher than circumstances contemplated by a force majeure clause. Frustration will apply in respect of fundamental obligations in a contract, rather than peripheral ones.

Conclusion

While force majeure and frustration may be relevant to consider, it is unlikely the consequences of COVID-19 would presently excuse either party from performing their obligations under a contract for sale of land in NSW. This may be change as special conditions evolve to deal with this event or if the event itself becomes even more disruptive.

Please contact us if you wish to discuss the impacts on your business.

If you have any questions about this article, please contact the office on 1800 870 407 and one of our solicitors/conveyancers will be able to assist.

 

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