Commercial contracts: what do I need to consider?

MITCHELL ZADOW Managing Principal & Accredited Commercial Law Specialist mitchell@sharrockpitman.com.au | 03 8561 3318

ANDRE ONG Principal & Accredited Property Law Specialist andre@sharrockpitman.com.au | 03 8561 3317

I have a contract that I will not be able to fulfil? What can I do?

Speak to the other party! The effects of the coronavirus are economy-wide, and every business will need to make adjustments. Often commercial, rather than legal, solutions will be the most effective.

If the other party is not receptive to your concerns, the starting point at common law is that parties are absolutely liable to perform their contractual obligations, unless the doctrine of frustration can be invoked to terminate the contract.

The doctrine of frustration only applies if: • Neither party is at fault for the failure to perform the contract; and • Complying with the contract has become

“radically different” to what the parties envisaged when they entered into the contract.

Delay or increased costs due to supply shortages will not normally frustrate a contract, as such events are reasonably foreseeable. That said, the current situation (if extended long enough) may make the contract practically impossible to perform and may allow a party to terminate the contract on the basis of frustration. At common law, termination only applies prospectively – that is the contract is terminated from the time of the frustrating event. Any moneys owed and/or paid prior to termination (including deposits) would remain payable/be able to be retained if already paid.

The provisions of the Australian Consumer Law and Fair Trading Act 2012 modify this situation to some degree, and allow the courts or VCAT to make adjustments to amounts paid and payable, both before and after termination to take into account a number of matters, including works already performed and value already provided.

What is a force majeure clause and how can they potentially operate in circumstances such as the spread of COVID-19?

The common law position regarding contracts and the doctrine of frustration can be overridden by the parties by the terms of their contract. The parties need to look to see if there is a “force majeure” clause. Such a clause, if present, will usually expressly provide for what happens if a contract is affected by events such as disease, government intervention, etc.

You should check your existing contracts to see if a force majeure clause covers the present situation caused by the coronavirus.

While it is too late for existing contracts, where you are entering into new contracts, we recommend addressing what happens in the event that your business is unable to fulfil the contract for reasons arising from the coronavirus.

How can Sharrock Pitman Legal assist?

There are many other questions that businesses will have in the days and weeks ahead. If you would like further information on the matters in this article or on any other commercial matter, please do not hesitate to contact us on 1300 205 506 or visit bit.ly/SPL-COVID19 for further information and updates in relation to coronavirus.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.