Consequences of COVID-19 (Coronavirus) on businesses

Many businesses in Australia are suffering as a result of the of the measures put in place by the government to combat the spread of COVID-19.

As a result of the measures implemented by the Government, businesses have lost trade and therefore have reduced or no income however they still have to pay permanent staff and ongoing overheads such as premises rent, finance repayments, equipment and maintenance costs.

Despite the downturn in trade which is due to no fault on the part of the business owners they still have to comply with the terms of their leases and contracts associated with the business.

Even though the government has committed to financial assistance packages to compensate for the lost income, this will take time to implement and probably will not cover the full extent of the businesses’ losses.

In the meantime, business owners want to know what legal remedies are available to the business owner to ‘stop the bleed’.

The areas of law which could help struggling business owners is the law concerning frustration of contracts and force majeure events

Force Majeure

Force majeure means “superior force” and the doctrine of force majeure can only be enforced with the inclusion of a “force majeure clause” in a contract.

A force majeure clause is usually included in a contract to exclude liability where a party’s failure to perform is caused by forces (either natural or human) beyond its control, and usually goes beyond “Acts of God” (for example flood, earth quake, etc).

The usual intent of a force majeure clause is to excuse one or both parties of the contract from contractual obligations and liabilities while they are prevented from performance (either completely or sometimes partially) by defined events or circumstances.

In some instances, a force majeure clause may also allow the contract to be terminated if the force majeure event subsists for a defined period.

Because force majeure clauses vary from contract to contract, the scope and effect of a force majeure clause is determined on a case-by-case basis, by reference to the wording of the specific clause and the relevant facts.

Frustration

Frustration is a concept whereby a contract can be terminated where an intervening, post-contract event, has occurred through no fault of either party which:

Makes a contractual obligation impossible to perform.

Changes a contractual obligation into a very different obligation.

Some examples of frustration include:

Physical destruction of the subject matter of the contract.

A change in the law rendering performance illegal.

Restraint by injunction.

Non-occurrence of an event which formed the basis of the contract.

Outbreak of war.

In Victoria the legislation that regulates how frustration operates is the Australian Consumer Law and Fair Trading Act 2012 which provides a fair result to the parties to the contract in the event that contract has been frustrated.

A simple example of how COVID-19 may result in frustration of a contract is if a performer was unable to honour a contract for a performance on a particular date because he or she had to self-isolate under a public health order. In this case it is clear that the artist was unable to perform the contract because of an intervening event which occurred through no fault of the artist.

Conclusion

If you are a business owner and you have been affected by the COVID-19 restrictions you may be able to seek compensation or terminate your contract, and possibly your lease, if:

Your contract or lease has a ‘force majeure’ clause in it;

The contract or lease has been “frustrated” by these measures;

And you are unable to perform your obligations under the contract because of the implementation of the COVID-19 restrictions.

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