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There is a lot of uncertainty for businesses and consumers during the COVID pandemic, especially when fulfilling your contractual arrangements. Typically, termination clauses allow parties to relinquish themselves from their contractual obligations before the end of the contract period. However, most termination clauses drafted before 2020 would not have foreseen the implications of a global pandemic. For this reason, this article outlines several ways in which small businesses might terminate their business contracts during a pandemic.

Contract Frustration

In any circumstance, whether there is a pandemic or not, you can have a right to terminate business contracts in two broad categories:

  • an express right to terminate within your contractual agreement; or
  • a right to terminate under general contract law.

Both rights generally require a breach of a term in your contract. For example, suppose a party fails to perform their contractual obligations on time as required under the contract. In this case, it will give rise to your right to terminate your contracts. However, an unforeseeable event like the COVID pandemic means that many businesses are unlikely to meet their contractual obligations.

When a party’s contractual obligations become radically different from what they had originally agreed to do when they signed the contract, the contract can be said to be frustrated.

When Do My Obligations Become ‘Radically Different’?

Whether your obligations become radically different by the COVID pandemic largely depends on your individual circumstances. Consider the following example.

Suppose you have entered into a contractual agreement to sell furniture to a customer. However, the COVID pandemic has meant that the cost of delivering the goods exceeds what you had originally forecasted. Whilst you will incur a greater cost in delivering the goods, the contract for sale is not necessarily frustrated. This is because your obligation to deliver the furniture is not rendered radically different from what you and the customer had originally contemplated. After all, you can still deliver the furniture.

Put simply, your contract may be frustrated if what you had initially agreed to do under the contract can no longer be performed as a result of the COVID pandemic. Alternatively, frustration occurs if your current agreement is now radically different from what you originally intended before the pandemic.

What Constitutes Unforeseeable Circumstances?

To satisfy the conditions for frustration, you must also have not reasonably foreseen the circumstances that would render your contractual obligations ‘radically different’. In this sense, if you entered into a 5-year contract in 2018 for the supply of goods, you would not have reasonably supposed that something like the COVID pandemic would affect your ability to perform your contractual obligations.

On the other hand, frustration will be challenging to make out if:

  • the event was foreseeable, i.e. a contract formed after 2020 where lockdown periods are frequent;
  • a party to the contract was responsible for the event occurring;
  • a mere delay causes your performance of the contract to be substantially different; and
  • the event already existed at the time you entered into the contractual arrangement.

What Are the Consequences of a Frustrated Contract?

If you can prove that the pandemic has frustrated your contract, you can terminate your contract. This means that you will not have to perform your future obligations under the contract. However, you and the other party can still enforce each other’s obligations before the point at which your contract becomes frustrated.

Existing Contractual Clauses: Force Majeure Clauses 

Beyond contract frustration, there are likely already provisions within your contract which enable you to relinquish yourself from your contractual obligations. For example, consider implementing a force majeure clause.

In most commercial contracts which last an extended period, parties will typically include a force majeure clause. A force majeure clause will generally list a broad range of events that would otherwise frustrate a contract, like natural disasters. If one of these specified events arises, a force majeure clause typically suspends your performance. 

Notably, this clause does not necessarily mean that you terminate the contract in full. However, a force majeure clause can provide that either party can terminate the contract if:

  • the specified event continues beyond a specified period; or
  • a party to the contract is incapable of remedying the event within a specified period.

To rely on a force majeure clause, you should clarify whether the COVID pandemic falls in line with the events specified in your contractual clause.

Key Takeaways

Terminating a contract can be risky business, even in non-pandemic times. However, in the absence of an express provision to terminate a contract based on the pandemic, you may be able to prove that your contract has been frustrated. Contract frustration will arise if you are incapable of performing your obligations under the contract or your obligations have become radically different due to the pandemic. If any of your business contracts have been frustrated by the pandemic, you may be able to terminate it. 

If you need help with terminating a contract during the COVID pandemic, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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Frequently Asked Questions

As a small business owner, what are my obligations under Australian Consumer Law?

Under Australian Consumer Law, you must generally not mislead or deceive customers. Likewise, you must not act unconscionably when dealing with your customers. Further, you cannot attempt to enforce unfair terms in standard form contracts.

What are unfair contract terms?

An unfair contract term largely depends on the circumstances of the contractual arrangement. However, unfair contract terms solely enable one party to avoid their obligations under a contract or terminate at any time. Another indicator of an unfair term is if it penalises another party for breaching the contract or alters the terms of the contract.

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