I cannot meet my contractual obligations as a result of Covid-19, what now?

We have received many enquiries from both individuals and businesses who are concerned about the inevitable breaches of contractual obligations stemming from the outbreak of the COVID-19.

This article will provide general information on the law relating to this subject matter. If you are concerned that you, your business, your customers or your suppliers may have no choice but to breach contractual obligations as a result of the COVID-19 situation, please get in contact with us to discuss your options moving forward.

Will I have to adhere to contractual obligations during this period?

This will largely depend on the terms of your contract. Some contracts have what is known as a “force-majeure” clause, which relieves a party to the contract from performing their contractual obligations due to an event outside the reasonable control of the affected party. Such events often include ‘acts of God’, ‘natural disasters’, ‘government action or interference’, ‘labour shortages’, ‘national emergencies’ and ‘acts of war’. Every contract is different. Accordingly, whether COVID-19 will be considered a force-majeure event relieving you of your contractual obligations will depend on the terms of your specific contract.

In some civil law countries such as China, where there is no force majeure clause in a contract, force majeure generally is implied in contracts, so specific provisions are less frequently included in contracts. While implied force majeure is not currently a feature of common law countries such as Australia and the United Kingdom, given that the COVID-19 situation is unprecedented, the law in Australia may develop and evolve in these uncertain times.

If there is no force majeure clause in your contract and you cannot meet your contractual obligations as a result of COVID-19, you may be relieved from your future contractual obligations pursuant to a common law doctrine known as “frustration”. For a contract to be frustrated as a result of COVID-19, it must be commercially impossible for you to meet your contractual obligations. it is not enough that COVID-19 causes you to suffer hardship or even severe hardship in meeting your contractual obligations. 

If your contract is frustrated, it is automatically terminated at the point of frustration and all future obligations of the parties pursuant to the contract are discharged. It should be noted that obligations which fell due prior to parties being affected by COVID-19 will remain in operation. 

If neither of the above apply to your current situation, you should note that many creditors are relaxing their credit policies to cater for this unprecedented situation. Accordingly, you may be in a position to renegotiate on the terms of your contracts.

Moreover, it should be noted that the Federal Government has recently introduced a series of new laws which seek to provide temporary relief for financially distressed businesses and individuals in the current economic climate. Those changes are summarised as follows:

·        Company directors will be temporarily relieved from any personal liability for trading while insolvent, with respect to any debts incurred in the ordinary course of the company’s business, with the measure set to run for six months.

·        The statutory time frame for a company to respond to a statutory demand will be extended temporarily from 21 days to six months.

·        The government is also temporarily increasing the current minimum threshold for creditors issuing a statutory demand on a company under the Corporations Act 2001 from $2,000 to $20,000. This will also apply for six months.

·        The threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor will temporarily increase from its current level of $5,000 to $20,000 for six months.

·        The time a debtor has to respond to a bankruptcy notice will be temporarily increased from 21 days to six months.

What should I do now?

If you are concerned about current or potential breaches of contractual obligations resulting from COVID-19, please get in touch with us. We can review the terms of your current contracts and advise you as to your options moving forward. We can also assist you in negotiating new contractual terms and in drafting future contracts.

Please feel free to make contact with John Mapleston of our Melbourne office on (03) 9600 2450.

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