The importance of satisfying your contractual obligations on time What is “time is of the essence”? and how does Covid-19 impact this requirement?

Differently to our southern states of New South Wales and Victoria, in Queensland, contracts are subject to the clause ‘time is of the essence’. This means parties to a contract must perform their contractual obligations strictly by the due dates and times.  

Depending on the terms of the contract, if a party does not satisfy their contractual obligations on or before the due date and time that party will be in default of the contract and the non-defaulting party may either affirm or terminate the contract. For example, a buyer must be able to settle by the set time on the settlement date otherwise the seller may either terminate or enforce the contract.

By affirming the contract, the non-defaulting party may sue the defaulting party for the following:

  1. Damages;
  2. Specific performance; or
  3. Damages and specific performance.

By terminating the contract, the non-defaulting party may (if they are the seller in the contract):

  1. Resume possession of the Property for sale;
  2. Forfeit the Deposit and any interest earned;
  3. Sue the Buyer for damages; and/or
  4. Resell the Property.

In the event the non-defaulting party is the buyer and wishes to terminate the contract, they may:

  1. Recover the Deposit and any interest earned; and/or
  2. Sue the Seller for damages.

If a party is unable to satisfy their obligations on or before the due date because of insufficient time, an extension of time may be requested in order for the party to satisfy its obligations. However there are risks when requesting an extension of time as the other party may not accept the extension request and may proceed to affirm or terminate the contract.

There are some circumstances where the clause “time is of the essence” is suspended in a contract. The Standard REIQ contract defines the circumstances “Delay Event” to include, but not limited to, natural disasters, riots, compliance with any lawful direction or order by a Government Agency (“Delayed Event”). Even though a “Delayed Event” does not explicitly include a pandemic such as COVID-19, it may be arguable that the recent Federal and State Governments’ restrictions and limitations constitute in fact a delayed event. In that instance the party unable to perform its obligations within “Time of the Essence” may suspend temporarily the contract by seeking agreement from the counterparty. It is common, in fact for the purposes of clarity, for the parties at time of executing the contract to include a specific special condition in the contract that takes in consideration the current circumstances of COVID-19 and enable both parties to protect their interest and the eventuality of their inability to fulfil their obligations.

In addition a force majeure clause in the Special Conditions may be advisable in the circumstances to enable either party, if affected by an unforeseeable event, to be excused from the performance of their contractual obligations or will have the timeframe for the performance of the relevant obligation extended. Force majeure is not a common law doctrine, but rather provided for in terms and conditions of the contract, meaning that it will only activate if the contract itself specifically provides for it.

On the contrary, frustration of a contract is a common law doctrine which does not require a contractual right of termination due to an unforeseeable event. Therefore, if a contract does not comprise of a force majeure clause, or if there is one which only seeks to deal with temporary delays or interruptions, frustration may come into play. This may be the case even during this Coronavirus pandemic.

Frustration of a contract in this instance would depend on the COVID-19 impact on the performance under that specific contract. If the impact of the Federal and State Governments’ bans to fight the pandemic make it impossible for a party to a contract to honour its contractual obligation, then that party may be able to show that the contract has been frustrated.

Generally Australian Courts will accept the test put forward by Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 when determining whether a frustration event has occurred. According to Lord Radcliffe, frustration will be satisfied if:

  1. The frustration event causes the contractual obligation owed by a party under the contract to become impossible or radically different from the obligation contemplated at the time that the parties entered into the contract;
  2. The frustration event was not caused by either party; and
  3. The contract does not otherwise deal with what will happen on the occurrence of the alleged frustration event (e.g. by way of a force majeure clause).

If the circumstances in the specific case satisfy the test established in this precedent, then a party may be in a position to argue the frustration of the contract. That means that the contract is terminated at the time of the frustrating event and accordingly both parties are discharged from their obligations under the contract.

The doctrine of frustration should be used with caution as any monetary recovery (such as a deposit under the contract) may prove to be difficult. As a matter of fact at common law a party that elects a contract to be frustrated loses its right to recover any monies paid under the contract on the principle that “losses lie where they fall”. This is the case, unless upon review of the contract itself, it is identified that the intention of the parties was to provide for recovery of those monies in case of frustration.

Given the current pandemic and the effects of COVID-19, SLF Lawyers can assist you with carefully reviewing contracts, providing advice and preparing necessary clauses and conditions to deal with the effects of COVID-19 so that, in the event the pandemic hinders your ability to satisfy your obligations under the contract with “time of the essence”, you can avoid facing unpleasant surprises and harsh economic consequences.

For any questions or if you wish to speak to one of our property and commercial lawyers please contact us on 07 3839 8011 or by email at stran@slflawyers.com.au

Article written by Stephanie Tran.

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