Can you legally terminate a contract due to Covid-19?
Can you renegotiate a contract because of the impact of coronavirus?
The Covid-19 crisis has adversely impacted many common transactions. Federal and state governments have enacted laws which enable the parties to some transactions to renegotiate the terms of their contracts if they have been disadvantaged due to the Covid-19 pandemic. Examples include commercial leases and residential tenancy agreements.
However, what about contracts relating to other common transactions such as buying land, building a house, buying a car or having a renovation undertaken to your home? Are there any laws which entitle the parties to these contracts to renegotiate the terms of their contract due to coronavirus?
Legal principles which may enable you to terminate a contract
Generally, governments have not enacted laws creating an entitlement for the parties to a contract to renegotiate the terms of the contract due to the impact of Covid-19, except in limited circumstances such as those mentioned above. (For more information on changes in law in response to the pandemic, please see Australian government coronavirus response package infiltrates many corners of Australian law.)
However, there are some legal principles which might apply in certain circumstances to enable a party to terminate a contract into which they have entered. These legal principles include termination of contract, force majeure and frustration of contract.
Termination of contract usually involves one party being in default
Usually, a contract will entitle a party to terminate the contract if the other party does not do what the contract requires them to do, either at all, or within the time period specified in the contract.
For example, if you have entered into a contract with a builder to build a house for you, and the builder has not commenced construction by the date specified in the contract for commencement of construction, the contract might give you a right of termination.
This type of termination usually involves one party being in default, in which case the other party may have a right to sue for damages.
Force majeure clauses and unforeseeable circumstances
Some contracts contain a clause entitling the parties to a contract to terminate the contract if unforeseeable circumstances arise which prevent a party from performing their obligations under the contract. For example, commercial contracts often contain a clause entitling either party to terminate the contract in the event of the outbreak of war. This is called force majeure.
Whether Covid-19 constitutes a force majeure event entitling a party to terminate a contract depends on the wording of the relevant clause in the contract. (For more information please see Do force majeure clauses apply to the coronavirus pandemic?)
Frustration of contract due to changed circumstances
In some circumstances, Covid-19 could constitute a change in the circumstances which existed at the time the parties to a contract negotiated the contract’s terms. A party may be entitled to terminate a contract if, as a result of the changed circumstances, but through no fault on the part of either party, it is no longer possible for the contract to be performed. This is called frustration. (Please see The doctrine of frustration for more information.)
For example, if, after a contract is entered into, laws change so that performance of the obligations under a contract become illegal, the contract might be considered to have been frustrated.
However, in order for frustration to apply, the change in circumstances must make it impossible for the fundamental commercial purpose of the contract to be performed. Frustration will not apply just because performing a party’s obligation under a contract becomes more difficult.
You could be sued for damages if you default on a contract
It is very important to remember that whether any of the legal principles mentioned above apply so as to entitle a party to a contract to terminate the contract, depends on the terms of the contract concerned, and the particular circumstances that exist.
If a party attempts to terminate a contract where these principles do not apply, the result will likely be that the party is in default of their obligations under the contract, in which case they risk being sued for damages by the other party.
It is therefore very important that, before attempting to terminate a contract on the basis of any of the principles mentioned above, you obtain legal advice.
More information about contracts and coronavirus
For more information about contracts and Covid-19, please see our articles below.