Part 1 of 2 - COVID-19 and Commercial Contracts?

Updated: Mar 30, 2020

COVID-19 grounded many commercial activities. This strain of the virus is novel because of:

  • its ability to remain alive outside living organism (droplets left on metal and wood surfaces) for a more extended period;

  • its high morbidity due to rapid rates of multiplication and transmission at the molecular level;

  • it is incurable without antibiotics or vaccine; and

  • its high fatality rate amongst those infected.

Anxiety heightens. Bouts of information are narrated through Facebook and social media to the masses. Governments step in to calm the population and take measures to curb the trajectory of the pandemic.

Below are some hypothetical situations arising during COVID-19 crisis:

  • A casual worker returned from a trip to Japan recently. During the 14 days quarantine period, he tested COVID-19 positive. His employer in Welshpool takes in someone else and decides to keep him for good. Can the employer dismiss the casual worker on the ground that he was infected by COVID-19?

  • A labour-hire company has entered into an agreement to deliver 10 welders to a site in the Pilbara region in the next 48-hours. Time is of the essence and the principal has agreed to pay the price, which is 3.5 times more than the usual rate plus a loading fixed at $550/welder. The 10 welders are ready and on standby since this morning, but the labour-hire company is unable to secure tickets to fly them to the site. Regional carriers shut down operations to all mining sites as pilots/air hostess refused to fly. What should the labour-hire company do?

  • A holiday cruise ticketing agent has accepted 100% upfront fees for a trans-pacific cruise with embarkation ex-Fremantle Port scheduled on 1 July 2020. The cruise liner cancelled the itinerary on short notice. Amongst the reasons, the cruise liner claims that Australian port authority no longer allows a foreign ship to dock for the next 6 months. Holidaymakers were told to defer the trip to 2021 and want to know if she/he must take the option?

  • A cattle farmer in Albany has an existing contract to supply 30 heads of live beef cattle per month, and the mobs are to be delivered to a designated depot in Forrestfield (near the airport) at a fixed price on condition that each cow must weigh not less than 350 pounds. The farmer does not have a sufficient supply of antibiotics for the herds. Drug suppliers face a global shortage of all sort of antibiotics and are unable to confirm the next shipment from India. The farmer anticipates that he will need longer time to rear each cattle up to the desired weight as the calves will feed on grass and more farmhands are required to care for them. The purchaser, on the other hand, cannot secure road trains to cart the cattle due to intra-state regional movement restrictions and no exception to the rule applies to his trade. Can the farmer defer delivery and vary the price per head at the same time, or is the purchaser entitled to cancel all existing arrangement at once?

  • A parent who regularly sends his son to a tuition centre in Leeming was told by the management that teachers no longer come to teach for fear of contracting COVID-19. He was handed copies of the workbook instead and told to pose questions by email. Can the parent seek a refund in respect of the balance of school term?

It is noteworthy that in each of the above illustrations, the event occurs without fault of either party. One party may cite COVID-19 as a ground of getting out of the contract or used it as a reason to allege that the deal has become commercially impossible.

The other party may insist on the performance of the contract, even though its performance might be dangerous, twice as long, and thrice as expensive.

No one answer fits all simply because the situation was caused by or somehow related to COVID-19. Generally speaking, the fact that a method for performance under a contract has been affected, or the burden of performance has been increased, by the pandemic COVID-19 without fault, does not automatically amount to frustration. Whether the contract has been frustrated is a question of law – meaning to say, must be decided by the court.

Business owners/managers should re-assess all existing contracts and ongoing projects to absorb the flow-on effects, and mitigate any liability arising, including the potential liability for liquidated damages for delay in the performance of obligations.

In the next part of this article, we will look at cases involving the application of the principle of frustration.

Series 0050220 | © J Lee, LLB. LLM. Senior Associate. JAC Lawyers. LIABILITY limited by a scheme approved under Professional Standards Legislation. DISCLAIMER: The above article does not take into account your situation/circumstances and is for general reading, hence should not be relied upon if you are dealing with a legal issue or matter. We urge that you contact our legal team for appropriate advice.

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