Since the COVID-19 health pandemic started creating economic disruption earlier this year, many parties have found themselves in a position where they are unable to comply with their contractual obligations.
Some parties have been able to rely upon force majeure clauses that were drafted broadly enough to contemplate circumstances like COVID-19. However, many parties have found themselves in a position where they do not have any express rights under their contracts and have been left to consider whether the common law doctrine of frustration can assist.
What is frustration?
The courts have taken the view that a contract may be said to have been “frustrated” where an unforeseen event has occurred of such a serious nature as to make the performance of the contract illegal, impossible or radically different from that contemplated by the parties: David Contractors Ltd v Fareham UDC [1956] AC 696 at 729. Generally, it is quite difficult to meet the threshold of the doctrine of frustration and the fact that a party has suffered hardship, inconvenience or material loss on account of increased expense, delay or onerousness will not of itself justify applying the doctrine of frustration: Tenants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] AC 495.
An attempt to rely upon frustration in the time of COVID-19
In the recent case of Happy Lounge Pty Ltd v Choi & Lee Pty Ltd and Anor [2020] QDC 184, the buyer of a bar and lounge business sought a declaration (among other relief) from the District Court that its contract for the purchase of a business was terminated due to:
- frustration upon the making of COVID-19 related directions under the Public Health Act 2005 (Qld); or
- alternatively, as a result of the seller’s breaches of the contract.
Prior to the contract being signed by the parties, the Queensland Health Minister declared a public health emergency in relation to COVID-19. After the contract was signed, Queensland’s Chief Health Officer issued a number of public health directions, including (and most relevantly) the “Non-essential Business Closure Direction”, which had the effect of prohibiting premises (including the business the subject of the purchase) from operating from midday on 23 March 2020 until the end of the declared public health emergency.
In the afternoon of 23 March 2020, the buyer objected to settlement proceeding the following day on the basis that:
- the business was no longer operating as a bar and lounge; and
- the seller had not provided a week of tuition in accordance with its obligations under the Contract.
The seller tendered at settlement the following day and the buyer’s solicitor attended settlement with the settlement cheques but advised that the buyer was not prepared to settle as the seller had not complied with the terms of the contract.
The buyer purported to terminate the contract the following day. Approximately one week later, the seller purported to treat the buyer’s notice of termination as a repudiation of the contract and advised that the seller elected to affirm the contract and sue the buyer for specific performance.
In the proceedings that followed, the buyer sought to rely upon three different health directions as having given rise to the frustration and automatic termination of the contract (as well as a number of other provisions of the Contract, which the buyer asserted the seller had breached).
In considering the three health directions, the court took the view that it was only the 23 March 2020 direction that had the effect of preventing the business from operating so it was only this direction that could have possibly given rise to frustration.
The seller asserted that the contract prevented the buyer from relying on the doctrine of frustration as the terms of the contract provided for the buyer to purchase the business on an “as is, where is” basis and therefore the buyer had agreed to purchase the business irrespective of any trading restrictions created by the 23 March 2020 direction. The court did not consider this position to be persuasive and took the view that the drafting related to the condition of the business assets, not the business itself.
In considering the doctrine of frustration, the court found that:
- while the 23 March 2020 direction had the effect of prohibiting the business from being operated and managed as a going concern in its usual way (which was a condition of the contract), the non-compliance was for one day only as the settlement date was the following day and therefore the obligation had been substantially performed; and
- the 23 March 2020 direction did not “unexpectedly created a fundamentally different situation striking at the core of the contract so as to destroy its commercial purpose”.
The court dismissed the buyer’s claim for a declaration that the parties were discharged from their obligations to perform by reason of frustration.
[While not discussed in detail in this article, the court ultimately found that the seller had failed to comply with certain provisions of the contract and made a declaration that the contract had been lawfully terminated by the buyer.]
If you require any advice in relation to compliance with your contractual obligations during the COVID-19 pandemic, please contact our commercial legal team in Cairns.