The outbreak of the 2019 Novel Coronavirus (COVID-19) has led governments around the world to impose strict quarantines to try to contain the spread of the pandemic. The closing of international borders has disrupted supply chains, while a sharp decrease in consumer spending and increase in government restrictions have resulted in almost unprecedented job losses and cash flow issues. These restrictions, while necessary, have dealt a devastating blow to our economy and disrupted business operations in all sectors.
We have recently been answering enquiries from principals and other leaders in the education sector about the impact of COVID-19 on contracts with students, suppliers and employees. While there are no easy answers to the problems we are facing in the COVID-19 era, here are our best tips for navigating contractual disputes in the age of COVID-19.
- Review your Contracts
If you are facing a possible dispute with a person or organisation, first consider the actual terms of any agreement between you. Generally, this is recorded in a written contract that sets out the entire agreement you. However, contracts can be oral (or partly written and partly oral) so think about relevant conversations. There may also be letters or email evidencing the agreement or varying it.
Consider what it is you and the other party have agreed to do, and whether you can both still fulfil your obligations under the contract, perhaps in a different way than what was anticipated. For example, while enrolment contracts may refer to curricular and non-curricular activities, it is unlikely to say that teaching must be provided in person, in a classroom setting, at the school campus.
Some contracts contain express termination clauses, which set out how and when a party can end the contract. It may be that schools (or parents, in the case of an enrolment contract) have to pay a fee to terminate a contract, in which case you should consider whether that fee is reasonable. Sometimes, if a fee is exorbitant, it may be found to be a penalty and therefore unenforceable.
Some commercial contracts also contain a force majeure clause, which operates to provide relief to one or both parties, where certain events (that are beyond the parties' control) prevent the contract from being performed. Whether a force majeure clause applies to the current situation will depend on how it is drafted and whether the pandemic was foreseeable at the time the contract was made.
Events that will 'trigger' a force majeure clause are often expressly defined and may include a pandemic or an act of government, both of which are relevant to the current COVID-19 situation. However, you should be wary of invoking a force majeure clause too soon and first seek legal advice, as these clauses are interpreted against the party who is seeking to rely on them.
- Consider other legal alternatives
If your contract doesn't allow for termination (or there is a cancellation fee you wish to avoid) or there is no force majeure clause that applies, there may still be other legal remedies available.
One example of this is the doctrine of frustration, which operates to terminate the contract where circumstances have arisen (called a frustrating event) that significantly changes the nature of the rights or obligations under the contract. Essentially, the contract is frustrated because it is now impossible to perform, or performance would be radically different than was originally intended by the parties.
There is no hard and fast rule as to whether a contract has been frustrated. Some things to keep in mind are:
- The length of the contract: If performance is delayed temporarily by a frustrating event, this will probably not affect a long term contract.
- Relevant clauses in the contract (such as a force majeure clause): If they exist and apply to the situation, they will operate instead of the doctrine of frustration.
- Physical impossibility or unlawfulness of performing obligations under the contract: If COVID-19 has just made performance more difficult (or more expensive), it is unlikely this will frustrate the contract.
If a contract is frustrated, all obligations after the frustrating event are discharged. Where you have paid money in advance for goods or services not yet provided, you should receive a refund from the other party (although an adjustment may be made for expenses reasonably incurred). Generally, frustration has a narrow scope and is therefore difficult to prove, so you should carefully consider other options that might be available to you.
Australian Consumer Law
Another thing to keep in mind is that the Australian Consumer Law (ACL) will apply to some school-related contracts (such as enrolment contracts). Therefore, you should be mindful of what remedies may be available to parents, if the school were to breach one of the consumer guarantees. Where the school is acquiring goods and services under a certain amount (or otherwise of a domestic or personal nature), the school may be considered a consumer and therefore able to claim a remedy for a breach of the ACL by others.
- Negotiate with stakeholders
The best way to achieve a result that will work for all is to negotiate individual outcomes. Try to preserve those long term relationships you have built up and engage with stakeholders early and often. Don't be afraid to get creative when thinking of a solution. Contracts can be varied by agreement and obligations postponed until this situation has (hopefully) blown over.
In any negotiation, it helps to be thoroughly prepared. If you are uncertain of your legal position, seek advice prior to negotiating so you know the strengths and weaknesses of your case. Accept that you may make mistakes, but try to stay focused on the matter at hand and not get sidetracked. Consider what compromises you are prepared to make, but don't be too keen or hasty to get to a result.
Where negotiations are failing, you may try to consider what other forms of dispute resolution are available, before resorting to litigation. Many mediators are now conducting online mediations.
- Stay abreast of government restrictions and regulations
Don't rely on media articles or even speeches to try to work out what government restrictions are currently in place. In NSW, the Public Health Act gives the Health Minister the power to make Public Health Orders, restricting movement, travel and other aspects of public life.
We are already seeing that some of these restrictions are easing. As such, contracts that are currently 'frustrated' may not remain so for much longer. As the situation develops, more options may become available, which will help to negotiate alternative solutions.
Also consider how your negotiations may be affected by current regulations. In regards to leases, the National Cabinet has released a mandatory code of conduct to impose good faith leasing principles to commercial tenancies and share the financial risk and cash flow impact during COVID-19. This code was enacted in NSW with the passing of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 on 24 April 2020. The NSW regulations will operate for six months.
- Seek assistance and consult available resources
The federal and state governments have announced additional measures to support many businesses and charities during this crisis. Some of these measures include cash payments to help with cash flow, changes to modern awards and to leave arrangements, as well as wage subsidies to help keep employees on the books. There are free resources online to assist businesses and charities – learn as much from these as you can and take advantage of all schemes that apply. This will give you time to deal with disputes as they arise. Seek assistance early, to avoid making costly mistakes in the long run.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.