Options for businesses when temporary COVID-19 restrictions make it illegal to perform a contract

Introduction

Recent public health orders and government directions introduced to limit the spread of COVID-19 (coronavirus) in Australia may make the performance of some contractual obligations illegal, at least temporarily. This article considers circumstances in which these changes in law may either result in the temporary suspension of a party's obligations under a contract (due to illegality), or have the effect of discharging the contract for frustration.

We have previously written about the effect of the COVID-19 pandemic on contractual arrangements, with a particular focus on force majeure clauses. Since then, State and Territory governments have introduced restrictions on the public to enforce lockdowns using public health orders such as those now in force in Victoria and New South Wales. We discuss below how these changes in the law may affect your business's contractual obligations, irrespective of whether the contracts contain a force majeure clause.

Key takeaways

These are unprecedented times in which sweeping new laws are being made on an almost daily basis. These laws are not necessarily consistent between States and Territories. Before continuing to perform any existing contracts, or entering into any new ones, consider whether performance of your obligations could lead you or your employees to breach the law and expose the company, its employees and agents to penalties. If it is illegal to perform your obligations, it may be that those obligations are suspended for the period of the illegality, even if the contract does not contain a force majeure clause. There is also the possibility that the illegality may frustrate the contract. Parties entering into new contracts should consider implementing mechanisms to reduce the risk that further changes in law may make it illegal to perform those contracts during the COVID-19 pandemic. Factors to consider if it becomes illegal to perform a contract

How contracting parties might handle a sudden change in law that makes it illegal to perform some or all of the contract will depend on several factors, including:

What specific obligations are now illegal to perform, and why? Can any of those obligations still be legally performed in any other way in accordance with the contract? How long will the illegality continue? Is it possible or commercially viable to wait until that period has passed? Does the contract provide for circumstances like this? Is there a force majeure clause which...