Tag Archives: insolvency

Is Covid-19 a frustrating event?

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Is Covid-19 a frustrating event? To almost anyone but a contract lawyer that is a stupid question deserving a terse and emphatic response.

But any decent contract lawyer’s answer is unlikely to be short or sweeping.

In contract law, ‘frustration’ is the discharge of a contract as a consequence of some supervening and unanticipated event rendering some or all of the agreement’s obligations incapable of performance. The reported ‘frustration’ cases involve a litany of  catastrophic surprises ranging from the appendicitis-induced postponement of King Edward VII’s coronation in 1903[1], through various wars[2] to (most familiar to Australian lawyers) the legal consequences of a contractor being injuncted from working 24/7 to build Sydney’s Eastern Suburbs Railway line[3] in circumstances where the construction contract was effectively predicated on ‘round the clock’ work.

The Covid-19 coronavirus is plainly a supervening and unanticipated event. It has already caused history’s first postponement of the Olympic games. It has closed all of your local gyms and eateries. It has largely shut down Victoria’s court system.  And just when we lawyers thought things could not get worse, it is even causing surprise outbreaks of law and order. But none of these extraordinary developments alone answers the question of whether the current crisis is a frustrating event for the purposes of any particular contract.

Here is a quick refresher on the frustration of contracts:

  • When looking at whether a contract has been frustrated, don’t be too distracted by the macro picture. Focus on the specific contract in question. Has the contract become largely or completely incapable of performance because of the Covid-19 crisis? (Obvious casualties would be, say, the catering contract for a large wedding party that would now be contrary to the Public Health and Wellbeing Act 2008, or the contract for the screening of TV advertisements during the telecast of the now-postponed Tokyo Olympics.) Or has the contract’s subject matter simply become less attractive or more onerous to one of the parties? (Examples in this twilight zone might include the marriage celebrant’s booking for that same large wedding — after all, the wedding itself is still permitted even if the attendance of more than 2 guests is prohibited — or the screening of TV commercials (themselves still clearly legal and feasible) promoting, say, holiday packages that are neither legal nor feasible in the current circumstances.)
  • Frustration is a binary concept. Some contracts will be discharged entirely for frustration. Some will be held not to have been frustrated at all and thus will survive the supervening event entirely unscathed. There is no legal middle ground in between which allows contracts to be amended but otherwise upheld on the basis that they were semi-frustrated.
  • Extreme pessimists (and possibly also those negotiating contracts very recently) might have had the foresight to address specifically the consequences of global pandemics in their agreements. They will have no need for the doctrine of frustration and will instead be governed by the force majeure clauses (aka ‘Act of God’ clauses) to which they have agreed. As frustration applies only where the supervening event is not anticipated by the contracting parties, frustration and force majeure clauses are best thought of as alternatives to each other.
  • Frustration ends a contract as a consequence of the supervening event. By contrast, force majeure clauses are bespoke provisions. They might end the contract but will commonly suspend rather than terminate the contract or reduce rather than eliminate a party’s entitlement to payment.
  • Frustration operates independently of the parties’ acts and intentions. Force majeure clauses are authored by the parties and as such will often require action or communication for invocation.

 

Consequences of frustration

Let’s suppose a given contract is frustrated by Covid-19. What next?

Melbourne’s Formula 1 Grand Prix last month is a high profile example. Armies of large and small contractors and sub-contractors were involved in setting up for the race and its various satellite events. The race was then cancelled at the last minute because of Covid-19 concerns. Myriad contracts must then have become incapable of performance. In each instance, the question arises of who should carry the cost of the food/ entertainment/equipment that was arranged and (mainly) delivered but ultimately wasted as a consequence of Covid-19?

There is no quick and confident across-the-board answer.

And don’t expect much help from the the frustrated contracts provisions of Part 3.2 of the Australian Consumer Law and Fair Trading Act 2012. In very crude summary, it provides that money paid or payable under a frustrated contract ceases to be payable and, if paid, is recoverable by the recipient EXCEPT where a court or VCAT considers it just to order otherwise.

Note that pandemic-sized exception.

Put another way, the answer as to who is to carry the losses of a frustrated contract  is ‘black’ except when a court or VCAT considers that it should be ‘white’ or some shade of grey (or perhaps some chequered-flag pattern for Grand Prix-related events).

This legislation gets more curious still. Its open invitation to litigation appears to have been accepted in Victoria on – wait for it – only a single occasion. That case was Foley v Afonso Building Solutions [2014] VCAT 1640.

In Foley v Afonso a landowner paid a builder a $10,000 deposit on a domestic building contract. It then transpired that the building permit necessary for the project was unobtainable. The owner wanted her deposit back. The builder refused as it was not his fault that the building permit didn’t issue. So the parties went to VCAT.

Senior Member Walker concluded that the contract had been frustrated by the impossibility of getting the essential building permit. He ordered that the owner was entitled to have most (but not all) of her deposit refunded. The builder was permitted to retain the $1800 he had spent on preliminary work (such as drawings and soil tests) but not the $8000 commission he paid the agent who had secured the contract.

The decision is short. It doesn’t mention any authorities or the word ‘restitution’ but the restitutionary flavour is unmistakable.

Presumably Covid-19 will soon ensure that Foley v Afonso is superseded by many more authorities on the consequences of frustrated contracts in Victoria.

 

Conclusion 1

Covid-19’s frustrations are suffocatingly obvious to most of us. But that doesn’t mean contracts affected by the virus will necessarily be themselves frustrated.

And whatever the answer on first principles to your particular frustration query, beware of the continuing cascade of government announcements and promised regulatory changes that might take your client’s situation beyond a ‘first principles’ analysis anyway.

With this in mind, follow resources such as –

Conclusion 2

A final thought over and above frustration.

In these extraordinary times, remember that your clients’ best Covid-19 solutions might not be in the legal textbooks at all.

The unexpected and supervening event of Covid-19 might, for example, trigger the business interruption insurance that your client has forgotten it holds and make the entire frustration discussion unnecessary. Check that insurance.

And while the C-19 maelstrom continues, remember also that the banking industry (see for example this Commonwealth Bank Covid-19 support page) and the laws of insolvency have both been temporarily transformed in recent weeks. (Your clients might have more time and options available than they appreciate.)

Stay safe!

[1] Compare Krell v Henry [1903] 2 KB 740 and Hearne Bay Steam Boat Co v Hutton [1903] 2 KB 683. Both cases involved sightseers disappointed by the coronation’s postponement. In the former case the contract was held to have been frustrated by the postponement; in the latter the contract was held not to have been.

[2] See for example Fibrosia Spolka Akcjyna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 where a pre-war contract that required an English company to deliver machinery into Poland was rendered illegal and frustrated by the outbreak of World War 2.

[3] Codelfa Construction Pty Ltd v State Railway Authority of NSW (1982) 149 CLR 337.

WA court bins stat demands, orders indemnity costs and calls the cops

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Some obscure judgments deserve a wider audience.

Master Sanderson of the Western Australia Supreme Court delivered one such gem in April in Rohanna Pty Ltd v Nu-Steel Homes Adelaide Pty Ltd [2013] WASC 109.

Some scene-setting first.

In Christmas week 2012 the plaintiff received two statutory demands from the defendant. The parties had never had any prior contact with each other and yet the demands totalled almost $220,000. Both stat demands were ultimately set aside by Master Sanderson. In the interim the defendant was represented in correspondence by a South Australian solicitor who did not file a formal appearance (Mr Nicholls) and in Court by a non-lawyer (Mr Pearse). Mr Nicholls had offered to settle the matter on the basis that the plaintiff pay the defendant’s costs of $25,000. He also remarked upon the need to advertise any winding up application which might follow if the plaintiff didn’t stump up that loot.

Master Sanderson was scathing. Here are some highlights from a stinging judgment.

11.   In further support of its application the plaintiff filed a second affidavit …. The purpose of this affidavit was to demonstrate the solvency of the plaintiff. A mere glance at this affidavit would be enough to convince even the economically illiterate the plaintiff was solvent. Indeed it shows the plaintiff as a massively successful commercial enterprise. But that was not enough for Mr McNamara.

 

       ….

 

17.   All of these matters can then be aggregated. First, the defendant served the statutory demands without any prior consultation with the plaintiff. If it had a genuine belief there was a debt owed it would have been reasonable to write to the plaintiff, make a claim and explain the basis of that claim. That was not done. Instead the demands were sent by post and arrived on the Thursday before Christmas. If ever there was a time when it was difficult to deal expeditiously with a demand which required action within 21 days, that was it.

 

 ….

 

20.   Fourthly, faced with clear evidence of the solvency of the plaintiff the defendant determined to press on. No reasonable party properly advised would have done so.

 

21.   Fifthly, the correspondence suggests an attempt to embarrass the plaintiff by advertising the fact of a winding up application. There was no need to refer to the advertising of a winding up application in the way Mr McNamara did. The letter strongly suggests the defendant was looking to force the plaintiff into a compromise to serve its own purposes.

 

22.  Sixthly, the defendant actually issued a winding up application. This was done prior to the application to set aside the demands being heard. It must have been clear there was a live issue as to whether the application to restrain the defendant would succeed. … Once again it looks as though the defendant was attempting to pressure the plaintiff.

 

23.   Seventhly, no appearance to the application to set aside the demands was ever lodged. Mr McNamara in his correspondence said he had been retained by the defendant. As late as 28 February 2013 he wrote to the plaintiff’s solicitors on behalf of the defendant. At no time did Mr McNamara indicate his instructions had been terminated and at no time did he give any indication he would not appear at the hearing of the matter on 7 March 2013. Perhaps the defendant was concerned if it did enter an appearance a costs order might be made against it. Or perhaps there was some other reason no appearance was entered. But it does suggest the defendant never took seriously the prospect it could successfully resist the plaintiff’s application.

 

24.   Finally, there is the offer to settle on payment of $25,000 for costs. It may be that Mr McNamara is one of South Australia’s leading corporate lawyers. If that is so, this case does not represent his finest hour. But even assuming high competence on the part of Mr McNamara there is no possible way the defendant’s costs could have amounted to $25,000. No appearance was filed, no affidavits in opposition to the application were lodged, it would appear submissions to be made on behalf of the defendant were drawn by Mr Pearse and the totality of Mr McNamara’s involvement was three or four letters. Really this demand for ‘costs’ is no such thing. It was tantamount to extortion.

 

25.   … This is a case where indemnity costs should be awarded and the only question is who should pay those costs. Mr Pearse will have 14 days from the publication of these reasons to make submissions as to why he should not pay the costs personally.

 

26.   I intend to refer these reasons to the Western Australian Police Service for such action as they deem necessary in relation to Mr Pearse. I will also refer a copy of these reasons to the authorities in South Australia who regulate the legal profession to take such action as they deem appropriate in relation to Mr McNamara.

 

Lessons from this case? Many.

But the very first that occurs to me is that the Wild West’s legal system might have been unfairly maligned by the late Robert Hughes (as recorded in my post here on his passing).

Paul Duggan

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Paul Duggan is a commercial litigation barrister based in Melbourne, Australia.

Since 1996 he has advised and appeared in most types of business-to-business and business-to-customer disputes – commercial and domestic building matters, commercial and retail leasing disputes, insolvencies, franchises, partnerships, insurance, professional negligence, sales of land, Corporation Act matters and trade practices disputes to name a few. Although Paul has represented governments, major public companies, insurers, Lloyds syndicates and private individuals his clients are predominantly small and medium enterprises contemplating or engaged in litigation in the Victorian Supreme Court, County Court or VCAT.

Paul also practises in the federal jurisdictions and interstate.

Paul’s clerk is Gordon & Jackson.

Liability limited by a scheme approved under the Professional Standards Act 2003.