LAWS71-100

Business Law
Presentation

J A I N A P. G A N AT R A
SUET HUNG SO

Impact of COVID-19 on Contractual Obligations

Problems faced by
businesses from COVID-19
- COVID-19 caused many businesses unable to perform their
contractual obligations, such as:

Suppliers fail to deliver the goods on time due to border

restrictions

Lessees/ Purchasers lease or purchase a property but unable

to carry out businesses due to social distance restrictions and
control

Builders facing an increase in cost due to global supply chain

issue, making the contract less profitable

Insolvency trade due to inability to pay back debts s588G of

Corporation Act 2001 (cth)
 Rule of laws on
contractual obligations
- Force Majeure refers to an exclusionary clauses normally included in commercial
contracts when business is unable to perform the contracts due to events that are out of
their control, such as war, industrial disputes. [2]

- However, businesses may not see the coming of COVID-19 and thus the force majeure
clause may be applicable for businesses entering contracts before COVID-19

- Thus, common law may assist

- Doctrine of Frustration allows both parties to exit from the contract when neither party is
responsible for unforeseen events out of their control

- The issue arises upon whether businesses are permitted to terminate the contract
applying the Doctrine of Frustration from COVID-19

- Insolvency for directors, Directors should be aware of financial difficulties of the

company and prevent insolvent trading [3]
 Is COVID-19 an excuse for businesses to avoid
contractual obligation?
- Even if businesses have included Force Majeure in the contract, COVID-19 may not qualify for a force majeure event as the party has to prove the COVID-19 has directly
prevented the performance of its obligation. [4]
◦ 3 elements
Necessary
Event Causal Link level of
disruption

Doctrine of Frustration may not always be applicable:

◦ Performance may still be possible even though it is burdensome
◦ Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729 [5] (DC Ltd agreed to build houses for District council at a fixed fee in 8 months, but the
costs exceeded the fee due to shortage of labour)
◦ Key ： Business cannot avoid obligation simply due to higher costs
◦ A short term (not permanent) change in circumstance may not result in frustration
◦ National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC (A tenant withheld the rent for a 10-year lease of a warehouse due to a street closure for 10 months, the
court decided that the lease is not frustrated as the lease can still be run after the street is re-opened
◦ Key ： Business cannot avoid obligation as the government restrictions on COVID-19 tends to be short-term
Introduction of COVID-19 safe harbour provision in Australia
However, the Coronavirus Economic Response Package Omnibus Bill 2020 (inserted a new section 588GAAA granting
temporary relief for financially distressed businesses) [6], directors still have to comply all other legal obligations
 ('Happy Lounge') was the first case of its unique type to consider whether parties could be released from a contract due to COVID-19
brough before the District Court of Queensland on 15 June 2020.

On 26 February 2020 Happy Lounge Pty Ltd (Happy Lounge) entered into a contract with Choi & Lee Pty Ltd (as Trustee) (Choi & Lee)
for the sale of its business – a bar and lounge open to the public offering food and alcohol for sale – known as The Palace Lounge or
The Palace Supper Club (The Palace).

Happy Lounge The purchase price of $550,000 comprised $500,000 for the assets of the business and $50,000 for goodwill.The contract was in the
form of the standard REIQ Business Sale Contract used in most small business sales in Queensland. All conditions, including the
landlord’s consent to the assignment of the lease and approval of the transfer of the liquor licence, had been satisfied and the
Contract was effectively unconditional.

Pty Ltd v Settlement of the contract was due on 18 March 2020, which the parties extended until 25 March 2020.

Choi & Lee Pty On 23rd March 2020, the Brisbane District Court has held that orders related to the public health response due to COVID-19 resulting
in the forced closure of a bar and café in the Brisbane nightclub area of Fortitude Valley was not an event permitting terminating the
Business Sale Contract due to its frustration.

Ltd [2020] This order was issued only one day prior to completion of the sale of The Palace on 24 March 2020.

When it came time to settle, Choi & Lee were ready, willing and able to settle, but Happy Lounge was not. The buyer refused to settle

QDC 184 on the day of settlement and subsequently terminated, alleging that the seller had failed to comply with the terms of the contract. The
seller then sued for specific performance of the Contract.

Ultimately, Choi & Lee terminated the contract for Happy Lounge’s breach and Happy Lounge applied to the Court seeking orders
that Choi & Lee specifically perform the contract.
 FRUSTRATION ARGUMENT
Choi & Lee’s primary position
was that it validly terminated the
contract, but it made the
alternative submission that the
contract had been frustrated as a
result of the Queensland
Government’s COVID-19
restrictions.
21 March 2020 – further direction
limiting the number of people
permitted at indoor gatherings;
and
to carry on the business as a going
concern nor ensure the business
was carried on “…in its usual
way… including, without
limitation, the maintenance of the
trading hours of the business that
apply at the Contract Date”; and
A contract will be discharged by
19 March 2020 – direction
frustration if an event or events
Choi & Lee relied upon the prohibiting indoor gatherings of
occur resulting in a situation
Queensland Government’s more than 100 people, with a
fundamentally different to what
directions addressing the COVID- requirement that patrons be four
was contemplated by the parties
19 pandemic, including: square metres apart at venues
at the time of entering into the
including The Palace;
contract.
Choi & Lee argued that the
23 March 2020 – a direction
contract was frustrated because
requiring non-essential
the COVID-19 directions on 19,
businesses, including The Palace, to give Choi & Lee possession of
21 and 23 March 2020 meant that
to close from midday on 23 the business and its assets;
Happy Lounge could not meet its
March 2020 until the end of the
obligations under the Contract
public health emergency.
including:
to provide tuition to Choi & Lee
or introduce customers, suppliers
and others to retain the goodwill
of the business for Choi & Lee’s
benefit.
 DID COVID-19 RESTRICTIONS
FRUSTRATE THE CONTRACT?
The Court considered a number of factors in analysing the impact
of the restrictions upon the contract.
The contract required the conveyance of a bar and lounge
business, and that the COVID-19 restrictions did not
fundamentally change the purpose of the contract.
The contract provided that Choi & Lee were to purchase
business assets for $500,000 (including plant, equipment and
intellectual property) and goodwill for $50,000. The impact of the
restrictions upon the goodwill of the business did not deprive
Choi & Lee of the whole benefit of the contract.
The Court found that the COVID-19 pandemic must have been in
the contemplation of the parties at the time of the contract
because, prior to the contract, the Queensland Government
declared and extended a public health emergency that remained
in place at the time of the contract.
JUDGEMENT
Her Honour Judge Rosengren said at [32]:
The type of business that the applicant was to give the
first respondent possession of, was expressed in the Contract to
be a bar and lounge. While it may have been an important
benefit for the first respondent and the parties contemplated that
it would get the benefit of the Business for such use, in my view it
was not essential for the fulfilment of the Contract
It is interesting that there were no customers enabling Choi
& Lee to operate the business (comprising $500,000 worth
of assets) because of the COVID-19 directions, yet it
was found that this did not deprive Choi & Lee of substantially
the whole benefit of the business, even though the value of
the goodwill was so low in comparison to the value of the
business assets.
This decision reinforces the “all or nothing” effect of frustration.
Temporary interruption “does not approach the gravity of a
frustrating event
Conclusion and Planning
ahead:
Issues to be concerned
- Review: Review the contracts and evaluate the business rights
and responsibility including the termination right [12]

- Insurance: Including force majeure clause and doctrine of

frustration

- Communicate: Open communication with customers and

suppliers

- Ultimately, businesses entering contracts intend to make them

legally enforceable, maintaining strong relationships with suppliers
and customers is key for businesses to success, extending
deadlines and provide rooms for negotiation may be an option
instead of contract frustration

- Compliance business as usual