Contracts And Coronavirus: What Happens If You Can’t Meet Your Obligations?

Like many businesses, you may have entered into contracts or commitments to provide services for your clients before the COVID-19 crisis.

With COVID-19 having unprecedented effects, you might be in a position where it is no longer possible for you to fulfil these commitments.

For example, videographers might have already taken a deposit months before a client’s event, which is now cancelled. Or you might be a gym that has been forced to close, but you have members who have paid you upfront for the entire year. In these cases, your clients might be asking for a refund.

But providing refunds could be difficult for you, especially because you want to preserve cash flow as much as possible during this time.

In these situations, you might be feeling uncertain about what you can do to prevent your business from going out of pocket.

So, what are your options?

You’ll need to think about your contracts, the laws behind refunds, as well as what practical options are available to you.

We understand this is a stressful time for many businesses who have made commitments to their clients, and we’ve experienced this first hand having helped our own clients navigate through these challenges in recent days.

In this article, we’ll walk you through what you need to know and what you can do.

Check Your Contract

Many of your clients may be requesting a refund of your deposits (regardless of whether you have specified that they are non-refundable) in light of unexpected COVID-19 changes.

So, are you actually required to provide those refunds?

The answer to this can often be found in your contract with your clients (if you have one). You should take a look at whether your contract has any specific terms around how refunds and cancellations work.

Understand The Law Behind Refunds

Legally, you can’t write in your contract that you won’t provide any refunds whatsoever. However, you can specify reasonable circumstances under which a refund can be refused.

Whether or not you have a contract, the Australian Consumer Law (ACL) sets out the circumstances under which a customer might be entitled to refunds, credit vouchers or compensation. You can read more about this here.

Also, the ACL also does not allow unfair contract terms. If you have harsh terms in your contract around refunds and cancellations, they might be seen as unreasonable and could be void under the ACL.

Getting Out Of A Contract – Force Majeure and Frustration

Your other option might be to get out of a contract. 

Because of the unexpected impact of COVID-19, there are the “force majeure” and “frustration” concepts under contract law that might enable you to get out of the contract.

A force majeure clause sets out circumstances under which parties can’t be held responsible to perform the contract due to something outside of their control. 

Although it might seem like COVID-19 would fall under this clause, it really depends on how the force majeure clause is drafted. For example, it might specifically mention things like “infection diseases” or “pandemics”, or it could be something less certain like “act of God”.

Typically, there are also additional requirements around notifying the other party as soon as the force majeure event happens and making reasonable steps to mitigate the damage.

Some contracts contain very narrow definitions of force majeure, so relying on a force majeure clause for COVID-19 can be difficult.

If there are no force majeure clauses, or if they don’t apply to COVID-19, “frustration” is an alternative you can rely on.

Frustration means that a contract can be brought to an end if an event fundamentally changes the basis of the contract and such that it can no longer go ahead. 

Frustration has a very narrow scope, so it is often difficult to rely on it to end a contract. Whether COVID-19 frustrates a contract will really depend on each individual case, as the pandemic has affected businesses in very different ways.

If you want to understand where your business and your contract stand under these laws, you’ll need to speak with a lawyer for specific legal advice.

Explore Your Options

It’s important to understand the legalities of a contract, as it affects how you go about your practical options.

First, it’s probably important to preserve cash flow as much as possible. Issuing refunds may create a big financial strain on your business, and you may even have to send some of your staff home.

Secondly, think about your clients. You might have long-term relationships with many of your customers, which you probably want to maintain after COVID-19 settles. 

As this is a stressful time for everyone, they are likely to be in a similar position to you. The last thing you want is the added stress of having a dispute with a good client.

In the interests of preserving your cash flow and customer relationships, it’s a good idea to start thinking creatively about your options.

So what can you do? 

A good place to start is by thinking about how you receive payments in your business.

Did you take payment upfront for a job? Was there an ongoing fee? Or is payment structured by milestones?

Depending on how you receive payments, this will typically determine your options.

For example, many airlines right now are struggling to keep up with flight cancellations and refunds in the face of COVID-19. Instead, they are offering flight credits to use once travel restrictions are lifted.

For everyday small businesses, where cash flow might already be tight, it’s even more important to start thinking about these alternatives.

In this climate, many people are understanding of small businesses in these kinds of predicaments. Therefore, negotiating a solution with your client could be the most practical option.

This way, you’re able to preserve your cash flow and also maintain a healthy relationship with your clients. 

And, when you do reach an agreement, definitely have that in writing to avoid any disputes later.

Thinking Ahead

Whether or not you’re already facing these kinds of predicaments, it’s a good idea to be prepared.

With the impact of COVID-19 being so unprecedented, now might be a good time to clean up your contract to protect you against this situation.

It’s also a good opportunity for you to propose creative alternatives to jobs that have been cancelled under new restrictions. Make sure you have these agreements in writing so that a refund will be the last resort. 

If you already have a contract and you’re not sure where it stands in this situation, a lawyer can have a look over it or even re-draft it to suit your needs.

Or, if you don’t have a contract, it’s a good idea to speak with a lawyer to get one in place.

At Sprintlaw, we’re here to help. We’re offering a number of discounted support packages for businesses who have been impacted by COVID-19. You can access free resources and read more about our services here.

If you have any other questions, please don’t hesitate to reach out to our friendly team on 1800 730 617 or at team@sprintlaw.com.au.

Regie Anne Gardoce

Regie is the Legal Transformation Lead at Sprintlaw, with a law degree from UNSW. Regie has previous experience working across law firms and tech startups, and has brought these passions together in her work at Sprintlaw.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal experience. Before starting Sprintlaw, he was an M&A lawyer at a top-tier law firm advising businesses of all sizes from large corporates to startups.