The COVID-19 pandemic has had a significant and wide-ranging impact on universities and other higher education providers nationally. These include the impact on obligations owed to students in the delivery of courses and the contractual obligations found in the many different types of contracts entered into by universities (for example, funding and partnership agreements, consultancy agreements and supply contracts).
Education was one of the first sectors in Australia to be directly impacted by COVID-19, with many international students unable to make it to Australia to commence their first or next period of study in 2020. The sector has also seen an increasing number of international students return home due to circumstances relating to the pandemic.
As universities move from dealing with the immediate impacts of the pandemic to longer-term consequences, it will be increasingly necessary for universities to deal with contractual obligations that cannot be performed as a consequence of COVID-19. This includes obligations owed to the university, and those owed by the university.
The purpose of this article is to give universities a framework within which to consider these issues as they arise. It also investigates some common scenarios in which universities may need to consider issues of force majeure and frustration.
Force majeure
Explaining a force majeure clause
A force majeure clause relieves a party from performing its contractual obligations due to an event outside the reasonable control of the affected party. Force majeure is a contractual concept not generally recognised in Australian common law. Due to their nature as a product of contractual negotiations, parties have the freedom to negotiate force majeure clauses as they see fit. This means force majeure clauses will vary from contract to contract. Events such as ‘acts of God’, ‘natural disasters’, ‘government action or interference’, ‘labour shortages’, ‘national emergencies’ and ‘acts of war’ are examples of common force majeure events.
How a force majeure clause applies to COVID-19
To determine whether a force majeure clause applies to circumstances arising from COVID-19, Universities should consider whether the events encompassed in their force majeure clauses include terminology such as ‘infectious disease’, ‘epidemic’, ‘pandemic’ or similar. Other events that are usually included in the definition of force majeure, such as ‘government action’, a ‘national emergency’ or ‘labour shortages’, may also arise as a consequence of COVID-19
Universities should also consider whether the force majeure clause only applies to certain obligations or if it will be activated if any obligation is affected by a force majeure event. Parties should also understand how the force majeure clause interacts with and applies to their obligations, and whether the clause may be invoked by each party to the contract.
Often force majeure clauses require the party affected by the event to give notice to the other party. In the current situation, the trigger for when notice is required may be complex or unclear.
For example, performance of an obligation may now be impossible due to government restrictions but could conceivably have been performed prior to that time, even after COVID-19 was declared a pandemic: was the triggering event the Australian Government's announcement of restrictions or the World Health Organization's declaration of a pandemic? The trigger point may vary depending on the obligations affected and the contractual provision in question. If possible, it may be helpful to ‘agree’ with a counterparty which date or event will trigger a notification. This is especially important when the party hoping to rely on the force majeure clause bears the burden of proof.
The failure of a party to give notice of a force majeure event in failure to do so in strict accordance with the contract, if required, may have different consequences. For example, failure to comply with a notice requirement may simply amount to a breach of contract for which damages (if there are any) might be claimable, however, in some contracts, it may act to prevent a party from relying on the force majeure clause.
Universities will also need to consider if the COVID-19 pandemic is genuinely a force majeure event, in the sense that it has caused real restrictions that prevent a party to a contract from performing its contractual obligations. It will often not be enough if a party has simply been inconvenienced or suffered financial loss. This will depend on how the force majeure clause is drafted and how it can be interpreted.
Some force majeure clauses refer to events ‘preventing’ a party from performing an obligation. Usually, this is interpreted to mean an obligation must become impossible, as opposed to simply more difficult or costly, to perform. The words ‘hinder’, ‘impede’, ‘impair’, or ‘delay’ may be used in other clauses. Nevertheless, courts will usually require that performance be substantially more onerous, and not just less commercially desirable or more difficult and expensive to perform. It would be unusual for a force majeure provision to waive a party's obligation while the other party is ready to perform if the affected party's primary obligation is just to pay money.
Activating a force majeure clause
The effect of a force majeure clause will differ between contracts, and universities should think carefully about the possible consequences of activating a force majeure clause. These consequences commonly include termination of the contract, extensions of time, excuse from liability for non-performance or delay, suspension of contractual obligations, renegotiation of certain terms, or some contract remediation or governance measures. Provided the contract is not terminated, relief is often only available for the duration of the force majeure event.
Universities will also need to consider any provisions in the contract which attach consequences to wrongful termination . This will be important if a party’s right to terminate the contract under force majeure is disputed.
Drafting force majeure clauses in the future
In the future, where universities think they may have to be relieved of certain contractual obligations in particular situations, they should ensure that all future agreements have a force majeure clause on which the university will be able to rely. The clause should include a definition of a force majeure which will encompass the current COVID-19 pandemic and similar future events. When drafting a force majeure clause, universities should also include whether the clause:
- Addresses all obligations parties wish to be covered;
- Includes the right to suspend or terminate the contract without penalty if the force majeure event continues for a sustained period;
- Provides for payment to be suspended until obligations under the contract can be performed;
- Provides for reasonable notification periods in the event that a force majeure event affects an obligation; and/or
- Requires that the affected party use reasonable efforts to mitigate the impacts of the force majeure event on the performance of their contractual obligations.
Frustration
A party may look to the doctrine of frustration to see if the contract has been terminated for frustration, if the contract does not include an operative force majeure clause.
Defining frustration
The common law concept of frustration occurs when, at no fault of either party, circumstances have arisen, which result in the obligations under the contract becoming incapable of being performed “because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract” (Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729).
When the doctrine of frustration will operate
Whether the doctrine of frustration applies to a situation will depend on the effect the frustrating event has on the ability of the parties to perform their obligations and the specific contractual context.
Frustration will generally not occur:
- If there is an existing force majeure clause in the contract which covers the circumstances;
- When performance of the obligation is merely delayed, unless the delay is for an unreasonable time;
- If the parties have merely suffered unforeseen loss or hardship; or
- If it has become more expensive or difficult to perform an obligation.
Frustration will be clearly established where an obligation is now impossible to perform, such as when performance becomes unlawful. Additionally, if the contract requires personal performance of an obligation, the incapacity or death of that person may mean that the contract is deemed frustrated.
There is no hard and fast rule as to which events will enliven the doctrine of frustration. Rather, a party needs to consider whether the situation is now radically different from that in which performance was originally contemplated under the contract. The standard of proof is very high – typically much higher than circumstances contemplated by a force majeure clause. Frustration will not apply to peripheral obligations in a contract, but only to the fundamental ones.
Effects of frustration
If the doctrine of frustration is applicable then outstanding obligations will be discharged and the contract terminated. Liability will remain for any obligations performed before the frustration occurred.
If a party incorrectly claims that a contract has been frustrated then they may be seen to have repudiated the contract, so universities should carefully consider the effect of claiming frustration.
In circumstances where the contract is a long term contract on terms advantageous to the university, or where the other contracting party is a particularly important commercial partner such as a government body or partner university, Universities should also consider the impact of asserting that a contract has been frustrated, Remember: frustration terminates a contract. It does not suspend it.
After a contract has been frustrated, under the common law losses lie where they fall. This means that any costs paid or expenses incurred in performing or preparing for performance of an obligation prior to frustration are irrecoverable. It may be possible for a party to recover the reasonable value of partial performance, if it would be unjust to allow the receiving party to retain the benefit of that performance, through a claim for restitution. Legislation in New South Wales (Frustrated Contracts Act 1978 (NSW)), South Australia (Frustrated Contracts Act 1988 (SA)) and Victoria (Australian Consumer Law and Fair Trading Act 2012 (Vic)) operates to reduce this harshness and provides for how rights may be adjusted if a contract becomes frustrated.
COVID-19 scenarios – the operation of force majeure clauses and the doctrine of frustration
The table below sets out hypothetical scenarios related to COVID-19 that highlight how a force majeure clause or the doctrine of frustration may operate. Please note these are hypothetical situations only, with basic analysis.
Example 1: ARC Linkage Program agreement
A university receives an Australian Research Council (ARC) Linkage Program funding grant to analyse the impacts of fine air particle pollution in three Chinese provinces. The Project Activity Period is 18 months, starting from January 2019. To date, the research team has visited two of the three provinces. However, the Department of Foreign Affairs has since issued a ‘do not travel warning’ and the research team has been unable to visit the final province.
There is no force majeure clause in the template ARC Linkage Program agreement. The ARC has the right to terminate funding for the project if progress has been unsatisfactory or if the university can no longer fulfil its role. Either of these rights may be triggered in this circumstance. While the ARC has indicated that it is aware of the impact COVID-19 is having on many research projects – and may be unlikely to terminate a research project on this basis – universities should proactively negotiate with the ARC to vary existing research funding agreements and, where necessary, extend project and reporting deadlines.
There would also be significant doubt accompanying an assertion that the contract was frustrated. Although it is unclear when the travel restrictions will be lifted and the research able to continue, research gathering in the third province is unlikely to be considered a fundamental obligation of the contract. Additionally, it may be possible to delay the provision of ongoing funding while the travel restriction is in place, without terminating funding completely.
Example 2: student exchange agreements
Universities around the world commonly enter into student exchange agreements where they agree to host a certain number of students from a partner university in exchange for sending a similar number of students to study at that university. However, government restrictions now prevent any international students from entering Australia. At the same time, Australian students are unable to leave the country to study internationally. This means that neither partner university can satisfy their obligations under the exchange agreement.
University exchange agreements sometimes include a force majeure clause, which may be triggered by government restrictions on travel. Universities may also wish to invoke any termination rights they have under agreements with their students in order to protect their wellbeing and safety.
On a practical level, it may be in the best interests of both universities to suspend performance of such contracts by agreement, at least until travel restrictions are lifted, even if the agreement does not have a force majeure clause.
Example 3: sponsorship agreement
A university business school enters into an agreement with a well-known management consulting firm to sponsor students to attend an annual international conference in Singapore. The management consulting firm has already provided the funds, but the conference has since been cancelled due to COVID-19.
Often these sponsorship agreements are informally arranged and executed, so there will be no specific force majeure clause. In these cases, the allocation of funding will be a matter of negotiation – for example, the university may seek to put any ongoing funding on hold and retain any funds they have already received, to be used at the conference the following year. If agreement cannot be reached with the management consultant firm, returning the sponsorship fees will need to be considered. Further, if the sponsorship was to attend a one-off conference, it is likely that any agreement has been frustrated.
If the sponsor was to receive any benefit under the sponsorship arrangement – for example, advertising of the event by the business school – this would also be the subject of negotiation.
Example 4: consultancy agreement
A university enters into a consultancy agreement with a large company in the oil and gas sector for a renowned emeritus professor to give expert technical advice on an upcoming project. Under the agreement, the company was to pay the university a specified sum after receiving the professor’s advice. Unfortunately, before she has an opportunity to give her advice, the emeritus professor succumbs to COVID-19 and passes away.
In this scenario, it is likely that the agreement between the university and the oil and gas company would be frustrated. This is because – following the death of the emeritus professor specified in the agreement – it is no longer possible for the university to fulfil its obligation to the company to provide her advice.
The university may be able to offer to provide the advice of an academic with comparable experience. However, even if this is an option, the company may still be able to claim the contract was frustrated if the purpose of the agreement – as ascertained by its context and plain ordinary meaning – was to secure the advice of that particular emeritus professor. If the agreement was frustrated, then the oil and gas company would no longer be under an obligation to pay the university.
Example 5: online and distant learning
In response to COVID-19, a university has arranged to transition the delivery of its English Language Intensive Courses for Overseas Students (ELICOS) from face-to-face mode of study to a mixture of online and distance learning. This was initially to secure the wellbeing and safety of its students, and later, in response to government directions. The changes have been approved in accordance with the university’s governance framework, and notified to the Tertiary Education Quality and Standards Agency. International students undertaking the course have been notified of the change.
However, an international student enrolled in the course has contacted the university and says that she does not wish to take the course under the new delivery model.
In accordance with regulatory requirements, the written agreement between the university and the student specifies the mode of delivery for the course is face-to-face. There is no specific clause that allows the university to require the student to undertake the course delivered in a different delivery mode, or a force majeure clause that allows the university to suspend its obligations to deliver the course.
If the student does not consent to receive the ELICOS course via the new delivery mode, there could be a real issue about whether the student agreement is effectively frustrated, due to the university being unable to deliver the course as promised, as a consequence of COVID-19.
However, in this scenario, the provisions of the Education Services for Overseas Students Act 2000 (Cth) (ESOS Act) would intervene. In the absence of the student agreeing to defer the commencement of her course, the university would need to comply with its provider default obligations under the ESOS Act, Part 5, Division 2. These state that the university must refund the student’s prepaid tuition fees or arrange for her to be offered a place in a comparable course that she accepts. The university would also need to report the provider default to the Provider Registration and International Student Management System (PRISMS).
See the matters referred to in Compliance, COVID-19 and the move away from face-to-face teaching.
What to do now
Universities should review their existing contracts (including funding and partnership agreements, consultancy agreements and supply contracts) and consider the effects of any force majeure clauses and whether these clauses can and should be activated in the current circumstances.
Negotiation with counterparties about the impact of COVID-19 on the ability to meet contractual obligations – including whether any force majeure clause is applicable or if the university considers the contract has been frustrated – will help to reduce unnecessary disputes between the parties. Regardless of whether force majeure or frustration applies, universities may prefer to renegotiate contractual obligations by way of variation, to avoid the uncertainty that often coincides with these types of circumstances.
Going forward, universities should also consider reviewing force majeure clauses in future contracts. This may include adding pandemic-type events to the list of events that will trigger the ability for them to suspend obligations in a contract.
Please contact us if you wish to discuss the impacts of COVID-19 on the performance of obligations under a particular contract.
