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COVID-19 Frustration, Force Majeure and Property Settlements

Senior Partner, Keturah Sageman looks at how the COVID-19 pandemic may affect some contractual relationships and impact the fairness of property settlements.

Businesses and people are struggling to keep afloat in the wake of the COVID-19 pandemic. In Contract Law there are provisions to void contractual obligations. By comparison, Family Law has some specific provisions that may be relied on in a COVID-affected world to help those in financial straits who are finding it hard to comply with the terms of their property settlement.

After an exchange of a contract, circumstances may lead to a default or non-performance of the agreement. Two concepts that may provide relief are the doctrine of frustration or force majeure clauses, sometimes colloquially referred to as “acts of God” provisions.

Both concepts operate in somewhat similar ways, that is, when something entirely unexpected happens, and where a party is unable to meet his or her obligations through no fault of their own, the contract can be voided or modified.

A force majeure clause can be included in a contract to give parties some agreed upon extrication if the worst were to happen. It can define in what unforeseen circumstances the clause will operate, which gives the parties a get-out clause.

The doctrine of frustration is distinct from a force majeure clause, and is implied by common law into all contracts. It voids contracts that have become incapable of being performed due to unforeseen and unpreventable events, however it involves an extremely strict test and it is not enough to establish hardship or the performance to be just impracticable.

In Family Law property settlements, these principles of Contract Law do not apply, and parties are expected to meet their obligations under Court orders. Courts are reluctant to vary orders once final orders are in place.

The effects of COVID-19 can radically change the balance of a settlement, for example the government could have, by its restrictions, prevented your business from operating and reduced patrons, as occurred during the lockdown. Tenants could not, in many cases, afford to pay rent to their landlords. This had the effect of rapidly turning what once were profitable businesses into unprofitable entities that could even become a liability. It could have reduced the size of an asset pool for division in a divorce settlement.

Family lawyers, when drafting Binding Financial Agreements, would do well to consider including a force majeure clause to cater for the impact of a pandemic on a settlement.

In a case of Guild v Stasiuk [2020] Fam CA 348 where an application was made to the Family Court to set aside a pre-nuptial agreement, Justice Wilson considered the meaning of “impracticable” under s90 of the Family Law Act. His Honour examined whether “In the circumstances that have arisen since the Agreement was made it is impracticable for the Agreement or a part of the Agreement to be carried out.” His Honour found that “impracticable” does not mean impossible, but rather something that is not able to be done. Wilson J contrasted the common law doctrine of frustration with the relevant family law provision, observing that frustration involves a frustrating event which “renders the performance of a contractual stipulation radically different from that originally agreed.”

Under the Act it is possible in limited circumstances to set aside court orders or settlements on the application of a party. Section s79A(1)(b) provides that orders can be changed upon application, where “in the circumstances that have arisen since the order was made it is impracticable for the order to be carried out or impracticable for a part of the order to be carried out”. However, case law on this matter is limited and suggests a narrow interpretation of this principle. In Cawthorn V Cawthorn (1998) FLC 92-805 the Family Court considered an application to set aside orders under s79A and held that a change in the value of business and devaluation of property with the husband’s financial situation becoming more onerous to carry out orders did not satisfy the “impracticable” test.

When the pandemic was declared, the Family Court, in some registries encouraged or accepted adjournments of negotiated property settlements until such time as property valuations could be obtained without being significantly impacted by government imposed COVID-19 restrictions.

It remains to be seen what further cases are filed in Court with applications to set aside orders or agreements due to the impact of COVID-19 devaluing assets and whether they meet the impracticability test.

Nicholes Family Lawyers has extensive expertise when it comes to property settlements in changing circumstances and our doors have remained open throughout the time of the COVID-19 pandemic.

By Nicholes Family Lawyers

 

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