With prices rising due to fuel shortages, many businesses are having difficulty ensuring they can deliver their goods on time or source the materials to finish a job.
So, what are your options if you cannot meet your end of a deal?
Read your contract first
Your contract is basically a rulebook for your agreement. Before doing anything else, read it carefully and ensure you understand the clauses. Look out for these clauses and keywords:
- Force majeure clause: This is a type of clause that may allow for a contract to be terminated or varied if there is an ‘unexpected disaster’. If it mentions things like ‘fuel shortages’ or ‘supply chain problems’, you might be able to rely on it to vary or cancel the contract. If it only covers things like earthquakes or ‘acts of God’, it may not apply.
- Price escalation clause: Some contracts allow you to raise your prices if your costs increase, like when there is a supply shortage.
- Termination for convenience: Some contracts let the parties walk away for any reason. If this is a term of your contract, you may be able to end the agreement provided you follow the steps outlined in the contract.
Acting in good faith
Before considering whether you can terminate or vary a contract, it is important to be mindful of how you respond to the situation. Parties are generally expected to act reasonably and in good faith in the performance of their contractual obligations, and such a duty may be implied in some contracts.
This includes early communication about any disruption, taking reasonable steps to minimise the impact (including mitigating any loss), and avoiding attempts to exit a contract simply because it has become more expensive to perform. This type of conduct is generally consistent with acting in good faith.
How you handle issues at an early stage can have a knock-on effect on your legal position if you later seek to terminate the contract.
If there’s no helpful clause, the law might still protect you
If your contract does not have any of these clauses, you might be able to use something called frustration. Frustration is a legal concept that says a contract can be cancelled if something completely unexpected makes it impossible.
Frustration only works if the fuel shortage makes it impossible to complete the contract, not if it simply makes it more difficult or expensive to meet your obligations. For example, if you genuinely cannot source fuel due to shortages, and there is no alternative way for you to meet your contractual obligations, that might qualify. If fuel is just pricier than expected, you will not be able to claim frustration.There are also laws that protect people buying goods or services from you that you should be aware of, called the Australian Consumer Law. If your business cannot deliver because of fuel shortages, your customers may be entitled to a refund or other compensation.
Depending on what industry you operate in, there may be legislation that applies to your specific circumstances. For example, there is legislation in Western Australia that applies only to building contracts. We recommend that you consult a lawyer to find out if there is any legislation that impacts your contractual rights and obligations.
6 steps to protect your business
1. Read all your contracts: Find every contract that might be affected and look for the clauses mentioned above. Contact a lawyer to assist you in reviewing your contracts, as misreading a clause could mean you that you improperly end or vary a contact, potentially leaving you liable for damages to the other party.
2. Understand when you need to send notices: Make sure you understand any time limits under your contract. If your contract says you need to notify the other party, do it as soon as possible. Many contracts set a deadline for providing notice and if you miss it, you might lose your rights.
3. Keep records of everything: Save evidence of the fuel shortage and how it is affecting you. This could include messages from suppliers, price increases or evidence of delays. You’ll need this if there’s ever a dispute.
4. Try to fix the problem: Courts expect you to try to reduce the damage, like finding an alternative fuel source or adjusting your schedule. If you do this and there is a dispute, a Court may take this into consideration.
5. Talk to the other party: Often the best solution is just having an honest conversation. You might be able to agree on a delay, a price change or a different arrangement. Remember to stay calm when having these conversations and write down whatever you agree to.
6. Get legal advice before cancelling: Never just cancel a contract without checking first. If you cancel without a valid reason, the other party could sue you for the money they lost. Always talk to a lawyer first.
The bottom line
You generally cannot just cancel a contract because fuel prices have increased. However, if a fuel shortage makes it genuinely impossible for your business to operate, the law may give you a way out. The key is acting fast, keeping records and talking to a lawyer before making any decisions.
If you would like any help reviewing your contracts or would like legal advice, get in touch with Cullen Macleod, we’d be happy to help.
