On this page
- Introduction
- Force majeure
- Termination right
- Frustration
- Moratoriums: temporary suspension of legal obligations by government
Introduction
Case study – organisation can’t comply with funding agreement
A community organisation that teaches English to immigrants has an obligation under a funding agreement with the Victorian government to run two face-to-face classes per week for the term of the contract.
The community centre where the organisation holds the classes is flooded. As a result, the organisation cancels the classes until another suitable venue can be found.
In these circumstances, it’s important that the organisation takes proactive steps to manage the situation to try and avoid being breach of the agreement.
If the organisation is found to be in breach of the agreement, the Victorian government may impose penalties (which could include fines or the recovery of previously disbursed funds) on the organisation or terminate the agreement. This may damage the organisation’s reputation and make it difficult to secure future funding or partnerships.
If your organisation can’t comply with certain contractual responsibilities because of a disaster, it is important that the organisation takes proactive steps to manage the situation. If the organisation doesn’t, it may be in breach of the agreement. Depending on the agreement's terms, failure to comply may result in reputational damage, an inability to attain other grants or funding, or an ineligibility to apply for future grants.
A good starting point is to review the agreement to determine whether the organisation has any obligations. Once this has been done, you can determine what obligations (if any) have been breached. The contract may contain important terms that will influence how your organisation should react if it suspects that it is in breach.
Common funding agreement obligations relate to payment of funds, use of the funds, specific performance indicators, specified personnel, auditing, monitoring, and reporting. If an organisation does not comply with the terms of a funding agreement, non-compliance may result in funding being denied.
Tip
Communicate with the other party to the agreement early to inform them of the situation and that your organisation may not be able to comply with the agreement. This helps to manage expectations and avoids surprising the other party.
Proactive and transparent communication increases the likelihood of the other party providing flexibility regarding performance.
Note – contracts that include terms about confidential information
In determining whether your organisation is in breach of its obligations, consider whether the contract includes provisions that relate to shared confidential information. These obligations may require the parties to only use information provided in relation to the contract for specific purposes and to only share the information with certain people and in certain circumstances.
Some emergencies, such as a data breach or other technical issue, can cause an organisation to breach their obligations of confidentiality.
It is important to read the terms of the contract to see if it accounts for the disaster, as contracts often contain flexibility for disruptions.
Many contracts specify a particular process that must be followed if one party thinks that another is in breach. Sometimes this includes:
- an obligation to notify the other party, setting out the nature of the alleged breach
- an opportunity for the defaulting party to rectify their breach within a certain time frame
- an obligation for the parties to negotiate to see if they can resolve the dispute, before the matter can be referred to dispute resolution or court proceedings
If the contract includes obligations regarding notice or negotiation, your organisation should ensure it complies with these provisions when they initiate communication with the other party.
Sometimes, these requirements are contained in different parts of the contract. For instance, the dispute resolution clause may require a party to send a 'breach notice' setting out various pieces of information. However, the 'breach notice' may need to be sent to the other party in compliance with a separate clause that deals with what notices under the contract should look like. This clause might state who notices should be addressed to, and what form they can be in.
Depending on the terms of the agreement, there may be ways to end the contract.
Force majeure
A force majeure clause (also known as an 'act of God' clause) sets out that the parties are not expected to perform their contractual obligations if they are prevented from doing so by something beyond the control of the parties, such as flooding or an earthquake.
Not all force majeure clauses are the same, nor will they necessarily cover the disaster your organisation is facing, so be careful to read the specific provision in a contract to determine whether your circumstances fall within the scope of the force majeure clause. Also make sure your organisation complies with any applicable notice periods.
Many force majeure clauses require that the affected party give notice to the other party within a certain period if they believe that a force majeure event will prevent them from complying with their contractual obligations. For example, a contract may require a party seeking to rely on a force majeure clause to give notice within five business days of the 'force majeure' event, setting out:
- which obligations they will be unable to perform
- why the disaster has caused them to be unable to perform those obligations, and
- an estimate of how long they will be prevented from performing the obligations
Termination right
The contract may include termination rights.
A termination right gives the parties a right to terminate the contract in certain circumstances. Sometimes, this can be as simple as giving the other party a certain amount of notice (which is called ‘at will’ termination).
If your organisation is not able to perform a contract, and the other party is unwilling to accommodate the circumstances, your organisation should check whether they have a termination right which they can exercise to end any future obligations under the agreement.
Terminating an agreement should be considered a last resort, as termination often means the end of a relationship between two parties.
Frustration
If an unanticipated disaster prevents parties from fulfilling their contractual obligations, they may be able to rely on the ‘doctrine of frustration’ to end the contract.
This may apply if there is a change in circumstances that was unexpected or not reasonably contemplated by the parties (through no fault of either party) that is so significant that the contract becomes impossible to complete. In these circumstances, the contract may be ‘frustrated’, meaning it is automatically terminated and neither party is at fault or liable for future performance.
The 'doctrine of frustration’ will not apply if the change in circumstances was known or expected or reasonably contemplated by the parties at the time they enter into the agreement.
In New South Wales, the Frustrated Contracts Act 1978 (NSW) provides guidance on this. Possible remedies include the return of money paid or adjustments of certain losses and gains.
Tip – review all your organisation’s agreements when a disaster occurs
In a disaster situation, an organisation’s directors, committee members or office holders should confirm whether their agreements include provisions that contemplate disaster situations and take any steps required by those provisions.
For example, some funding agreements may require an organisation to notify the other party if a disaster occurs, including providing details about how the disaster is preventing the organisation from complying with its obligations.
An organisation should closely consider the terms of any grant or funding agreement that it is a party to and identify if any of the organisation’s obligations are likely to be disrupted in a disaster.
Note
It is important that organisations entering into grant or funding agreements understand the terms of the agreement, including their rights and obligations, and where necessary (and possible) negotiate terms to account for a disaster or emergency which prohibits them from complying with an agreement.
For more information, see our webpage on grant funding.
Moratoriums: temporary suspension of legal obligations by government
A moratorium is a temporary suspension of legal obligations. For example, during the COVID-19 pandemic, the Federal government announced a six-month moratorium on evictions for commercial tenants. Some banks also granted temporary relief to borrowers, allowing them to defer mortgage repayments.
While moratoriums of this nature are rare and generally only granted in extreme circumstances, if you suspect that your organisation is in breach of a contractual obligation, you should confirm whether any extraordinary moratoriums apply to the situation.
Note
If proactive communications and negotiations with a contractual party are not successful in resolving a dispute, your organisation should consider whether it needs to develop a legal strategy to protect itself. A lawyer will be able to consider your facts and advise on whether a technical argument (such as one involving the doctrine of frustration) is available.
Disclaimer: These resources provide general information about legal issues that may arise for not-for-profit organisations in managing disasters. This information is a guide only and is not legal advice. If you or your organisation has a specific legal issue, you should seek legal advice before deciding what to do. See full disclaimer and copyright notice.
The content on this webpage was last updated in December 2024.
