After a breach of contract, can you force another party to perform their contractual obligations?
Are you a manufacturer? Are you relying on product inputs from suppliers who are seeking a price increase in the light of the impact of COVID-19, the Australian bushfires, recent flooding or some other world disaster? Have you already agreed prospective supply quantities or fixed prices?
If so, you may be able to force your supplier to provide you with the agreed quantity of supply at the agreed price by obtaining a specific performance order. This said, as we have previously written about, a supplier could look to a force majeure provision in the contract or the contract law doctrine of frustration to avoid its obligations.
Specific performance case study
A drinks manufacturer (Drinks Manufacturer) was party to a three-year contract with a counterparty (Sugar Supplier) for the supply of sugar, a critical input in Drinks Manufacturer’s products.
Under the contract, Sugar Supplier agreed to supply sugar up to a specified weight (subject to a minimum order) at a fixed price for three years. (These types of specified quantity and fixed price contracts are common in manufacturing supply contracts.)
As a result of a cyclone and flooding, significant quantity of Sugar Supplier’s sugar crop was destroyed. This caused a steep rise in the price of sugar among all affected growers and refiners. Sugar Supplier, both grew and refined the sugar, refused to supply sugar to Drinks Manufacturer at the price fixed in the contract. Sugar Supplier said that if the Drinks Manufacturer did not pay an increased price (which would have severely reduced Drinks Manufacturer’s profit margin), Sugar Supplier would not supply any sugar to it.
Can Drinks Manufacturer force Sugar Supplier to supply the sugar at the agreed contractual price?
The question here is, would Drinks Manufacturer be able to obtain a Court order to force Sugar Supplier to provide Drinks Manufacturer with the sugar at the agreed fixed price? Such orders are known as specific performance orders.
Specific performance orders are mainly available in relation to ‘executory contracts’. This is where something more is required to fulfil the contract. In this case, the supply of the sugar at a specified price.
Specific performance is an equitable remedy, and to obtain it there needs to be:
- A binding contract; and
- A breach, or anticipatory breach, of that contract.
The Court will not order specific performance of a contract where damages would be an adequate remedy for the breach. Based on the facts of the case study, assume that Drinks Manufacture has two options:
- Drinks Manufacturer buys sugar from Sugar Supplier and or other suppliers at a higher price – resulting in a lower profit margin, or a loss; or
- Drinks Manufacturer cannot produce some or all of its products, resulting in a loss of sales revenue and associated losses
In both scenarios, Drinks Manufacturer’s loss is economic and therefore the Court might consider that damages would be an adequate remedy. In order words, money would adequately compensate Drinks Manufacturer for Sugar Supplier’s breach (assuming loss had been proved). This said, the Court would take into consideration several other factors including whether the refusal to supply sugar at the agreed price could result in an irreversible insolvency situation for Drinks Manufacturer, and the general availability of sugar in the supply market.
What defences are available to Sugar Supplier?
There are several defences which Sugar Supplier could consider in defending an action seeking a specific performance order. These include a defence that performance of the contract would be impossible – ie Sugar Supplier does not have, and cannot obtain, the quantity of sugar required by Drinks Manufacturer.
If it has one, Sugar Supplier might also rely on a force majeure provision in the contract, or the contract law doctrine of frustration.
While a Court will not simply allow a party to a contract to breach its obligations to the counterparty, the parties may have agreed a force majeure clause to provide relief in certain situations. A force majeure clause, in effect, releases the parties from performing their obligations under a contract in the event of a circumstance arising beyond their control.
In this case study, assume the contract between Drinks Manufacturer and Sugar Supplier contains a force majeure provision. Sugar Supplier could argue that it is not in breach of the contract because the crop-destroying cyclone and flooding was an event beyond its control, and the operation of the force majeure clause relieves it from performance of the contract. If so, there is no breach of contract and Drink Manufacturer would not be able to obtain a specific performance order, and may not even be able to claim damages.
If Sugar Supplier could obtain sugar from elsewhere, even at a higher price or on an unprofitable basis, it may be precluded from relying on the force majeure provision. Given the unprecedented effects of novel coronavirus (COVID-19), it will be important for parties to contracts to look closely at any force majeure provision.
Force majeure provisions are not necessarily a ‘get out of jail card’. It is crucial to carefully consider the wording of the clause. Some clauses may be drafted in broad terms whereas others may be drafted with great specificity. By way of example, if the clause is drafted with great specificity, it may be argued that events outside the specified list are excluded. The devil is in the detail, and there are several Court cases which provide instructive insight into the interpretation and construction of these clauses.
Under Australian contract law, the doctrine of frustration may be applied to discharge a contract completely. A contract can become frustrated when certain conditions or circumstances arise such that performance of the contract has become impossible. The law treats the date of termination as the date on which the event occurred.
In this case study, if the cyclone and flood had destroyed all of Sugar Supplier’s crop, and it was impossible for Sugar Supplier to obtain alternative crop elsewhere to supply to Drinks Manufacturer, it could be argued that the contract has been frustrated and therefore terminated, relieving Sugar Supplier from its obligations. This said, the doctrine of frustration and the test applied by the Court is not straightforward, and a close consideration of all the facts are required before a party asserts a contract has been frustrated.
What to consider before Drinks Manufacturer applies for a specific performance order
If the supplier relationship is important, especially where the pool of potential suppliers is limited, then a negotiated outcome may be much better than Court action or even threatened Court action. Threatening or starting Court action could lead to irreparable harm to the commercial relationship.
It is also important to remember that the innocent party claiming damages for breach of contract, has a duty to mitigate its loss. For example, in this case study, Drinks Manufacturer might have to buy sugar from another supplier albeit at a higher price, rather than doing nothing and incurring an even greater loss. The law requires the innocent party to take reasonable steps to mitigate its loss; failure to do so may have the effect of reducing the amount of damages payable to the innocent party.
Specific performance orders, force majeure clauses, frustration and mitigation do not just apply to sugar supply contracts. They apply to a whole range of contracts. Many supply contracts for goods and services will have been affected by the Australian bushfires, recent floods and novel coronavirus (COVID-19), and therefore it is worth looking closely at your contracts.
We are specialists in advising in breach of contract cases, and resolving them at an early stage. Contact us today if you have any concerns about breach of contract and specific performance.