Over the last few months, we have seen the COVID-19 pandemic unravel and disrupt nearly all aspects of our lives both on a domestic and international scale. In New Zealand, the entire country went into Alert Level 4 lockdown on 25 March following the government’s decision to suspend all non-essential travel and business for a period of 4 weeks. Now, as the country begins to revive back into gear and return to some form of normality, the effects of COVID-19 are really starting to be felt, and businesses in particular have been hit hard.
As a result of the government-imposed halt to their operations, businesses which have entered into contracts prior to the lockdown may find themselves unable to meet their contractual obligations due to circumstances beyond their control. If you or your business are concerned you may be forced into this position (or are already in this position), broadly speaking there are two avenues which you can take in order to avoid liability for breach of contractSome contracts contain force majeure clauses, which enables the parties to delay performing their contractual obligations. For those without (or whose force majeure clauses don’t cover the COVID-19 situation), businesses may have to resort to relying on the doctrine of frustration to avoid termination of the contract or paying damages to the other party as a result of breach.
- Force majeure clause
A force majeure provision is a common clause in commercial contracts that excuses a party from not performing their obligations under the contract when the performance of it becomes impossible or impracticable, due to an extraordinary event or circumstance beyond the parties’ controls.
Not all contracts will include a force majeure clause. The invocation force majeure will only be possible if there is a specific provision for it under the contract in question. If there is a force majeure provision in place, the triggering events will generally be listed. Commonly cited events include fire, earthquake, terrorism, ‘Act of God’, and most importantly in this context – epidemics and government directives.
Whether or not a force majeure provision is triggered by COVID-19 and the subsequent government measures that have been implemented will depend entirely upon several factors, including the nature of the event, the actual and practical effect it has on the parties’ ability to perform, and the specific wording of the clause.
The first step to take is to go over your contract thoroughly and see if there is a force majeure clause in place. Remember that a force majeure clause will only apply if the parties have specifically agreed to such a term in the contract. Accordingly, the wording of the particular clause at issue will be critical in assessing whether it applies.
- Frustration of contract
COVID-19 may also give rise to the need to rely on the doctrine of contractual frustration.
A frustrated contract is one where the obligations under the contract cannot physically or legally be performed, due to an expected event or series of events. Performance of the contract must become impossible or ‘radically different’ from what the parties initially agreed to. The event in question must arise from something completely out of the parties’ controls, such as a fire or earthquake, and cannot be the fault of either party.
When frustration occurs, the contract is brought to an end. The parties are excused from further performance, meaning neither party is required to perform any further obligations under the contract. Under the Frustrated Contracts Act 1944, the Courts have the power to order the parties to pay compensation to each other having regard to the expenses incurred and benefits received prior to the date of frustration.
It is important to note that a contract will not be frustrated simply because a change in circumstances renders the contract more expensive or inconvenient to perform. The frustrating event must be entirely non-foreseeable nor anticipated. Establishing frustration requires surpassing a very high threshold, therefore each case will depend on its own circumstances.
If your business has been affected by COVID-19, we urge you to speak with us and seek our legal and commercial advice. You may be able to rely on a force majeure clause within your contract, or alternatively resort to the common law doctrine of frustration. Remember that this is a complex area of law that is highly contextual, therefore wording and interpretation plays a crucial role. If you are struggling to meet your contractual obligations or worry that you may be exposed to contractual liability, it is important for you to obtain professional legal advice before making any decisions that may ultimately do more harm for your business than good.
Recent Comments