Some points to consider in these difficult times for businesses

Covid-19 has had a dramatic impact on New Zealand and the world. As a result, your business may be struggling and you may not be able to fulfil your obligations under a contract. However, you may have rights under a force majeure clause or under the common law doctrine of frustration, which mean you don’t have to do the things you promised you would.

Force Majeure

Force majeure has often been a clause thrown in at the end of contracts, without much thought. It gives the parties an ability to avoid their contractual responsibilities without penalties when something happens that is beyond the reasonable control of the parties. The extent to which such a clause will apply depends on how the clause is drafted in your contract, and there must be a force majeure clause in the contract in order to rely on this legal doctrine. Does it include reference to an epidemic or pandemic? Or is it drafted broadly enough to capture such an event?

To rely on a force majeure clause, you need to be able to show that the event beyond your control — in this case Covid-19 — is the reason you are now unable to fulfil your obligations. For instance, such a clause could apply where Covid-19 has prevented you from being able to organise an event. However, a tenant to a commercial lease may have a more difficult time arguing that Covid-19 has caused it to be unable to be unable to fulfil its obligation to pay for the lease.

The threshold for a force majeure to be relied on is high. You will likely need to be able to show that there is no alternative way for you to perform the contract and that you were not able to mitigate the situation. An example of mitigation might be performing part, but not all, of the contract. A force majeure clause will not apply where meeting your obligations has simply become more difficult or expensive.

It is a good idea to check the entire contract and understand your rights and obligations. Some contracts may contain clauses that help deal with the effects of Covid-19 (such as economic disruption and market downturn). If there are other remedies or revenues available to the parties you may not be entitled to rely on a force majeure clause.

Frustration

Where a contract fails to provide any parameters for the parties to respond to Covid-19, they may wish to rely on another legal doctrine, known as frustration. Frustration might apply when a contract becomes impossible, or radically different than your purpose for entering into it. It applies when neither party is at fault, but some third party event has intervened.

Frustration can bring the contract to an end and release both parties from their obligations.

Frustration was first applied to a case involving a contract to lease out a music hall for a series of concerts. The hall burnt down before the first concert took place, which led the plaintiff to sue the hall owner for failing to fulfil its obligation to provide the hall. The court held the contract was frustrated as performance had become impossible and the parties were discharged from their obligations.

In the context of Covid-19, frustration may apply in a variety of examples: a supplier no longer able to fulfil its obligation to supply materials to a third party due to the lockdown; a contract relating to an event that can no longer take place; or to a lease where the purpose of the lease has become impossible, such as where the lease was signed for the month of the lockdown period for the purposes of hosting a pop-up store.

As with the use of a force majeure provision, the threshold to satisfy the legal test of frustration is high and will not apply where contract performance has simply become more difficult or expensive.

Forces and frustrations

The Covid-19 pandemic has given us all pause for thought about the forces in our lives that are beyond our control. For many of us that comes with feelings of frustration. When it comes to our businesses and our commitments, it is important to consider taking good advice before making hasty decisions that could make an already difficult situation all the more difficult.

The contractual issues arising from Covid-19 are nuanced and complex. A wrongful claim can be a breach of contract in itself and can lead to an award of damages to the other party or an order that all or part of the contract be performed, so we encourage a courageous but measured approach in the Covid-19 era.

 - Jenna Riddle is a partner and Kari Schmidt is a solicitor in the disputes resolution team at local law firm Gallaway Cook Allan.

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