Posted on March 25 2020
Contracts, Leases and Covid-19: Frustration, and Force Majeure
New Zealand is currently facing a lockdown for at least one month – potentially longer. It has seen all businesses close except for essential services. These current events will have a great impact on both individuals and businesses.
There will be many people and businesses who entered into contract shortly before these events who will be wondering if those contracts still apply, or potentially how they can get out of them.
Force majeure clauses
Your contract may include a “force majeure” clause, which excuses one or both of the parties from performing part or all of the contract following specified events. Force majeure clauses often list (among other things) acts of God, extreme weather events, and government intervention as force majeure events.
Whether the clause applies will depend on the events classified as a force majeure in your particular contract. For example, the clause may specify an epidemic or pandemic as a qualifying event. If it specifies government intervention, the current lockdown is arguably a force majeure event. However, force majeure clauses do vary from contract to contract, and it may be that the clause did not contemplate a pandemic or national lockdown – meaning that it may not be possible to invoke the clause.
If your contract does not include a force majeure clause or if the clause does not apply to the COVID-19 pandemic, the common law doctrine of frustration may be of assistance. Frustration applies where a supervening event outside of the parties’ control significantly changes the nature of the contract, or makes the contract impossible to perform.
We have seen contracts frustrated in situations where, for example, the Government has intervened in a way that makes the contract impossible to perform. This was particularly relevant during war time, where, for example, factories were requisitioned for war time purposes, or certain services were closed until the war ended.
We are facing a similar situation today. While we will at some stage be able to return to business as usual, we are facing a delay of indefinite duration while we fight to contain the spread of Covid-19. The question will be whether, after the lock down is lifted, the parties to a contract would find themselves dealing with each other in completely different conditions than when they made the agreement. Frustration will apply if the purpose of the contract has been defeated.
The threshold for frustration is high. Whether a contract will be deemed to be frustrated will also turn on the particular terms and purpose of the contract, and the Courts take this strictly on a case by case basis.
These are highly unusual and difficult times, and the issues your business face will not be straightforward.
To discuss any of the matters discussed here, or any other contractual issues you face, please contact our team.
021 2200 710
027 439 5385
03 379 3880