The COVID-19 pandemic is a global, and completely unprecedented crisis of modern times. New Zealand’s alert Level 4 lockdown has placed substantial restrictions on the operation of businesses and travel, compelling individuals to stay largely confined to their homes. As a result, many have found themselves in positions where they are unable to perform their obligations under existing contracts. Those in this situation will be wondering what their legal position is in relation to such contracts and whether they have the ability to cancel or alter them.
Some contracts will contain specific provisions accounting for situations where parties are unable to perform their obligations, and others will not. In the absence of such provisions, the doctrine of frustration may apply. Where frustration occurs, the contract ends and the parties are discharged from further performance.
Frustration applies where unforeseen events occur which render performance of a contract impossible or only possible in a radically different way from that originally contemplated. In the context of a global pandemic, application of the doctrine of frustration has unsurprisingly, not been tested in New Zealand.
Frustration will apply where:
- the parties have contracted on the basis that some fundamental thing or state of things will continue to exist; and
- this is subsequently altered by an event, making performance impossible or only possible in a very different way from what was originally contemplated, for which either party is not responsible.
Frustration cannot be invoked for events which the parties are responsible for. In the current context of COVID19, parties should consider whether the frustrating event being relied on is due to a government imposed mandate, or is the result of optional precautionary action. Taking action which was merely recommended prior to the official Level 4 deadline could potentially be considered self-induced. This will be a question for the courts.
Frustration very commonly arises through delay. The delay must not be the fault of either party and must be so severe it means what would eventually be delivered or performed would be fundamentally different to what was originally contemplated. Uncertainty around the duration of a delay may not be enough to warrant frustration of a contract. Even the uncertain duration of war and any resulting delay has been held will not necessarily be sufficient to frustrate a contract by itself. Here, whether COVID-19 related delays are sufficient to apply the doctrine will depend on the duration of the government imposed restrictions and the particular circumstances of each contract.
Law changes which make performance of obligations under a contract impossible could also result in a contract being frustrated. It is possible that the variety of emergency legislation and powers which have been invoked by the New Zealand government in response to COVID-19 could have the effect of making performance under certain contracts, illegal.
Frustration is generally based on the interfering event being totally unforeseen and unexpected. However, it can still apply where the parties foresaw, or ought to have foreseen, the frustrating event. However, where the parties have made provision of the potential of the event in the contract, frustration usually will not apply. It may also be held that in failing to account for a foreseeable event, the parties have impliedly assumed the risk of that event. This will be case dependent.
Force Majeure Clauses
Force Majeure clauses are contractual mechanisms to deal with events which are beyond the reasonable control of a party. Where they apply, frustration principles will not.
The ADLS “no access” provision included in many leases in New Zealand could be considered to be an example of such a clause.
Whether the outbreak of COVID-19 constitutes a force majeure event will depend on the wording of the force majeure clause in question. In the absence of reference to a disease or pandemic in the clause, general terms such as “act of God” or “government restrictions” may apply. Determining this will require careful consideration of the contract and surrounding circumstances.
Ascertaining whether the pandemic crisis has prevented, hindered or delayed performance of the contract will also depend on the specific facts and terms of contract. Often force majeure clauses will require that performance is rendered legally or physically impossible, however some clauses have a lesser standard.
Common effects of invoking a force majeure clause include suspension of contractual obligations, discharge from liability for non-performance or delay, termination of contract, extensions of time, alteration of certain terms or certain contract remediation or governance measures. Any relief is often also only available for the duration of the force majeure event.
If you are party to a contract and are wondering what your options might be in the current crisis of COVID-19, you should review your contract carefully and consider the effect of any force majeure clauses and whether these clauses can and should be activated in the current circumstances.
If you need assistance determining whether you can rely on frustration or a force majeure please contact us for further assistance.