COVID-19 – frustrating for contracts
19 March 2020
In recent days, the Government has taken an ever-increasing number of measures to combat the spread of COVID-19 in New Zealand, including the recent advice that public events of 500 or more people should be cancelled.
From a legal and commercial perspective, these measures have a potential impact on contractual relationships at all stages of the supply chain.
In many cases, affected contracts may contain a 'force majeure' clause, which might excuse the parties from performing their obligations in the event of a specified occurrence outside of their control. Commonly cited events include strikes, acts of war and epidemics. Whether or not a force majeure provision is triggered by COVID-19 related events will depend upon the nature of the event, the actual and practical effect it has on the parties' ability to perform and the language of the clause. Accordingly, careful thought will need to be given before relying on a force majeure provision.
COVID-19 might also give rise to the need to rely upon the doctrine of contractual frustration. Frustration applies where the performance of a contract becomes impossible or radically different from what the parties initially agreed because of a factor outside their control, for which they are not responsible. Where frustration occurs, the contract comes to an end and the parties are excused from further performance. If a contract is frustrated, the Courts have the power to order the parties to make payments to each other having regard to expenses incurred and benefits received.
It is not easy to establish that a contract has been frustrated and in assessing whether this is the case the Courts will take into account a wide variety of factors. Examples of potentially frustrating events include the destruction of property essential to the performance of the contract (for example, the venue for a concert) and – relevantly in the current climate – the introduction of a government directive or law change that makes further performance illegal. In this regard, mere guidance or advisory statements from the Government may not be sufficient to give rise to frustration – each case will depend on its own circumstances.
Given the very high threshold for establishing frustration, a party wishing to rely on it to bring a contract to an end should take legal advice before doing so. A refusal to perform contractual obligations always carries with it a risk that the other party may allege breach and bring a claim for damages.