The Covid-19 pandemic and the announcement of the Level 4 Covid-19 threat level in New Zealand has meant that many businesses may be forced to default on their commercial obligations, especially as non-essential businesses are told to close. However if their contracts contain a "force majeure" provision, this may provide them with a way out.
What is a Force Majeure Provision
A force majeure provision is an exception to the usual consequences of breaching a contract. The French term literally translates to "superior force". A force majeure is a provision that recognises that there can be failure to meet contractual obligations due to an event that is beyond the control of either party. The provision does not need to include the words "force majeure". However, not every contract includes a force majeure term, and the specific actions that trigger the provision may vary across contracts.
Therefore the ability for either party to trigger a force majeure provision depends entirely on how the contract has been drafted.
Effect of a Force Majeure Provision
If a force majeure provision is triggered this means that the rights that usually flow from a default, such as penalties, termination of the contract, and the payment of damages, will not arise. The provision may also provide the parties with flexibility regarding future performance, such as suspending the contract until after the force majeure event has passed, partial performance of the contract.
Force Majeure and Covid-19
After the SARS epidemic of 2002-2003 some force majeure provisions were updated to include specific reference to "epidemics", "pandemics", "or other health related-disasters" as triggering events. On 11 March 2020 the World Health Organisation classified Covid-19 as a pandemic. After the Canterbury earthquake some contracts (eg leases) were updated with definitions to refer to “epidemic”. If such language is not included, Covid-19 could arguably be included under "impossible circumstances", "Act of God", "beyond the control of the parties" or other similar catch-all language. The governmental and administrative actions taken in response to Covid-19 are likely to fit into these types of provisions. Should contracting parties disagree as to whether Covid-19 fits within the language of a contract, it will ultimately be up to a Court to decide.
Triggering a Force Majeure Provision
The party wishing to trigger a force majeure provision must show that the event, such as Covid-19, was unforeseeable, beyond their control and that the non-performance or default of their contractual obligations was directly connected to the event. A non-performing party cannot use the provision as an attempt to get out of a contract they no longer wish to perform. It is critical that the non-performance of the contract is directly connected to the event. For example, the closing of New Zealand borders in order to prevent the spread of Covid-19 could constitute force majeure, to the extent that performance is prevented by such actions. In considering whether performance has in fact been prevented, the Court will consider the core purpose of the contract. Force majeure is not typically applicable to the performance of secondary obligations under contract.
If There is no Force Majeure Provision
If there is no force majeure provision in the contract the general principles of 'frustration' may apply. A contract may be 'frustrated' when an extraordinary and unforeseen event, not caused by the fault of either party, makes it impossible for the parties to the contract to perform their obligations. Establishing that a contract has been frustrated, however, may be more difficult to establish than relying on a force majeure provision.
If you are unsure whether your contract contains a force majeure provision, or how to apply it to your circumstances, then please get in touch with us.
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© McVeagh Fleming 2020
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.