Contracting Amidst Coronavirus

Coronavirus (COVID-19), or more specifically, the emergency measures put in place to prevent its spread, is impacting the global economy.

Travel restrictions, office and factory closures, and government enforced quarantine requirements have seen substantial business and operational disruptions across the world, and New Zealand is no exception.

At a contractual level, the disruption caused by the coronavirus means that parties have been/may be unable to perform their contractual obligations, which raises the question of whether those parties are liable for any loss suffered by contractual counterparts arising as a result of non-performance.

Whether a party is excused for delay or non-performance of a contractual obligation and can, therefore, avoid liability for breach of contract will largely depend (at least if the contract is governed by New Zealand law) on whether the contract contains a “force majeure clause” and, if so, on the wording of that clause.

The force majeure (which is French for “superior force”) clause is a contract provision that allows a party to the contract to suspend or terminate the performance of its obligations when certain events beyond their control arise.  The provision may state that the contract is temporarily suspended, or that it is terminated if the event of force majeure continues for a prescribed period of time.

If a contract contains a force majeure clause, whether the contract provides relief for the affected party will depend on the words used and their interpretation.  For example, a generically defined force majeure clause with no reference to particular events (i.e. it might refer simply to “events beyond the reasonable control of a party”) may not apply to the COVID-19 as the courts have generally interpreted these types of clauses narrowly.

It is important to note that force majeure clauses usually contain additional requirements that need to be complied with, such as formal notification procedures within a specified time frame and an obligation on the affected party to use reasonable endeavours to mitigate the impact of the event.  In addition, invoking the force majeure clause may give the non-affected party termination rights.  Other factors such as the governing law and jurisdiction of the contract will also be relevant.

If you have entered into a commercial contract that has or may be affected by COVID-19 and want to understand your rights under the contract, a review of the contract to see if it contains a force majeure clause and, if so, the wording of that clause is a good place to start.

If you are currently negotiating a commercial contract, we suggest turning your mind to a force majeure clause as it is possible that COVID-19 business disruption will continue for some time.

If you have any questions in relation to these issues or have other concerns about your business’s position in relation to the coronavirus, please contact us for assistance.