The commercial and economic disruption caused by COVID-19 is now being felt by all New Zealanders. The impact is likely to increase, both in New Zealand and around the world. With the New Zealand Government’s announcement of Alert Level 4, there are many challenges and unknowns ahead as we move into this unprecedented time.
In this article we consider how COVID-19 might affect performance of contractual obligations or trigger specific contractual rights. Some businesses or individuals may find they are unable to meet their contractual obligations due to shortages of labour or materials, movement restrictions, or general business downturn.
The reality for many is that, as a result of COVID-19, contractual obligations will be impossible to perform or will be fundamentally different from what was contemplated by the contracting parties.
What if a party cannot meet its contractual obligations?
Parties may be able to rely on:
Parties may be able to rely on:
- a ‘force majeure’ clause in the contract itself; and/or
- the legal doctrine of ‘frustration’.
Force Majeure
A force majeure clause operates to excuse a party from its contractual obligations if that party is unable to perform those obligations due to some specified event. The effect of a force majeure clause will depend on its wording, but it will generally not be enough to say that the event made it difficult, or more costly, or more time consuming for a party to carry out their obligations. The clause may allow for the contract to be cancelled or for performance to be suspended.
A force majeure clause operates to excuse a party from its contractual obligations if that party is unable to perform those obligations due to some specified event. The effect of a force majeure clause will depend on its wording, but it will generally not be enough to say that the event made it difficult, or more costly, or more time consuming for a party to carry out their obligations. The clause may allow for the contract to be cancelled or for performance to be suspended.
It will be important that parties carefully consider the wording of the force majeure clause to determine whether it is triggered. Often the clause will list specific events which are covered, such as war or natural disasters.
It is less common that the word ‘pandemic’ might be used. However, COVID-19 could be interpreted to fall within the scope of ‘disease’ or ‘government restrictions’, given the announcement of Alert Level 4 which triggers powers under emergency legislation to restrict the movement of people and the operation of businesses.
Whether the party could have done something in order to mitigate the effects of the event will also be relevant. The duty upon a party to mitigate will vary according to the circumstances.
Where a party wrongly relies on a force majeure clause, that party may be treated as having repudiated the contract and may be liable for damages or face the risk that the contract is cancelled.
Force majeure clauses will need to be carefully considered so as to determine if the impacts of COVID-19 fall within the relevant clause.
Frustration
The doctrine of ‘frustration’ can apply where, by no fault of either party, performance of the contract is impossible, illegal or radically different from what was contemplated by the parties when entering the contract.
The doctrine of ‘frustration’ can apply where, by no fault of either party, performance of the contract is impossible, illegal or radically different from what was contemplated by the parties when entering the contract.
Frustration of contract may include circumstances where:
- the purpose of the contract no longer exists;
- performance of the contract is illegal due to a law change or government directive;
- a party dies or becomes incapacitated; or
- external events delay or obstruct performance of the contract.
The inability of a party to complete its contractual obligations by a certain time may give rise to frustration, provided that time for completion is fundamental to the contract.
If a contract is frustrated, the contract is at an end and the parties do not need to continue with their future obligations under it. The Contracts and Commercial Law Act 2017 allows parties in certain circumstances to recover money paid up to the date of frustration, or claim compensation for work completed under the contract up to the date it was frustrated.
Parties should remain careful in asserting that a contract is frustrated. If a party incorrectly relies on frustration as a basis for non-performance they may be deemed to have wrongfully repudiated the contract and be liable for damages.
Recommendations
COVID-19 has, and will continue to affect performance of contracts due to illness of staff, restrictions on the movement of people, government actions and the imposition of measures designed to protect those affected.
We recommend that individuals and businesses locate and assess their existing contracts to better understand where they stand and what risks they are exposed to by way of non-performance or default.
COVID-19 has, and will continue to affect performance of contracts due to illness of staff, restrictions on the movement of people, government actions and the imposition of measures designed to protect those affected.
We recommend that individuals and businesses locate and assess their existing contracts to better understand where they stand and what risks they are exposed to by way of non-performance or default.
Contracting parties should be willing to communicate and negotiate to reach a practical resolution. Parties are better to communicate and tackle these issues now and avoid the potential for litigation.
Parties currently negotiating contracts should consider whether COVID-19 may have an impact on either party’s ability to perform their obligations. Parties should consider whether to include a force majeure clause which makes specific reference to COVID-19. The parties will be unable to rely on frustration for COVID-19 related events because it is a known concern in current negotiations.
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Holland Beckett promotes two partners
Leading New Zealand law firm, Holland Beckett has announced the promotion to partnership of two of its senior lawyers, Will Dymock and Natasha van der Wal, effective from April 1st 2024.
The Bay of Plenty based firm has offices in Tauranga, Rotorua, Whakatāne and Taupō, and advises local, national and international clients. With over 140 staff including over 70 lawyers, the full-service firm\'s specialist teams work collaboratively and cater to a vast range of legal matters, including property, trusts and estates, commercial, corporate, finance, employment, family, civil litigation, resource management and local government. Holland Beckett also has a specialised Māori Legal Unit.
“It is a pleasure to announce the promotion of Natasha and Will, both experts in their respective fields”, says Ken Hawkes, Partner at Holland Beckett. “These talented lawyers represent the diverse capabilities we have as a firm, and the growth and strength of our team. We look forward to expanding the partnership with their specialist expertise”.
The promotion of Will and Natasha expands the partnership to 16, which is testament to Holland Beckett’s reputation as a top tier legal employer, firmly focused on recruiting the best talent and developing the next generation of legal leaders. The firm has the most female partners of any law firm in the Bay of Plenty, growing from two to five women in the past seven years.
Will Dymock, Partner
Will advises clients on a wide range of finance, corporate, restructuring and commercial transactions. Will has extensive international and domestic experience advising financial institutions and businesses (small and large) across a broad range of areas including asset finance, general corporate lending, property finance and corporate finance. Will specialises in aviation and asset finance and leasing where he advises international clients, including financial institutions, aircraft lessors, lessees / airlines and other aviation market participants, on a wide range of aviation financing, acquisitions and sales, leasing and lease restructuring. Prior to joining Holland Beckett in 2021, he spent six years in Singapore where he worked for two leading international finance practices, most recently as a Senior Associate in the global asset finance team at Clifford Chance. Prior to Singapore, Will worked in a leading banking and finance practice in Auckland.
Natasha van der Wal, Partner
Natasha joined Holland Beckett as a Senior Solicitor in 2016. Natasha’s expertise is focused on property law, commercial law and Māori legal issues. Natasha provides strategic and trusted advice on a broad range of property and commercial matters for individuals, corporate entities and local government. She has experience with complex property issues including subdivisions and development, the acquisition and disposal of residential, rural and commercial properties; and commercial leasing and licencing matters generally. As part of the specialised Māori Legal Unit at Holland Beckett, Natasha provides advice on Māori legal issues for local government, individuals, Māori trusts, Māori incorporations and post settlement governance entities. She is experienced with Māori property matters such as partitions, large commercial developments, iwi social housing and Papakainga. She has appeared before the Māori Land Court on property related matters. Outside of work, you’ll find Natasha supporting her children on the sidelines of their various sporting interests. She also promotes scientific literacy for children in New Zealand as a trustee of the House of Science NZ Charitable Trust.
Family Trusts Q&A Evening – Whakatāne
Come along to a free Trusts Q&A evening with Holland Beckett’s Trust Law experts Luke Stewart, Dan Broadhurst and Brittany Ivil.
5:30 to 6:30, Wednesday 22 May
BNZ Partners Centre, 181 The Strand, Whakatāne This free event is an opportunity for the Whakatāne community to get general guidance and discuss specific issues: Do I still need my Trust?
How easy is it to wind up my Trust?
If I keep my Trust what do I need to do?
How can I simplify my Trust? There is no charge for this session, and it is open to the public.
Please email Tiffany.head@hobec.co.nz or contact our Whakatāne office +64 7 308 8325 to indicate your intention to attend.
Holidays Act – could change finally be on the horizon?
Earlier this week the Workplace Relations and Safety Minister Brooke Van Velden gave a speech to the Auckland Business Chamber, reiterating her priorities following the conclusion of the Government’s 100-day plan in which Fair Pay Agreements were abolished, and the availability of 90 day trial periods extended to all new employees. The Minister has confirmed that delivering changes to the Holidays Act (“Act”) is one of her top priorities, which is likely to be welcome news to both employers and employees. Compliance with the Act has been difficult and costly for employers and payroll providers. The Labour Government put together a taskforce in 2018 to address the many issues being experienced by employers when calculating leave and holiday entitlements. The taskforce made a number of recommendations, all of which were accepted (for further details on these changes see our previous article here). A draft Leave Entitlements Bill was prepared, however was not introduced prior to last year’s election. The overarching issue with the Act is that there are multiple ways to calculate an employee’s holiday pay, and the Act has struggled to keep up with working arrangements outside of a normal five day a week salaried employee. Payments such as bonuses, commission, or if an employee works variable hours mean that the calculations are not straight forward and are often done incorrectly. The changes proposed were an attempt to simplify these calculations. The Minister has now confirmed that the changes recommended by the taskforce and the draft Bill will not be “simply rubberstamped” and will be subject to scrutiny as well as consultation with key stakeholders. She went on to say “if the policy is difficult to draft, chances are businesses would have a tough time implementing it too”. This indicates a major reset of the Act, and the changes which we had expected, could be on the way. Other indicated changes to employment law include a change to the rules surrounding contractors (with the Court of Appeal due to hear the Uber case this month (see here for our previous advice regarding this), we are likely to also have further developments in this area from the Courts later in the year) and changes to personal grievances. The Minister has asked for advice on whether an income threshold for raising a personal grievance can be set and removing eligibility for any remedies when an employee is at fault. The Minister has been very clear that she would like to receive feedback from the stakeholders who will eventually have to work with the Act and it is important that businesses use this opportunity to have a say on the Act. The majority of employers have struggled to achieve strict compliance with the Act due to its many complexities. Putting forward issues which regularly impact your business will ensure these can be given consideration. Our team will be closely monitoring this and will provide specific information on how feedback can be given when this information is available. If you require assistance with your current obligations under the Act, or would like to discuss providing feedback then please feel free to get in touch with a member of our specialist employment team.