So far, the ‘20s have been anything but predictable. COVID-19, the Auckland flooding, Cyclone Gabrielle, the West Coast flooding, Cook Strait ferry cancellations, and the ongoing concern of New Zealand’s creaking infrastructure, have respectively caused devastating damage to New Zealand businesses, property, and communities.

Beyond extreme weather events, the cost of living crisis has sparked the working population of Aotearoa to take strike action across different sectors, including health, education, rest homes and ports.

Our previous articlereferences COVID-19, and how significant disruptions and halts to commercial activities bring to light questions of the continued feasibility and enforceability of commercial contracts, and whether opportunities for relief exist.

As a result of the events of this decade so far, and any other catastrophic and unforeseen events, the following key questions should be top of mind for affected parties:

1. Is there a force majeure clause in my contract and if so, does it apply?
2. Is my contract frustrated?

A discussion of these legal concepts follows.

Force Majeure

In brief, a force majeure clause is a provision in a contract which allows a party to suspend, terminate, or extend the time for performance of its obligations when certain events beyond its control occur. The purpose of a force majeure clause is to manage the risk of unforeseeable events between contracting parties to protect them from liability for non-performance or delay in the case of such events. It is a creature of contract - there is no similar common law or statutory concept in New Zealand.

Reliance on a force majeure clause depends on a number of factors, including: the nature of the contract, the circumstances surrounding the event in question, the precise wording of the provision and compliance with any requirements, the preventative steps taken by the non-performing party in attempting to mitigate or avoid the event, the connection between the applicable event and the corresponding non-performance of an obligation, and the extent to which adherence to the contract is possible.

Determining whether a force majeure clause applies requires stringent case-by-case analysis of both the wording of the clause, and the relevant circumstances against that clause. The party who wishes to rely on the force majeure clause, bears the burden of proof.

Force majeure provisions are generally enforceable where specific language is used which covers the event in question. However, where the clause is ambiguous, or does not expressly capture the relevant event, further interpretative analysis may be required, which provides fertile ground for argument.

Frustration

If the contract does not have a force majeure clause, the contract may be “frustrated”. The common law doctrine of frustration will apply where unforeseen events render a contract unable to be performed, or only able to be performed in a radically different way from that initially envisaged. Frustration operates to “kill” the contract and remove further liability from the involved parties. As such, a high bar has been set for invoking this doctrine, and the New Zealand Supreme Court has confirmed that it may only come into play where the main purpose or obligation of the contract is unable to be accomplished.

The Contract and Commercial Law Act 2017 deals with the effects of frustration of a contract. However, the Act does not define what frustration is, or where it applies.

With reference to extreme weather events for example, the doctrine of frustration may apply where the Auckland floods or Cyclone Gabrielle made it impossible or impracticable to meet the obligations envisioned by the contract, i.e. a leased premises rendered derelict and uninhabitable Contracts which are merely made more difficult or expensive, but not impossible or radically different to achieve, are unlikely to meet the threshold for the doctrine of frustration.

Recent exposure of force majeure and frustration

After facing the commercial consequences of the COVID-19 pandemic, businesses may already have an understanding of the operation of force majeure clauses and the doctrine of frustration. However, the engagement of these concepts may have been more straightforward in the context of COVID-19, where Government restrictions and lockdowns in many cases absolutely prohibited the types of activities required to fulfil obligations and contractual promises. Conversely, extreme weather events are a more localised and convoluted question of fact and degree. Questions are likely to be raised as to what parties could have done to reduce, or prevent the impact of severe weather on their ability to fulfil their contractual obligations.

What are your options?

When considering how an unforeseen event may affect your contracts, you should:

1. Analyse your contracts to determine whether they contain a force majeure clause;
2. Ascertain what the force majeure clause specifically contemplates and any sensible additions in the context of the contract and your contractual obligations;
3. Understand any procedural steps that must be met to apply the force majeure clause, for example, timing of notices; failure to comply with the procedure specified in the clause may affect a party’s right to rely on it;
4. Identify whether there are any alternative options which allow some or all contractual obligations to be met; and
5. If the contract must be terminated, take any steps to mitigate any argument of contractual breach.

Contracting parties should be particularly aware that a mere declaration of a force majeure event under a contract does not automatically excuse that party from non-performance under the contract. Usually (subject to the particular construction of the force majeure provision), it is expected that parties seeking to rely on a force majeure event will:

• Provide notice to the other party or parties to the contract;
• Specifically identify the force majeure event in question and its anticipated duration;
• Consider which and to what extent the obligations under the contract are unable to be performed due to the force majeure event;
• Work with the other party or parties involved to reduce the extent of non-performance; and
• Continue to meet any obligations which are unaffected by the force majeure event, unless agreed otherwise.

Additionally, it is useful to bear in mind other clauses which could provide an alternative avenue to relief if things go awry, including:

• General termination/suspension provisions – which may provide that either party can terminate a contract upon notice ‘for convenience’, upon the downturn or cessation of business, or reduction in purchase volumes by a certain level.
• Material adverse change/effect clauses – these allow for a party to cancel a contract if triggered. These are discussed in Dentons’ COVID-19 force majeure article.
• Change in the law – the Government could choose to take an approach which provides commercial operators with relief to terminate, suspend or seek time relief on a contract. For example, if a business cannot deliver goods on time due to damage on the roads or train lines.

If you would like assistance in reviewing your contracts to understand your position and available options, or to improve your position under your standard terms, please get in touch with the contacts listed with this article or your usual Dentons relationship manager.

This article contains contributions by Sophie McAllister, Solicitor and Sarah Gibbs, Senior Associate.