The New Zealand government has initiated its pandemic response plan following the World Health Organisation’s declaration of a Public Health Emergency of International Concern with respect to COVID-19, also known as the Corona Virus.
The more general impact on the economy is at this stage unknown. However, it is very likely to have an impact on the internal and external supply of goods and services. Contracts provide the machinery by which those supply chains operate. People on both sides of those contracts will be assessing the potential impact of COVID-19 on their obligations.
A written contract may already expressly provide for what happens when particular circumstances arise and where as a result of those circumstances the contract cannot be performed. This is generally referred to as a “force majeure” clause. In almost all cases there will be a heading which explicitly states “force majeure.” However, there may also be situations where a provision has the effect of a force majeure clause even if it is not identified as one.
Whether such a provision applies, and if so how it applies, in the case of COVID-19, will be different in every case. It is sensible to take legal advice if there is any uncertainty. Taking legal advice is particular important because if someone asserts that the force majeure provision applies, and therefore does not perform the agreement, and in fact the force majeure provision does not apply, then that person will have breached and perhaps even repudiated the agreement, which may have serious unintended consequences.
Where a contract is impossible to perform it is thought of as being “frustrated.” This situation may be dealt with under the common law doctrine of contract frustration. This doctrine provides that a party to a contract is released from his or her obligations in a situation where neither party is at fault and something has happened that makes performance either impossible or radically different to what the parties to the contract originally agreed.
So, what we would be looking at is whether the consequences of COVID-19 in a particular situation are so substantial that performance of the contract is either impossible or radically different to what was originally contemplated. As above, care is needed because an improper assertion of this doctrine may have the unintended consequence of that party itself breaching the agreement.
New Zealand is of course a nation of exporters. Where an international supply contract does not provide for New Zealand law to apply to the contract then additional care is needed because the laws of other countries are different. A local New Zealand lawyer should be able to obtain appropriate input from an overseas lawyer.
I am continuing to make available my QuickQuery ™ service which provides for an affordable fixed-price 15-minute telephone call with a brief email follow-up.
Steve Keall, barrister
16 March 2020