Let's Talk Law: The impact of Covid-19 on commercial contracts

Does Covid-19 release your business from commercial and legal obligations? Photo / 123rf

The subject of the Covid-19 virus is front and centre of everyone's minds at the moment. Whether it's content in media, conversations with friends and loved ones, or physically preparing to limit your exposure to the outside world., it is present in our thoughts.

The related pace of change and uncertainty for the business world, is frightening. And with each day that passes, we are seeing that the unpredictability is leading a lot of businesses to revisit their existing commitments and/or to delay or abandon planned investments.

From a legal perspective, businesses are seeing the importance of reviewing their contractual obligations to third parties. Sound business practise will include assessing whether the existence of the virus enables your business (or those of another party you have contracted with) to be released, without penalty, from commercial and legal obligations.

The current climate brings into sharp focus some legal concepts often not thought about, and sometimes buried quietly in the fine print of a contract.

The first concept is a common "boiler plate" clause known as a force majeure clause. The term force majeure comes from the French language and translates to "superior force".

The wording of force majeure clauses varies from agreement to agreement however the general concept is fairly uniform - if an event which is beyond the control of the parties, such as something caused by a superior force, higher power or act of god occurs, the parties will have the option to suspend or end the agreement or certain elements of it.

Not all agreements contain a force majeure clause and there is no general legal rule which implies force majeure, so it's important to first identify the clause and then ensure its wording includes pandemics, such as Covid-19.

The clause is often included in the fine print or toward the end of an agreement and will have two elements. First, a list of events to which the clause will apply. The version of the clause we often use includes:

a) act of God;

b) earthquake, flood, fire, storm and adverse weather conditions or natural events for which provision could not reasonably have been made;

c) interruption or failure of any utility services, or unpredictable delays which could not
reasonably be prevented in delivery of materials, equipment or services necessary for the
compliance by that party with an obligation under this *3. (a) agreement | (b) deed

d) sabotage, riot, civil disturbance, explosion, terrorist acts, insurrection, epidemic, national emergency (whether in fact or law) or act of war (whether declared or not);
e) act or omission of any Authority not directly or indirectly arising from any act or omission by that party, its agents, representatives or advisers;

f) governmental restraint, sanction, expropriation, prohibition, intervention, direction or
embargo;

g) strike, lockout, work stoppage or other labour hindrance.

The current situation with Covid-19 would come under clause (d).

The second element is how the party may enact the provisions and what steps they must take to do so.

Typically, this will include giving the other party notice of the event, making reasonable efforts to perform the agreement anyway and mitigate the effect of their non-performance.

Treadwell Gordon Let's Talk Law legal column

It's important to note that generally, in order to rely on a force majeure clause, performance of the agreement must be all but impossible either physically or legally, and not just difficult or uneconomic.

The second concept is the common law doctrine of frustrated contracts. In New Zealand
"frustration" is covered in subpart 4 of the Contract and Commercial Law Act 2017. Where a contract doesn't include a force majeure clause, parties can claim that the agreement is "frustrated" as events, such as the outbreak of Covid-19 and the government's response to the outbreak, have made the agreement impossible to perform or where to require performance "would render it a thing radically different from that which was undertaken".

As with force majeure clauses the threshold for relying on frustration is quite high and should not be invoked without proper legal advice.

In the rapidly changing business environment we find ourselves at the moment, it is more important than ever to examine your business' obligations and the duties of others who have contracted with you, as well as seeking sound legal advice before entering into commercial agreements.