Everyday life has been severely impacted by COVID-19, and even after the pandemic eases or ends we will have to adjust to new ways of conducting ourselves and our businesses. These are likely to include new methodologies to prepare ourselves better to ensure continuity of businesses, and safeguard the livelihoods of employees.
During these testing times, it is easy to overlook important deadlines, legal obligations and those terms and conditions under a contract which continue to run uninterrupted, and the fulfilment of which may be rendered impossible. This commercial law guidance briefly reviews what options may be available under a contract should businesses face difficulty in performing their contractual obligations.
Please note we provide general guidance only regarding commercial contractual obligations in the context of the current pandemic. This guidance does not cover employment contracts as these should be considered separately in accordance with the Employment Relations Act 2007.
Contract Management and Review
At the present time, it would be advisable for businesses to consider any legal contracts they are a party to and to create a list of contractually binding obligations including but not limited to:
- any time frames and/or deadlines;
- any dates by which a payment must be made to the other party; and
- contractual options available under the contract to extend deadlines and how to provide notice to the other party.
When reviewing contracts businesses should also consider whether the contract contains:
- A force majeure clause (this is intended to release parties from strict contractual obligations when something big happens that is out of the parties control, sometimes referred to as an "act of god").
- Any other relevant clauses such as clauses providing for extensions of time or setting out termination rights under the contract.
- Any options to re-negotiate the contract.
- A jurisdiction clause providing which law applies to the contract. Note some international contracts will specify another country's law applies and this can make matters more complicated.
Generally speaking well drafted contracts should include various clauses relating to contractual redress and two common ones are, extension of time clauses and force majeure clauses. However, both need to be carefully considered to ensure they apply to the current situation.
Extension of Time Clauses
An extension of time clause should set out the procedure to follow if one party foresees or discovers that it won't be able to complete an obligation in time, remains willing to complete but needs an extension of time to comply with its contractual obligations.
A well drafted extension of time clause should provide a process to seek an extension of time and this could include stipulating how written notification should be provided to the other party. This may include the requirement to state the circumstances which have led to the request for an extension of time. The clause may specify a time frame within which a party has to notify the other and request an extension of time. This clause should be carefully considered to ensure it is complied with in all respects. Further the party seeking an extension of time must be realistic in assessing the additional time required to complete its obligation, and at all times ensure that the party is acting on a clear understanding of how the contract works and its ability to deliver on its legal obligations.
If a party has to engage sub-contractors or suppliers to meet its contractual obligations then the party must also consider the locations and any restrictions imposed on the sub-contractor or supplier. If the sub-contractor or supplier is in another jurisdiction then further complexities and considerations will arise. It is an unfortunate reality that in a pandemic like Covid-19, global trade has been affected and therefore it may be necessary to consider how the global situation affects a party's ability to comply with contractual obligations. A business may do this by seeking information and invite communications from their suppliers, and sub-contractors and by considering which contracts may be impacted due to closures, delays, restrictions and lock downs in their own and other jurisdictions.
If, following this process, the assessment is that it is unlikely that the business will be able to meet its contractual obligation, due to matters beyond the control of the business, then the contract's force majeure clause may be relied upon. However, to be certain of this, legal advice is encouraged.
Force Majeure Clause
A force majeure clause is a clause in the contract that may excuse a party from completing its obligations under the contract due to an act (the force majeure) which is beyond either party’s control.
However, a force majeure clause must also be carefully considered (preferably by a lawyer) to ensure that a pandemic such as the current Covid-19 pandemic is included in the clause. Particular phrases that are common include “an act of god”, however, a lawyer will want to see that pandemics are mentioned, or that there is a catch all phrase of “any act beyond the control of either parties”.
Again, the contractual notification provisions must be followed carefully to enable a party to rely on the clause, and generally to ensure the other party is appropriately notified in accordance with the contract. Further, it is important to review whether any penalties may have to be paid as part of invoking the force majeure clause although generally speaking a force majeure clause allows both parties to walk away without any penalty, as the act is considered beyond the control of either party and unforeseen.
Frustration (a legal doctrine)
In the event that a contract does not allow for the extension of contractual obligations or does not contain a force majeure clause then the doctrine of frustration under common law may be relevant. However, this is an area where specific legal advice should be sought. In brief, the common law doctrine of frustration may provide an option to set aside contracts where an unforeseen event either renders the contractual obligation impossible to perform, or radically changes a party's principal purpose for entering into the contract.
Generally speaking to take advantage of the doctrine of frustration a party would have to establish that the pandemic was:
- an unforeseen event or unexpected event; and
- it is impossible for the party to perform its obligation or substantially changes the purpose of entering the contract; and
- the act is beyond the control of the parties to the contract.
In the event that the doctrine of frustration is raised in relation to the current pandemic, all parties must bear in mind that the onus is on the party seeking to rely on the doctrine to show in good faith that it is impossible to perform the contractual obligations for reasons beyond their control and as a result of the Covid-19 pandemic.
This commercial contractual law guidance, is just that, guidance. Every contract is unique and every situation is dependent on its own unique set of facts. There is no “one solution fits all” and it remains important for businesses to have good contract management systems and where necessary seek early legal advice.
Further, parties should not lose sight of the difficulties and complexities that are affecting everyone and parties should remember that it is within their power to vary or alter any contract by agreement (such variation should be recorded in writing). Parties do not need lawyers to be reasonable in such situations but it is always sensible to record any subsequent changes clearly in writing and ensure good communications.
Other areas of importance that are outside the scope of this brief guidance include considering whether there are additional termination rights beyond those recorded in the contract (legal advice may be required), and consideration of any insurance policies and what they cover in this situation. Businesses, should contact their insurance broker or insurance company if considered necessary.
Disclaimer: This commercial law update does not, and is not intended to constitute legal advice and is for general information purpose only. Readers of this Article should contact their lawyers to obtain proper legal advice with respect to any particular legal matter.