Commercial contracts in the COVID-19 lock-down

(For information about leases in the COVID-19 lockdown see our separate article)

COVID-19 lock-down

  1. Commercial contracts often have clauses that apply when a significant event or change beyond the control of the parties occur.  These clauses are known amongst lawyers as “force majeure” clauses.  Force majeure means “superior force” in French and is used interchangeably with the idea of an Act of God.
  2. Typically a force majeure clause excuses the parties to a commercial contract from performing the contract while and to the extent that they are prevented from doing so by the force majeure event or Act of God.  Most contracts that include a force majeure clause:
    1. Define what qualifies as a force majeure event;
    2. State how the parties’ obligations change when there is a force majeure event.
  3. They may also:
    1. Require a party to the contract to notify the other if they believe there is a force majeure event and thatthey want to be excused from performing their duties.
    2. Allow a party to terminate the contract if the force majeure event continues for a certain period of time.
  4. If you are a party to a commercial contract and the COVID-19 lockdown is causing problems with the contract then we suggest you check the contract for a force majeure clause and seek legal advice.
  5. As well as force majeure clauses written in to contracts the law may also recognise that a contract has been “frustrated” and excuse a party from performing its obligations under the contracts.
  6. “Frustration” is reserved for extreme cases when an exceptional event entirely independent of the parties to the contract occurs and makes it effectively or utterly unfeasible for the substance of the contract to be enacted.   When a contract has been frustrated sections 60 to 69 of the Contract and Commercial Law Act 2017 provides some relief for parties where expenses were incurred or benefit gained before the contract was frustrated. As long as the expenses are reasonable and not more than what they would have received had the contract been fully performed then expenses can claimed. They also provide that if a valuable benefit is provided then this should be balanced by equivalent consideration. Likewise, if the contract has been part performed prior to frustration then, if at all possible, that part of the contract should be severed and considered a separate contract.
  7. However “frustration” is reserved for extreme cases and before acting on the basis that a contract has been frustrated we recommend you seek legal advice.

For example, the current edition of the Auckland District Law Society has a specific clause that applies where the tenant cannot get access to their premises for reasons beyond their control and we will cover this in a separate article.