Business law issues arising from COVID-19

With COVID-19 (novel coronavirus) now being declared a pandemic, what are some of the potential legal issues for New Zealand businesses to consider?

Capital markets have been shaken and global supply chains and international trade has been disrupted. These effects are already being felt by businesses in New Zealand.

Existing Contracts

As New Zealand businesses prepare to deal with the short and longer-term impact of COVID-19, one aspect of a broader risk management strategy is to review key commercial contracts with customers and suppliers. Key elements to consider include:

• Termination provisions.  For example, what options (if any) are there for you to terminate early?  Equally, what is the likelihood of you being on the receiving end of a contract termination notice?
• Termination provisions.  For example, what options (if any) are there for you to terminate early?  Equally, what is the likelihood of you being on the receiving end of a contract termination notice?
• Liability and damages:  What are the consequences of a failure to deliver products on time?  Is your liability capped, or is it potentially unlimited?
• Insurance:  Check with your insurer to see whether your current policies include cover for business interruption in the current circumstances.
• Force majeure clauses:  Does the contract contain a provision designed to protect the parties in an event beyond the parties’ control?  Although there is no such thing as a “standard” force majeure clause, such provisions tend to cover catastrophic events such as acts of God, civil unrest, war, terrorism, widespread industrial action and the like.  Acts of government (such as closure of borders or restrictions on exports/imports) would normally also be included as a force majeure event, so even if pandemic itself is not expressly mentioned it may still be possible to claim force majeure in those circumstances. 

Contracts may have a “boilerplate” force majeure clause tucked away in the back, or (less likely) the parties may have specifically negotiated the allocation of risk for unforeseen or catastrophic events.

Contracts may contain a force majeure-type clause even if they aren’t specifically characterised as such.  For example, some New Zealand standard form construction contracts relieve contractors of their obligation to complete on time in “any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor” – although in that case a contractor will likely not be entitled to financial compensation (in other words they will get extra time, but not extra money).

New Contracts

For any new contracts, it will likely be difficult for parties to argue that the effects of the Coronavirus weren’t foreseeable at the time of contracting. Extra caution may now be required around the allocation of risk and responsibilities; this might even include specific drafting to address particular identified risks such as disrupted supply chains and unavailability of labour.

Frustration

The contractual doctrine of frustration may also provide some relief. The Contract and Commercial Law Act 2017 has codified in statute the treatment of frustrated contracts, but the starting-point is still always the terms of the contract itself.

It should be noted that there is a high threshold to reach before parties are released from their contractual obligations due to frustration: it’s usually not enough that future performance has simply been rendered more expensive, onerous or difficult.

Mitigation

In most cases parties still have a duty to mitigate losses. For example, contracting parties will likely need to be proactive in attempting to source alternative suppliers or resequencing construction projects.

Conclusion

A thorough understanding of your key commercial contracts should be part of a prudent COVID-19 risk management strategy.

In most cases early communication – with the other contracting party, with the bank, with insurers, with other key stakeholders – is generally the best approach.

If you would like further information please contact Laura Monahan on 07 958 7479.