CORONAVIRUS – MANAGING RISKS AND LITIGATING FOR BUSINESS INTERRUPTIONS

Posted by Jesvin Boparoy on March 18 2020 in News

In the wake of the Coronavirus crisis, many New Zealand businesses who export or import into China are feeling the hit. 

China has become one of New Zealand’s top traders – supplying technology and electronics into New Zealand and importing dairy, meat and wood from New Zealand. However with many international carriers and cargos stopping or reducing shipment between countries, there has been a supply chain disruption leading to missed deadlines.

Litigation disputes between companies in this area are increasing as business owners are now looking at whether parties are honouring their contracts and how they can sue for this loss.

Resolving the issue is not as simple as cancelling a contract where there has been a breach arising out of the Coronavirus outbreak. New Zealand businesses who are selling and buying goods in Chinese markets should consider the legal defence of ‘Force Majeure’ within their contracts to free themselves of a breach. Where the contract itself does not respond, they should look at the Doctrine of Frustration to assist their case. And lastly, when all else fails they should look to their insurance policies and find out if it will respond to events outside of their control.

 

Force Majeure

Companies adversely affected by the Coronavirus should look to their contracts with their suppliers, and customers. If their contract includes a Force Majeure clause, there is a possibility for them to rely on this to their avail.

A Force Majeure refers to an unexpected external circumstance that prevents a party to a contract from meeting their obligations. Common triggering events for a Force Majeure include fire, flood, earthquakes, terrorism, acts of god, acts of government, labour strike, lock out and sometimes epidemics.  

However, whether the contract in question will provide relief for a breach arising out of the Coronavirus outbreak will depend on the words of the contract and their interpretation. 

Force Majeure clauses rarely specify that ‘diseases or viruses’ are captured as a triggering event and the New Zealand courts have been slow to read into the parties’ contractual intentions.

Most commercial contracts with a Force Majeure clause will normally provide for relief for unforeseen ‘acts of god’ or ‘acts of government.’  With the government imposing travel bans here in New Zealand and Chinese Authorities directing lock downs of factories -  relying on ‘acts of government’ as a triggering event may provide some relief for New Zealand business owners.

Each case will need to be determined on its facts. For instance while most commercial parties will negotiate for a standard Force Majeure clause, not all standard contracts have these clauses. The general conditions for construction contracts in NZS 3910:2013 for instance do not in their standard terms have a Force Majeure clause. Parties in the construction industry who want to protect themselves for potential breaches arising out of Force Majeure will need to include it specifically in the Special Conditions.

Generally speaking most contracts provide some flexibility in terms of dealing with a Force Majeure event which may involve suspending works until the Force Majeure event is over or requiring part performance of the contract in the interim rather than simply terminating the contract. Depending on the wording of the contract, the relief sought may be limited.

 

Frustrated Contract

When there is no Force Majeure provision within your contract, business owners can rely on the Doctrine of Frustration with similar effect. 

The threshold for proving a ‘frustration of contract’ in New Zealand Courts is typically higher than the standard required for Force Majeure under contract. This is because when a contract is ‘frustrated’ the contract will automatically come to an end rather than being temporarily suspended. A contract is frustrated (and comes to an automatic end) when it becomes physically or commercially impossible to perform due to an unforeseeable event.   Parties will not be excused from performance simply because it has become more costly or time consuming to do so.

 

In the construction industry for instance clause 14.1 of the NZS 3910:2013 has a general clause dealing with ‘Frustration’ but this type of clause is very difficult to prove compared to relying on a Force Majeure event. For instance, if the contract could be performed by engaging alternative workers and using alternative methods, it will not be frustrated under this doctrine.

 

Business Interruption – Insurance

While the above avenues can save businesses from lawsuits in the short-term, there are still long term financial losses far beyond delays caused by the Coronavirus outbreak. These include lost profits, lost production, travel restrictions for staff and possible loss of business site due to government lock downs.

It is important to check whether your insurance cover protects you for business interruption and the scope of that cover under the policy chosen.

While it is difficult to predict the exact financial consequences of Coronavirus, analysing the risks to your business, considering the legal implications of your current contracts and insurance cover as well as developing a risk management plan with regular review is critical.

If you would like to learn more about this topic or discuss where you stand in terms of defending a breach of contract claim, please contact us.

 

Jesvin Boparoy | Associate
t +64 9 379 0655 | Jesvin.Boparoy@shieffangland.co.nz