On 12 March 2020, the Word Health Organization declared Covid-19 a pandemic. The human and economic impact is enormous and growing. There has been a lot of discussion around force majeure clauses and material adverse change clauses. But what if your contract has neither of those provisions? If you do not have those clauses in your contract, the doctrine of frustration could be relevant. And even if your contract does contain such provisions, the doctrine of frustration may still apply and should not be overlooked. Frustration can apply to all types of contract (including leases, employment agreements, construction contracts, insurance contracts and other commercial contracts).
What is frustration?
- A frustrated contract is automatically discharged. No action is required by the parties (although in practice parties disagree about whether or not a frustrating event has occurred and will turn to an arbitrator or judge to resolve that issue).
- The test for whether or not a contract is frustrated is a common law one; the consequences of frustration are codified in s 60 of the Contract and Commercial Law Act 2017.
- Mere hardship or delay is not enough.
- A frustrating event requires (i) a radical change in circumstances compared to what the parties contemplated at the time of contracting; and (ii) impossibility of performance of an obligation that concerns the common object or purpose of the contract; and (iii) that neither party is at fault.
- Whether or not the test for frustration is met depends on all the circumstances of the case. The following factors will be important:
- The terms of the contract.
- The context of the contract.
- The parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, so far as these can be ascribed mutually and objectively.
- The nature of the supervening event.
- The parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.
(The “multi-factorial analysis” was developed by Rix LJ in Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The Sea Angel)  EWCA Civ 547;  2 Lloyd's Rep 517 and applied by the Supreme Court in Planet Kids Ltd v Auckland Council  NZSC 147.)
How does frustration sit alongside force majeure?
- Force majeure only applies where the parties have expressly agreed to force majeure provisions.
- Every force majeure clause is drafted differently: the terms of your force majeure provision are paramount.
- A force majeure clause may oust the doctrine of frustration (on the basis that the parties expressly turned their minds to how a particular event should be dealt with contractually), but that question is highly fact-specific.
- Improper notice of a force majeure event can be fatal to reliance on force majeure. Notice is irrelevant to frustration: a frustrated contract is automatically at an end.
- A successfully invoked force majeure clause usually enables a party to suspend not terminate contractual performance of those obligations that are impacted by the force majeure event (i.e. Covid-19) (although depending on the duration of the force majeure event, termination may be an option).
- The force majeure clause operates to excuse non-performance of those obligations for the duration of the event so that there will be no contractual liability for non-performance. In all other respects, the contract continues so that obligations unaffected by Covid-19 remain in force.
- You should consider the obligations that are impacted by the Covid-19 outbreak and the extent to which those obligations are impacted. Is alternative performance possible? For example, although a person may not be able to travel to carry out an in-person audit under a contract, an obvious option would be to do so through video link. If alternative options are available but a party does not avail itself of them, non-performance is unlikely to be excused and you will be contractual liable for damages flowing from your non-performance.
Practical considerations for frustration
If you cannot avail yourself of a force majeure provision or if there is a commercial motivation for the contract to be terminated, you may be able to rely on frustration.
Since Covid-19 is very likely to be deemed to be outside the control of the contracting parties, the questions will be:
1. Does Covid-19 constitute a radical change in circumstances, as compared to what the parties had in mind at the time of contracting?
2. Does Covid-19 make the performance of fundamental obligations impossible?
- The timing of the contract and whether Covid-19 was part of your factual matrix at the time of contracting. If so, what was the parties’ mutual understanding?
- For contracts entered into after the outbreak of Covid-19, reliance on frustration will be difficult as the parties are more likely to have turned their minds to the issue.
- The term of your contract: is it a short-term contract that is disproportionately affected by the outbreak?
- Is time of the essence so that performance cannot wait until, for example, the lifting of a travel ban, a 14-day period of self-isolation or the other consequences flowing from the Covid-19 outbreak or response?
- Can the contract be performed despite the outbreak? Is there are alternative means of performance? (If there is, it will not be a frustrating event, see for example Seton Contracting Co Ltd v Attorney-General  2 NZLR 368.) Note that a construction contract between a principal and sole trader has found to be frustrated when the sub-contractor fell ill and in circumstances where there was a relationship of personal trust between the parties.
For more on the doctrine of frustration in New Zealand, please see: L Lindsay and S Jeffs “Frustration of Contracts” Practical Law New Zealand (first published 2019) (Lindsay & Jeffs Frustration of Contracts).