New Zealand (and indeed the world) has had its fair share of unforeseen, devastating and disruptive events in recent years. As a business owner, you have likely entered commercial contracts for the supply of goods and services to and from your business. Unforeseen events can detrimentally impact the operation of these commercial arrangements and mean it becomes impossible for one or both parties to deliver on their contractual obligations. Where this happens, you may want to suspend or terminate a contract. However, if your contract does not allow for termination for convenience, you may need to rely on a force majeure clause (if the contract has one) or the doctrine of frustration.

What is a Force Majeure Clause?

A force majeure clause allows parties to be excused from performing their obligations under the contract due to a particular event.

This means that your rights to take action when the other party defaults – such as recovering damages from the other party for breach – will not apply. Force majeure events generally cover incidents outside of the parties' control, such as:

  • natural disasters;
  • pandemics;
  • war; and
  • industrial action.

Whether a particular event triggers a force majeure clause will depend on the wording of the particular clause.

Triggering a Force Majeure Clause

Suppose an event that could trigger a force majeure clause arises. Consequently, the clause may allow the parties to:

  • suspend the contract for a period of time to allow for the force majeure event to pass (and, if it does not pass within a specified period of time, for either party to terminate the contract); or
  • to terminate the contract on the occurrence of the force majeure event.

If you want to trigger a force majeure clause, you will need to show that:

  • the event was unforeseeable and beyond your control;
  • the event has made it impossible for you to fulfil your contractual obligations (whether legally or physically); and
  • you used all reasonable endeavours to rectify the event and mitigate any damage caused. What is considered "reasonable endeavours" will depend on the contract terms and the facts and circumstances surrounding the event.

It is important to note that parties cannot use force majeure clauses to try to avoid performing their contractual obligations.

What is Frustration?

The doctrine of frustration is a legal concept that operates when:

  • a contract becomes impossible to perform; or
  • the obligations of a party become radically different from what the parties originally intended.

If a contract is frustrated, then it will be at an end. Accordingly, the parties are released from their obligations under it.

The threshold for a contract to be considered frustrated is high. Therefore, you must take care to refrain from repudiating an agreement that is not actually frustrated and is instead valid and enforceable. For example, a party's obligations under a contract becoming more expensive or difficult to perform will not amount to frustration. Whether a contract has been frustrated will depend on factors such as:

  • the contract terms;
  • the circumstances, expectations and assumptions about risk when the parties made the contract;
  • the nature of the event leading to a claim of frustration; and
  • the possibility of future performance in the new circumstances.

Contract Frustration

Suppose a contract is frustrated and you are released from your legal obligations. In that case, the law sets out what happens to money already paid under the contract before it was frustrated. The law provides that all funds already paid under the contract are repayable. However, the party receiving the money can retain some of it to cover expenses they have incurred in performing the contract and to account for any benefit their performance has provided the other party. A court will determine the amount a party retains in the absence of an agreement between the parties.

Force Majeure vs Frustration?

Frustration and a force majeure clause operate independently.  However, if the contract you seek to terminate has a force majeure clause, it will likely be easier to rely upon this clause than the doctrine of frustration. This is because the threshold for triggering a force majeure clause is often lower than the threshold for a contract to be considered frustrated.

Suppose there is no force majeure clause in the contract, or the wording of the clause does not allow for it to be applied. In that case, consider whether the circumstances amount to the contract being frustrated. In either situation, you should reach out to your lawyer for advice before taking action.

Key Takeaways

A force majeure clause and frustration are two ways to end a commercial contract when you can no longer perform your contractual obligations. However, you must satisfy certain threshold requirements to rely on these methods. For example, a force majeure clause relies on the occurrence of a force majeure event as per the wording of your contract. Similarly, frustration relies on a situation where your contractual obligations become impossible to perform.