The ongoing impacts of the Covid-19 pandemic on businesses have been devastating, and they look to continue now that New Zealand is back in the red traffic-light setting.

With Omicron cases expected to grow, the main economic impacts are likely to come from worker absenteeism. Staffing issues and supply-chain disruption are inevitable. Transport operators need to be mindful of their obligations and any mechanisms that can limit their contractual liability when their businesses are impacted.

What is a force majeure clause?

The term force majeure describes events over which operators have little or no control and can include an epidemic or a pandemic. A force majeure clause may relieve a contracting party for failure to perform in certain circumstances by allowing them to terminate or temporarily suspend their contractual obligations.

However, an event will not be covered by a force majeure clause unless it makes the performance of the contract impossible, it was unforeseeable, and it was irresistible both in its occurrence and its effects.

Rights and obligations

The range of disruptive possibilities is endless. There is a complex web of potential rights and obligations between those who may be involved or affected by a major disruptive event. If there is a disruption in the supply chain, it could be sudden, gradual, complete, partial, anticipated, without warning, brief or long term.

Each type of disruption is associated with varying degrees of technical difficulty, risk and expense. The parties to supply contracts and others for whom there may be downstream impacts will need to consider the following:

• Does this disruption qualify as a force majeure event as defined in the contract for supply?

• Are all the relevant contracts on the same terms?

• If there are restricted supplies available, then who gets priority?

• Is the disruption of such a magnitude that the contracts cease to have any effect?

• What obligations do the supplier and downstream parties have to each other in terms of contract, negligence or any environmental or safety obligations?

Why is a force majeure clause important?

The parties to any major contract involving the supply of goods and services need to understand what the limitations are to the force majeure clauses included in their contracts and what other risk management and contingency plans they need to provide. When drafting or negotiating force majeure clauses, careful consideration of the clauses’ implications is essential because it is easy to underestimate the importance of such a provision. In the context of natural disasters, a clause that has not been adequately drafted could put the critical infrastructure of a business in jeopardy. So being precise at an early stage may save a business substantial penalties or even prevent its collapse.

When can a force majeure clause be relied on?

Force majeure clauses are drafted with varying degrees of sophistication. That is why the ability to rely on a force majeure clause will depend on the precision of the drafting. In general, most clauses will include the following:

• Force majeure event: A force majeure clause will typically be triggered if a ‘force majeure event’ occurs. Often the term ‘force majeure event’ is defined in the contract. Usually, a force majeure event will be defined as an event that is external and beyond the control of a party, including a prescribed list of events such as floods, earthquakes, cyclones, riots and confiscations or requisitions of facilities. Ensure contracts include ‘epidemic’ or ‘pandemic’ in the force majeure definition. Also, carefully consider what other items are critical to the performance of your contractual obligations. For example, a fuel shortage could be included as a force majeure event.
• Causal connection: Usually, a force majeure clause may only be relied upon when the force majeure event has rendered a party unable to perform its contractual obligations. This could be either wholly or in part.
• Contribution to the force majeure event: Usually, a party may only rely on a force majeure clause if that party did not cause, in whole or in part, the force majeure event. That means the event should be both beyond their control and such that they could not have prevented the event or the consequent failure in performance by the exercise of due diligence. This is particularly relevant with strikes or industrial actions and confiscations and requisitions.
• Notice: The party seeking to rely on the force majeure clause may need to give notice of the force majeure event to rely on the force majeure clause. The notice may be required to specify various details, including the nature of the event and the expected length of disruption to usual services. The party affected by the force majeure must also use due diligence to remove the disruption and resume performance of its obligations. Remember that the subsisting of a force majeure event for a specified time will normally result in a termination right for the other party to a contract.
• Debt: Usually, an obligation to pay money will not be suspended by a force majeure event.

Please note that this article is not a substitute for legal advice, and if you have a particular matter that needs to be addressed, you should consult a lawyer. Danielle Beston is a barrister who specialises in transport law. Contact her on (09) 379 7658 or 021 326 642