Insights

25 March 2020

Due to New Zealand moving to Covid-19 alert Level 4 for at least the next four weeks, many New Zealanders will be assessing the impact of the virus on their contractual obligations. In some circumstances it may be possible for the doctrine of frustration to excuse parties from their contractual obligations.

The doctrine of frustration releases parties from a contract where, by no fault of either party, an intervening event makes performance impossible or radically different from what the parties agreed. If frustration occurs, then the parties don’t have to perform the contract as intended. In New Zealand the doctrine of frustration is supported by the Contract and Commercial Law Act 2017 [CCLA] (formerly in the Frustrated Contracts Act 1944). The CCLA confers four major benefits on parties that are supplementary to the doctrine, it:

• gives a party the right to recover money paid in consideration of the contract, despite payment being made before the date of frustration, and
• allows a party to claim compensation for work done and/or expenses incurred under a contract up until the date of frustration, and
• permits the benefits received up to the date of frustration to be taken into account when determining the recovery of monies paid, or expenses incurred.

In a contract, parties can contract out of the CCLA 2017 by specifically addressing the event of frustration. In such instances, the contractual term will apply instead of the Act.

The following are recognised examples of when frustration can occur:

• Where the subject matter of the contract ceases to exist (e.g. a hall which was hired to host a series of concerts burnt down before the concerts could commence)
• Non-occurrence of events - the purpose of the contract has become impossible to attain (e.g. A flat was rented for the purposes of viewing the King’s coronation procession. The procession was cancelled due to the King’s illness and the contract was discharged as the sole purpose for which it was rented ceased to exist.)
• Death or incapacity of a party where the contract involves obligations of a personal nature (e.g. a pianist was unable to perform on a specific day because the pianist became too ill to perform.)
• Delay and obstruction of performance, where caused by external events, may be held to be frustration if the delay is so long, or the obstruction so extreme, that it would make the result of the contract fundamentally different from what had been contemplated.
• Performance is rendered illegal by legislation. If a change in legislation that comes into effect after the creation of the contract renders its performance illegal, the contract is held to be discharged.

If the parties to a contract are effected by the above then the doctrine of frustration may apply. However, if the contract has a clause which deals with the risk of disease or government shut down then that clause will prevail and the doctrine of frustration can’t be used.

Parties need to be very careful when asserting frustration. If the doctrine ​is used incorrectly, then the party refusing performance may be liable for breach of contract. Therefore, we strongly recommend you to talk to one of our commercial lawyers before bringing a contract to an end on the grounds of frustration.

If you need advice, or would like to discuss any  business concerns around COVID-19, please contact any of our commercial partners whose contact details are set out below, or call us on 0800 55 44 66 or (04) 496 9990