When disruption hits: force majeure, MAC clauses and frustration under New Zealand law

Since the escalation of conflict in the Middle East, we have received enquiries from clients across diverse sectors seeking guidance on protecting and preserving their legal position. These enquiries are wide-ranging and similar to those seen during the COVID-19 pandemic – including potential contractual exposure in cross-border transactions, supply chains and energy deals.

This note summarises key considerations for New Zealand organisations affected by the conflict, particularly in relation to proactive contract management under New Zealand law.

 

Force majeure

It is common for parties to seek to rely on force majeure clauses in times of war or hostilities. A force majeure clause is a contractual provision that may relieve a party from performing its contractual obligations where performance is impacted by specified events, usually (but not necessarily) beyond its control.

Under New Zealand law, the precise wording of a force majeure clause will have a significant impact on whether the clause is engaged and the extent of any relief available. In general, a party seeking to rely on force majeure must satisfy a three-part test:

1. The event must fall within the definition of a force majeure event under the relevant contractual provision.
2. The disruption must render performance legally or physically impossible (not merely more expensive, more difficult, or commercially unattractive).
3. The affected party must comply with the procedural requirements of the clause.

Other key points include:

• A typical force majeure clause suspends obligations impacted by the event, but does not terminate those obligations.
• Force majeure clauses usually require the invoking party to notify the other party within a specified timeframe. There may also be express requirements as to the notice’s form and delivery. Parties should carefully observe all process requirements, as a defective notice can extinguish protection entirely.
• Many force majeure clauses require the affected party to take steps to mitigate the impact of the event on performance. Even where there is no express obligation to mitigate, courts will often imply mitigation obligations into force majeure provisions.
• Many clauses also provide termination rights if the impact of the force majeure event is not lifted within a specified period.

 

Material adverse change clauses

A material adverse change (MAC) clause generally gives a party (commonly lenders, investors or acquirers) the right to take certain actions – such as terminating or renegotiating an agreement before completion – if an unforeseen or seriously detrimental event occurs in relation to the target assets or company and reduces (or is likely to reduce) revenue, earnings or net tangible assets.

MAC clauses are usually heavily negotiated and commonly used in M&A deals and project finance transactions. As with force majeure, the ability to trigger a MAC clause depends on the specific drafting and the relevant trigger events, and courts will look closely at the surrounding circumstances.

New Zealand law on MAC clauses remains unsettled. Metlifecare is a recent example of an acquirer, EQT, seeking to rely on a MAC clause to terminate a scheme implementation agreement because of the potential detrimental impact the COVID-19 pandemic could have on Metlifecare's net tangible assets – however, the dispute was resolved before the matter was heard before the court. Courts overseas have generally been reluctant to allow parties to rely on a MAC clause to avoid contractual obligations. An unsatisfactory financial result or change in forecasts is not, in isolation, likely to trigger a MAC clause.

 

Frustration

In the absence of a force majeure or MAC clause, parties may consider whether the contract has been frustrated.

Under New Zealand law, a frustrating event generally requires:

1. A radical change in circumstances compared to what the parties contemplated at the time of contracting.
2. Impossibility of performance of an obligation that concerns the common object or purpose of the contract.
3. That neither party is at fault.

Whether a contract is frustrated is highly fact specific and carries a high evidentiary burden for any party seeking to claim frustration. Courts will focus on the terms and context of the contract, the nature of the supervening event, and the parties’ knowledge and expectations at the time of contracting – including how risk was allocated and whether the event was foreseeable.

 

Caution before invoking clauses

A wrongful repudiation based on force majeure, a MAC clause or frustration may entitle a counterparty to terminate and seek damages for breach of contract (or seek specific performance). Parties should therefore exercise caution before seeking to invoke such provisions. Legal advice is recommended.

 

Practical steps

For organisations affected by the ongoing conflict, the following initial steps may assist:

• Prepare a list of all relevant contracts that may be impacted.
• Review force majeure and MAC clauses closely, particularly any procedural requirements around notice and mitigation.
• Consider whether the ongoing events give rise to an obligation to notify lenders and/or insurers.
• Consult legal advisers before seeking to invoke a force majeure clause, a MAC clause or frustration.
• Even if you consider you have a legal right to terminate, suspend or delay performance, continue to take steps to mitigate any losses.

If you have any queries or concerns about your legal rights as a result of the conflict, please contact any of the lawyers listed below.