Contractual performance amidst a global fuel crisis

The ongoing conflict in the Middle East, including disruption to shipping through the Strait of Hormuz, has created uncertainty around global fuel supply. While current attention has been on the impact to fuel, the blockade is also having significant impacts across other supply chains and making it increasingly complex and costly to perform supply agreements. 

While fuel supplies are still available in New Zealand, there has been a significant increase in fuel prices since the conflict began and the Government has released a four phase Fuel Response Plan 2026, giving effect to the National Fuel Plan, to manage potential risks to domestic fuel security (Fuel Response Plan)¹. Any escalation to Phase Three and Phase Four of the Fuel Response Plan will likely require the issuing of directives to control domestic fuel demand and prioritise supply. 

In this context, the ability of many businesses in New Zealand to perform their contractual obligations is currently being affected in a number of ways, and may be further impacted if the Government restrictions are implemented under Phases Three and Four of the Fuel Response Plan. 

Lawyers advising on these issues should be asking themselves two questions:

1. Is my contract frustrated?
2. Does my force majeure clause apply? 

Many lawyers will be familiar – perhaps more familiar than they ever thought they would need to be – with the operation of the doctrine of frustration and the force majeure clauses in their contracts following the COVID-19 pandemic and severe weather events such as Cyclone Gabrielle. Indeed, we published previous versions of this article in the context of those disruptions on 20 February 2020 and 16 February 2023. However, there are some potential differences in relation to the application of these concepts to a fuel crisis, which we address below.

Frustration

The common law doctrine of frustration governs the position of parties to a contract where, as a result of an unforeseen event and through no fault of either party, a contractual obligation is rendered incapable of being performed. In such circumstances, the contract is frustrated and is automatically and immediately terminated, regardless of the subjective intentions of the parties.

In light of the drastic consequences that can arise when a contract is frustrated, our courts have confirmed that a high threshold applies. In Planet Kids v Auckland Council [2014] 1 NZLR 149, the New Zealand Supreme Court confirmed that the doctrine of frustration can only be invoked when the main purpose of the contract has become incapable of being performed. 

The doctrine cannot be relied on to terminate a contract when the main object can still be accomplished. In Tsakiroglou Co Ltd v Noblee and Thorl GmbH [1962] AC 93, the sellers agreed to ship Sudanese groundnuts to buyers in Hamburg. The sellers anticipated shipping the groundnuts through the Suez Canal but the contract neither expressly nor impliedly required this. Before the sellers made shipment, the Suez Canal was closed to traffic. The House of Lords held that the extra expense on the sellers to divert their route via the Cape of Good Hope did not justify a finding of frustration as the fundamental contractual obligations would not be altered. If the contractual obligations can otherwise be fulfilled, albeit by alternative measures or at a greater cost, the doctrine of frustration will unlikely be satisfied.

On the other hand, direct government intervention, particularly in times of war, can cause frustration. In Metropolitan Water Board v Dick, Kerr & Co [1918] AC 119, a contract to construct a reservoir within six years (with provision for extensions caused by difficulties, impediments or obstructions) was rendered incapable of performance when the government ordered the respondents to cease work and sell the plant during World War I. It was held that the extension of time provisions in the contract did not cover such interference and the contract was completely discharged.

If under Phase 3 or Phase 4 of the Fuel Response Plan the Government directly intervenes in the fuel supply chain (e.g. the Government directs that fuel supply must be prioritised to essential services ahead of other customers) and an entity within the supply chain is subject to such binding directives, such intervention could amount to frustration if it results in the party being unable to perform its contractual obligations to other customers.

Force majeure

Parties to a contract are also free to agree on the consequences that may flow from an event that might otherwise engage the doctrine of frustration. Such an agreement is often documented in force majeure clauses, which are particularly common in supply, transportation and construction contracts (along with extension of time clauses).

While the wording of force majeure clauses varies from contract to contract, they are designed to relieve a party from liability arising either from its delay in performing, or failure to perform, its obligations under the contract, upon the occurrence of certain defined events. These clauses will typically list the circumstances in which relief can be invoked, such as acts of God, natural disasters, epidemics, war, strikes, and acts taken by governments.

It is typically not possible for a party to rely on a force majeure clause in circumstances where performance of contractual obligations has merely become more expensive or is no longer profitable. 

Rather, standard force majeure clauses generally require the reliant party to show that:

1. a triggering event has occurred;
2. the triggering event was outside the control of the party;
3. the triggering event either delayed or prevented the party from performing their contractual obligations; and
4. there were no reasonable steps that could have been taken to avoid or mitigate the event and the consequences. 

Whether the fuel crisis will be sufficient to engage a force majeure clause will depend on the nature of the contract, the wording of any force majeure clause, and key factors reasonably outside the control of the party. Depending on those circumstances, it is certainly possible that the force majeure clause might provide relief for an otherwise defaulting party where problems in performance of the contract have arisen.

How does the current fuel crisis compare to other recent events?

The current assumption is that the Government would use the Petroleum Demand Restraint Act 1981 (Act) as the enabling legislation to impose mandatory fuel conservation and supply-prioritisation measures as envisaged under Phase 3 and Phase 4 of the Fuel Response Plan.² Restraint regulations made under the Act may provide that impacted parties (i.e. fuel suppliers, importers, distributors) will not be liable for contravening or failing to satisfy (in whole or in part) their contractual obligations relating to the acquisition, distribution or supply of petroleum products as a result of complying with such regulations.³ The existence of express statutory powers enabling enforcement of the Fuel Response Plan means that, if those powers are exercised (and assuming the Act is relied on or updated for the current context), those directly impacted would not be in breach of contract, nor required to have recourse to the doctrine of frustration (which may not be desirable given the resultant termination of the contract) or force majeure.

What should you do?

For parties who are concerned about how the recent fuel crisis may affect their contractual arrangements, we recommend:

• reviewing any relevant contracts to determine whether they contain a force majeure clause;
• determining whether the applicable force majeure clause specifically addresses war, supply disruption, government intervention, etc that are beyond the parties' control;
• making note of any procedural provisions required to invoke the force majeure clause, such as notice or timing requirements. Strict compliance with such requirements is usually required, and a party could lose its rights under the force majeure to excuse or defer compliance if it does not meet them;
• identifying whether there are any alternative means to performing the obligations under the contract, such as identifying other suppliers;
• considering what steps can be taken to mitigate the potential consequences of a breach of the contract; and
• keeping track of Government responses, including any changes to the Fuel Response Plan or supporting legislation. 

Generally, parties should also consider whether they may have insurance protections available to them. Businesses may hold business interruption policies that provide cover. As always, insurers should be notified promptly and may wish to have input into how the flow-on consequences are to be managed.

If you require contract-specific advice, please get in touch with one of our experts below.

This content is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter, please contact a Russell McVeagh partner/solicitor.