In this update, we address the key legal considerations for businesses affected by the cyclone:
- Government support
- Health and safety
- Contractual obligations
- Property and leasing
- Food safety
The government has announced $50 million of interim emergency business and primary sector support. The government says that this package is intended to provide businesses with quick, easy cash flow to address immediate needs in the wake of the cyclone.
The package includes $25 million for farmers and growers to undertake urgent work, including:
- Up to $10,000 for pastoral and arable farmers to help with initial recovery, such as repairs to water infrastructure for livestock, and fencing.
- Up to $2,000 per hectare (up to a maximum of $40,000) to remove silt from trees and vines, support clean-up, and minimise future losses.
A further $4 million has been allocated to help rural communities and groups undertake urgent work. Further details of the package are here.
In addition to business support, Work and Income is making civil defence payments to people who have been evacuated from their homes or who can’t work (either because they can’t get to work or their workplace is closed).
These payments are intended to help cover the costs of food, bedding, clothing, accommodation and loss of income. People don't have to be on a benefit and don't have to be a New Zealand resident to qualify, and (in most cases) it doesn't matter what the person’s income or assets are. For more details, click here.
Under the Health and Safety at Work Act 2015, a person conducting a business or undertaking (PCBU) owes a primary duty of care to ensure, so far as is reasonably practicable, the health and safety of workers while they are at work in the business.
As part of these obligations, a PCBU must ensure, so far as reasonably practicable, that the workplace is safe to attend after a serious weather-related event. In some cases, it may be necessary to engage a specialist to assess any potential damage before confirming with employees that it is safe to attend. This may include assessing any structural damage and electrical components that may have become water-damaged.
Employers affected by serious weather events will need to support their employees, and carefully manage employment law obligations, as part of their response. In particular, employers should bear in mind the following:
- Communication and support: Employers should contact employees as soon as possible, either during or after a serious weather event, to check in on them and to inform them of any temporary workplace arrangements (for example, if the workplace will remain closed for a period of time). Employers should also consider what other support could be offered to employees, including reminding employees of any support services in place (such as an employee assistance programme) or options for leave and flexibility while employees manage their own personal response to the event.
- Payment of employees if temporary closure: As highlighted by recent COVID-19 cases, if a business is temporarily closed but an employee is ready, willing and able to work, it is likely that an employer will have to continue paying that employee. Even if an employment agreement includes a clause saying that the employer is able to withhold pay due to weather-related events, it is likely that the duty of good faith requires prior consultation before an employer can rely on that clause.
- Working from home: If a business is unable to open, it would be reasonable to direct employees to work from home during their normal work hours, if employees can safely carry out their role remotely. If an employee is unable to work from home safely, an employer should engage with the employee in good faith to assess whether there are any options for paid or unpaid leave.
- Leave arrangements: If an employee is unable to work (for example, because of childcare requirements or unsafe infrastructure), or if an employee feels too unsafe to return to work, an employer should inform the employee what leave may be available for them to take (such as annual leave, sick leave, leave without pay). Under the Holidays Act 2003, an employer cannot require an employee to take annual holidays unless they have attempted to agree on the timing of taking leave with the employee and, if agreement cannot be reached, the employer has given the employee at least 14 days’ notice of the requirement to take leave.
- Permanent closure: Even if a weather event results in the permanent closure of a business, this does not displace an employer’s obligations under employment law, including the duty of good faith. Before terminating an employee’s employment, the usual fair process obligations apply. This includes consulting with an employee about a proposal to terminate employment, seeking feedback on the proposal (including any alternatives to termination), and fairly considering any feedback before confirming a decision.
Businesses who have suffered property damage as a result of the cyclone may have insurance cover under their material damage policies.
In addition, if businesses have been unable to trade (or have suffered a loss in trade) as a result of property damage caused by the cyclone, they may also have cover under their business interruption policies.
Here are the key considerations for businesses who have a potential insurance claim:
- Review the terms of the insurance policy carefully (and obtain advice in relation to the terms of the policy if needed). Understanding the terms, any exclusions, and any conditions of cover, is critical in pursuing an insurance claim.
- Notify your insurer or broker of the potential claim as soon as possible. This is typically a requirement of any insurance policy, and (in any event) allows the insurer to start considering your claim at an early stage. You do not need to have all of the final supporting information before you notify the claim.
- Documentation and evidence are critical. Collect and maintain a file of all supporting documents and other evidence such as photos and videos. Make a note of any conversations that are relevant to the claim.
- Communicate with the insurer or broker throughout the process, so that they are aware of steps being taken to remediate the damage.
- Track your time spent on the claim and on remediating the damage.
What happens if the devastation caused by Cyclone Gabrielle means that you are no longer able to meet your contractual obligations? One example we are already seeing is fruit and vegetable growers, who are no longer able to meet their supply contracts.
The terms of each particular contract will be critical in assessing parties’ ongoing contractual obligations. However, there are two principles in particular that commonly come up.
Force majeure clauses
Force majeure clauses are fairly standard in contracts and excuse a party from its contractual obligations and liabilities where it is prevented from acting due to a specified event. A force majeure clause only applies if the parties have specifically agreed to such a term in the contract. Accordingly, the wording of the particular clause at issue will be critical in assessing whether it applies in the case of Cyclone Gabrielle.
There are typically four key considerations in assessing whether a force majeure clause applies:
- Specified event: A force majeure clause often lists specific events that must occur for the clause to apply. Force majeure clauses are usually triggered by ‘acts of God’, for example, storm, fire, flood etc. Whether a force majeure clause has been triggered will depend on the specific circumstances and the nature of the claim.
- Prevented performance: If there is a qualifying event, the force majeure clause will often require that event to have prevented performance by the affected party. This is a high standard – the courts have ruled that it is not enough that the event has made performance more difficult or expensive. Instead, performance must be legally or physically impossible. Some force majeure clauses may have a different standard. For example, a clause may require the event to have “hindered", “delayed" or “adversely affected" a party. These set a lower standard than “preventing" performance.
- Party's control: Typically, a force majeure clause will require that the failure to perform was due to circumstances beyond the party's control. If the clause is silent on this issue, the courts may read in this requirement.
- Mitigation: Finally, there must be nothing that the party could reasonably have done to avoid or mitigate the event or its consequence.
If a contract does not contain a force majeure clause, the common law doctrine of frustration might apply. This releases parties from a contract – but only if the impacts of Cyclone Gabrielle make performance impossible or radically different to what the parties agreed.
Examples of frustration include circumstances where:
- The subject matter of the contract is unavailable (for example, the person providing the services is permanently indisposed); and
- The purpose of the contract no longer exists (for example, the contract relates to an event that can no longer take place).
However, if the terms of the contract deal with such a risk, the doctrine of frustration will not apply.
Other potentially relevant clauses
When reviewing a contract to assess the potential impact of the cyclone, you should also consider a range of other clauses that may potentially be relevant. For example:
- Material adverse change: Facility agreements, sale and purchase agreements and supply agreements may contain “material adverse change" or “material adverse effect" provisions that allow a lender or other party to cancel the contract if triggered. In some circumstances, the effects of Cyclone Gabrielle may meet this threshold.
- Cessation of business: Some agreements, including leases, can contain provisions requiring a party to continue business at a certain rate or at certain times, with remedies on default. If the cyclone causes a party to cease business, these provisions may apply.
- Financial covenants: Many financing documents require borrowers to maintain certain financial covenants, such as for cash flow or earnings. The cyclone may cause a borrower to breach a covenant, leading to an event of default.
- Termination: Parties should also be mindful of the termination provisions of their contracts, and whether any termination rights might arise as a consequence of the cyclone.
Cyclone Gabrielle has clearly had a major impact on a large number of properties in the affected regions. While there will undoubtedly be long term implications for properties in affected regions, the cyclone is likely to have had an immediate impact on a number of property leases and sale and purchase transactions.
Landlords and tenants whose premises are affected by the cyclone should review their leases and consider whether certain key clauses will apply, including:
- Damage and destruction provisions: Leases in New Zealand typically contain damage and destruction clauses which distinguish between premises which are totally destroyed by an event such as Cyclone Gabrielle (where the premises are left “untenantable”), and premises which are only partially damaged or destroyed (where the premises are not left untenantable). Where premises are untenantable, leases will usually automatically terminate as at the date of damage or destruction. If the premises are not untenantable, then the landlord is generally required to apply its insurance proceeds towards the reinstatement of the premises, with the tenant being given a fair and reasonable rent abatement in the meantime. Issues can arise where the landlord is unable to reinstate – for example where the required resource consents or building consents can no longer be obtained. In those circumstances the lease will usually automatically come to an end.
- Inaccessibility provisions: Inaccessibility (or “no-access”) clauses apply where the premises are not damaged or destroyed, but are instead rendered “inaccessible” to the tenant. Consideration should be given to the reason why the premises are “inaccessible” this is generally limited to circumstances where a relevant authority (such as the government) has issued a prohibition on the premises being accessed, rather than the premises simply being difficult to access due to slips or washouts. If the premises are inaccessible under the lease, then the tenant will usually be have the right to a rent abatement for the period of inaccessibility, and a right to terminate the lease if the premises remain inaccessible for a certain period (often nine months).
Sale and purchase agreements
If an affected property is currently the subject of a sale and purchase agreement, the following issues may arise:
- Risk provisions: Sale and purchase agreements in New Zealand typically provide that if the property is damaged prior to settlement, and the damage has not been made good by the settlement date, then the vendor and the purchaser need to assess whether or not the property is untenantable. If the property is untenantable, the purchaser is usually given the option of either terminating the agreement, or proceeding with settlement but at a reduced purchase price (with the reduction in purchase price equal to the reduction in value caused by the damage). If the property is not untenantable, then the purchaser must proceed with the purchase but with the benefit of a price reduction (again equal to the reduction in value caused by the damage). Often there can be difficulties in determining whether a property is untenantable, and determining what the reduction in value of a property may be.
- Settlement timing: When there has been damage to a property prior to settlement, there is often insufficient time to assess the rights of the parties prior to the settlement date. Even where a property is not damaged or destroyed, there may be circumstances (such as access or communication issues) which make settlement difficult. In either case, the terms of the sale and purchase agreement should be reviewed in order to determine whether a party has the right to defer settlement. The New Zealand Law Society has recently urged asked lawyers dealing with settlements of cyclone-affected properties to urge their clients to be tolerant given the circumstances. They also noted that patience and flexibility will be required in many cases, and that practical solutions may need to be agreed between parties, even if a sale and purchase agreement does not allow a party to defer settlement.
Taxpayers should let the IRD know as soon as they reasonably can if the cyclone has impacted their ability to meet their tax obligations.
Taxpayers are ordinarily charged use of money interest and late payment penalties when tax is not paid on time. An order in council enables taxpayers impacted by the cyclone to request relief from use of money interest up to 30 June 2023. Relief may be granted where it is deemed to be equitable to do so, the taxpayer requested the relief as soon as practicable, and the taxpayer makes the core tax payment as soon as practicable. The IRD also has the ability to waive any late filing and payment penalties.
Where the deadline for filing certain research and development tax credit applications and returns falls between 16 January 2023 and 7 March 2023, the due date has been extended to 31 March 2023 where the taxpayer’s ability to meet the filing deadlines has been impacted by the cyclone.
Subsidies and grants received by businesses may have tax consequences. Where financial assistance is paid to assist in carrying on a business, such payments will often be assessable income. However, the financial assistance may be excluded income for a business provided certain criteria are satisfied.
Taxpayers who wish to donate trading stock to those impacted by the cyclone should be able do so without triggering deemed income for income tax purposes. An existing order in council provides this relief up until 31 March 2023. Cash donations to organisations who are assisting with relief efforts in the wake of the cyclone will also generate a tax credit or tax deduction for the donor.
The Ministry for Primary Industries (MPI) and New Zealand Food Safety (NZFS) have released guidance following Cyclone Gabrielle, aimed at commercial produce growers who will be harvesting flood-affected produce for human consumption.
This guidance has been released given that flood waters in the wake of the cyclone may be contaminated with sewage, chemical contaminants, pathogenic microorganisms or dead animals. MPI and NZFS have said that, while peeling and cooking produce will reduce the level of contamination, there is no certainty that this will provide a reasonable assurance of human food safety.
MPI and NZFS have therefore asked produce growers to consider the following, in order to ensure crops that have been in contact with flood waters are safe for human consumption:
- All mature crops that have been in contact with flood waters should not be harvested or consumed, and should be destroyed.
- This applies to all types of crops, fruit and vegetables, vine and tree fruit, surface crops, underground crops, and produce with or without a skin or shell.
- This also applies to mature underground crops that have been grown in fields submerged by flood waters.
- Underground crops (including onions) that are still early in their growth (that is, they are due to be harvested in at least four weeks) can still be grown to maturity and harvested.
The guidance also sets out additional food safety measures that produce growers should take into consideration.