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Brief Counsel

Help sheet for businesses in earthquake-struck Canterbury

08 September 2010

Chapman Tripp’s Christchurch office is now working out of temporary accommodation in a hotel so we know first hand the issues the earthquake – and the energy-sapping after-shocks – have created for people and businesses.

It was in that spirit that we have put together this help sheet.  It covers employment, insurance, leases and termination of contracts through the ‘doctrine of frustration’.  We hope that you will find it useful.

Insurance

Material damage insurance

Most businesses will have material damage insurance to cover the physical damage to insured property from the earthquake. 

Check your policy for your claims obligations.  But as a general rule, you should notify your insurer of your claim as soon as possible and keep evidence of the damage until it is examined by your insurer. 

If safety or clean-up work is necessary, check your insurer's requirements first, if practical to do so. Otherwise take lots of photographs.  It may help to speed up the processing of your claim if you gather together information now about the damaged property - such as make and model details of damaged equipment, where it was purchased, where replacements can be obtained from and so on. 

Business interruption insurance (B.I)

This insurance is normally sold as an add-on to material damage cover and provides income to replace the income the firm would have earned if the physical damage, insured by your material damage cover, had not occurred.  The main element of the insurance is typically the firm’s anticipated gross profit.

The calculation of B.I claims is notoriously complex and they are one of the most difficult claims to prove because of their theoretical nature.  The firm and the insurer need to agree on what the firm’s gross profits would have been if the loss had not happened.  It will often be necessary for the firm to employ professional advisers to assist with a significant claim.  This should be prepared in consultation with the insurer’s appointed loss adjusters.

In addition to gross profits cover, the B.I insurance will often cover:

  • fixed costs incurred while the business remains closed

  • costs of leasing temporary premises

  • extra expenses to continue operations (to the extent they minimise the gross profit losses), and

  • claim preparation costs.

You will need to check your policy to determine the scope of your own coverage.

Key messages

Understand your policy coverage and how it will be adjusted.  This is crucial to ensuring that you can maximise your entitlement.

Maintain control of the process. 

Do not just accept the insurer’s approach and timetable if you are not satisfied it is appropriate.  This requires a proper understanding of your respective rights and obligations under the policy.  Issues to be considered will include:

  • when and how operations will be resumed

  • whether advance funds are available or required

  • how the elements of the loss will be valued, and

  • what precisely is covered.

Collect and preserve all of the data that will be needed to calculate and prove your claim such as:

  • historical sales and costs data

  • information about recent business changes that may have improved business profitability (so this can be taken into account in assessing likely lost profits), and

  • accurate records of extra costs incurred as a result of the damage to your property.

Talk to your insurer and appointed loss adjuster to make sure that you agree the way forward.  Later disagreements can be costly.

Keep in touch with your insurance broker.  Consider employing your own professional loss consultant if you have a substantial claim.  You will almost certainly need accounting advice.  Legal advice may also be useful if there is uncertainty or disagreement about what may be covered.

Employment

Health and safety

Employers have duties under the Health and Safety in Employment Act to take all practicable steps to ensure the safety of their employees while at work.  In many cases, experts (such as structural engineers, plumbers and electricians) will need to be called in to ensure the workplace is safe before staff return.

Pay

In most cases, employers will also have a duty to pay normal pay, even if the employees have been prevented from working, and irrespective of whether they are waged or salaried.  The determining factor is whether they are ready and willing to work.  If so, then (subject to the terms of the applicable employment agreements) they must be paid.

Wage subsidy scheme

Enterprises with 20 employees or fewer, which are unable to operate because of the earthquake, qualify for wage subsidies announced by the Government yesterday.

From tomorrow (Thursday 9 September), the Government will pay qualifying employers $350 (gross) per worker per week in the form of a lump sum.  The employer may choose to top up this amount as they pass it on to their employees. 

Payments will be backdated to the date of the earthquake and are expected to be made for at least the next 4 weeks. 

Contact the Chamber of Commerce, which is organising the refunds with WINZ.  The Chamber’s focus will be on helping those in serious financial difficulty.  Employers with insurance cover for loss of earnings will be expected to use this before accessing the wage scheme. 

The Government has not ruled out extending the subsidy to larger employers (more than 20 employees) but considers they are in a better position to look after themselves.

If an employer is not financially able to continue to pay wages, the parties may agree to a temporary discontinuance of work during which wages need not be paid.  However, the express agreement of the employees will be necessary.  The key for employers in such situations will be open communication with their employees as to the state of the business and the employer’s ability to continue to pay wages indefinitely.

Employers should also consider obtaining employees’ consent to take annual leave.  Where employees have accrued annual leave, and the parties have been unable to agree to when it shall be taken, employers can only require that annual leave is taken after providing 14 days’ notice.  

Employers may be able unilaterally to alter the hours of work of certain employees, such as those who work on a roster basis.  This will depend on whether (and to what extent) the hours to be changed are a term of the employee’s employment contract. 

If certain working hours are expressly stated in the employment agreement (or have perhaps become implied terms of employment following what has happened in practice), the employee’s consent will be required to change those hours.  The only exceptions will be where the change in work hours is technical or inconsequential. 

By contrast, where no particular or minimum hours are specified or implied, the employer may be able (following suitable consultation and notice) to alter the employees’ hours of work.

While it cannot be used as a threat, in certain situations it may be appropriate for employers informally to advise that if agreement cannot be reached (for example, as to periods of unpaid leave or altered working hours), the employer may need to consider redundancy.  As noted above, the key for employers is to be open and frank with employees about the extent to which the earthquake has affected the employer’s business and ability to operate both in the short and medium term.

Landlords and tenants

The Property Law Act provides that if leased properties are damaged or destroyed by earthquake, the rent or outgoings will abate, in fair and just proportion to the extent of the destruction or damage, until the premises have been repaired and reinstated. 

If the property is no longer habitable; no rent or outgoings will be payable until the landlord has reinstated the premises so that the tenant is able to re-occupy them.   

Landlords often have insurance in place for loss of rent and may seek to recover loss of rental and outgoings from their insurers during any period that payments by the tenant are suspended or reduced. 

Leases

The standard ADLS lease, which is extensively used for commercial leases, makes provision for termination of leases in the event of damage or destruction. 

If the premises, or any part of the building of which the premises form a part is untenantable, the lease shall terminate.  Also, the landlord has the right to terminate the lease if the landlord considers that the premises require demolition or reconstruction. 

Where the property is damaged but still tenantable, the standard ADLS lease provides that the landlord shall with all reasonable speed, once consents have been obtained, expend the insurance money received towards repairing or reinstating the premises.  Until reinstatement, the rent and outgoings shall be reduced by a fair and reasonable proportion having regard to the extent of the damage.  However, if necessary consents cannot be obtained, or the insurance money received by the landlord is inadequate for the repair or reinstatement of the premises, the lease shall terminate.

Doctrine of frustration

Contracts can be terminated under the ‘doctrine of frustration’ in certain conditions, absolving the business from the need to perform the contractual obligation.  The trigger must be an unforeseen event, not caused by either party’s default and which has created such a change in the circumstances of the contract as to render its performance either impossible, or radically different from what was contracted for. 

The doctrine is most often used in respect of commercial contracts, but the Employment Court recently applied it to an employment agreement.  The Court stated that the doctrine is not to be invoked lightly, but should be applied where the facts of the case warrant the intervention of the law to avoid injustice.1  If it applies; it will terminate an employment contract even where employees are ready, willing and able to perform their employment obligations.

Force majeure

Contracts sometimes provide for what will happen in an event like an earthquake in a “force majeure clause”.  Typically the party attempting to rely on the clause will be required under the contract to first give notice to the other party. 

Note also, that a force majeure clause may only relieve parties of their obligations to the extent that they have been affected by the earthquake.  A contract could not be terminated, for example, if goods cannot be delivered on time due to damaged roads, but it would be satisfactory to deliver them at a later date.

Conclusion

The advice above is necessarily general and should not be relied upon except as a guide.  For further information or more specific assistance, please contact the authors featured.

Our thanks to Matt Fogarty and Mihiata Pirini for their assistance with writing this Brief Counsel.

Footnote

  1. A Farmer v A Worker (2009) 9 NZELC 93, 132 para 40.

Contacts