Coronavirus: Did your contract predict the unpredictable?

Tuesday June 2 2020

Where a contract does not contain a forc

Where a contract does not contain a force majeure event, the parties can consider amending the existing contract to include a pandemic as a force majeure event. Shutterstock photo  

Coronavirus (Covid-19) has heavily disrupted the normal way of running business worldwide. As a result , almost every business has suffered from the effects of the lockdown.Such restrictions have affected the ability of various businesses and individuals to meet their contractual obligations and or duties ranging from the performance of various contractual terms to the payment of any contractual financial obligations. This is bound to result in some contractual disputes.

With many law firms currently being unoperational and the Courts being partially open for business, there have been few instances of contractual litigation arising from the restrictions imposed on account of Covid-19. This situation is very likely to change after some restrictions are lifted and the contractual parties are confronted with the realities of their contractual status.

Therefore, businesses should consider their potential contractual exposure and risks in relation to their existing contracts and reconsider the nature and contents of the contracts they may execute in the near future.

Individuals and businesses, for example, could start by re-examining their current contracts and consider whether their counter parts or their own businesses can be excused from performance of contractual obligations/rights on the basis of the existence of an event of force majeure due to the spread of Covid-19.

Force Majeure is a contractual clause that relieves a party from performing its contractual obligation where its performance is impacted by unforeseen circumstances commonly termed as “Acts of God”.

For the concept to apply, a link between the event and inability to perform the contract must be shown. A party that seeks to rely on a force majeure clause must retain evidence of what constrained its ability to perform its obligations.

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In determining whether a party can rely on a forcemajeure clause, the first essential step is a review of the of the contract’s force majeure clause, if any. A typical forcemajeure clause should define or list the events that shall excuse performance and continues to specify the standard that ought to be established to excuse performance.

In determining whether an event is a force majeure, one ought to establish whether ‘’epidemic’’ and or ‘’pandemic’’ are specifically covered as a force majeure event in the contract. If not, then the party ought to determine whether the event is of a nature that would fall under general force majeure wording in that contract.

A force majeure event can also be established through government decisions/administrative action preventing performance which meets the political interference language commonly included in definitions of force majeure. For example, the different directives issued by the president in respect of the Covid-19 developments in Uganda and the health laws that have been passed to manage the situation.

Finally in determining whether an event falls under a force majeure event, foreseeability tests shall also be relevant as some contracts exclude events which could have reasonably been provided against, avoided or overcome.
Any party seeking to assert the force majeure clause should prove that the event was beyond its control. The party must also show that it has taken reasonable steps to mitigate/avoid the effects of the force majeure event and in situations where prompt notification is a contractual condition, this must be implemented.

With the force majeure clauses, there will always be events that cannot be anticipated and addressed.
The clause must also set forth any additional requirements such as the types of notice required and all the mitigation step that a party is required to take in case of any force majeure event. These clauses also indicate that the consequences of a force majeure event such a termination, suspension of the contract.

Where a contract does not contain a force majeure event, the parties can consider amending the existing contract to include a pandemic as a force majeure event. The parties can also enter consensual agreements with each other on the anticipated liabilities. This will help the parties to explore alternative avenues for continued performance of their core contractual obligations without terminating contracts.

A party’s approach to a force majeure clause will vary depending on the nature of the contract, whether the party has performance obligations or is the beneficiary of the performance obligations of the other party or both under the contract, the particular industry, the relative bargaining leverage, the applicable governing law and other considerations.

Frustration
Ifa contract does not have a “force majeure clause”, the legal principle of ‘’Frustration’’ can come into play.

Frustration is provided for where a contract becomes impossible to perform or it is frustrated and where a party cannot show that the other party assumed the risk of impossibility for performance of such a contract, the parties to the contract shall be discharged from the performance of the contract.

Frustration of a contract occurs where an event occurs without default of either party and for which the contract makes no sufficient provision, which changes the nature of the outstanding contractual rights and/ or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them liable to perform their duties as stipulated in the contract.

These circumstances render performance different from what was contemplated by the parties at the time they entered into the contract.

If performance is required by delivery at a specific time in a specific place and due to acts such as the lockdown and the ban on travel, a party fails to either import the said goods or export; such party can seek to be excused from performance on the ground of frustration.

The spread of the Covid-19 pandemic can be argued as an event of frustration for several contracts that can prove the existence of the aforementioned circumstances. This is because the spread of the virus was neither foreseeable nor foreseen and parties to contracts have/had no way of preventingthe same.

However, frustration does not merely suspend a contract but rather discharges parties from their contractual obligations and such contract is terminated.

In instances such as a landlord-tenant relationship, the tenant would not be required to pay rent and the landlord shall not be obliged to provide rental space. Any party that is considering exploring this option ought to take all cautionary steps to ensure that they are not entrapping themselves.

The law
What amounts to a force majeure event?

-The parties can be relieved from performance of obligations hence avoiding the risk of a default termination of the contract.
- The target dates for achieving milestones in the contract can also be extended enabling the parties to perform once the force majeure event has been conclusively handled.
-Parties may bear their own costs as a result of non-performance or exceptions may arise where certain costs must be paid.

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