Force Majeure: Contractual Obligations in the Covid-19 era – Adelante Legal LLC
The pandemic is not here to stay! However, knowing that it not business as usual, we want to assist our Adelante clients and followers at large by highlighting a key contractual area that you should re-check be it you are an individual, a business, an investor and or a transaction team. A difficulty and impossibility in performing an existing contractual obligation is imminent and the operation of the ‘force majeure’ provisions in mitigating liabilities resulting from delayed or non-performance of these contractual obligations needs interpretation.
Here are some contractual pointers for your keen understanding:
- What is force majeure.
In simple terms, it is the unforeseeable circumstances that prevent someone from fulfilling a contract. It is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent parties from fulfilling their obligations. The Kenyan Legal System is based on the English Common Law and such, the words used in the contract determine if there is a valid excuse for non-performance.
- You have a “force majeure” clause in your contract?
Good for you! If not, do not panic, there still is a way.
In general, non-performance of obligations under a contract amounts to a breach of contract under Kenya’s Law of Contract. However, a ‘force majeure’ clause, operating under the common law doctrine of ‘frustration’ may offer relief to contractual parties subject to various conditions.
How did your lawyer draft the wording in your contract? Could it be buried, or, refer to “exceptions”, “unforeseen events” or “acts of God” rather than force majeure? Did the wording have a pandemic reference?
Yes? NO?
In the event of uncertainty, the burden of proof lies on the entity alleging non-performance or delayed performance on grounds of force majeure. The affected party must demonstrate impossibility of performance, show that the impossibility is linked to COVID-19 and that they could not reasonably foresee its occurrence. There may be other provisions that provide protection when performing a contract that becomes difficult. For instance, a “hardship clause” inclusion might apply when an unforeseeable event makes the performance of the contract excessively burdensome, and can lead to an adjustment of the terms of engagement. The exact wording of the clause is of extreme importance to determine its scope.
Other useful clauses could include material adverse change, price adjustment, liability limitations and exclusions, extensions of time, variations or changes in law (for example, the changes in our tax laws or the partial lockdown effecting transportation controls for suppliers etc).
In case of conflict and your contract does not have a force majeure clause, you could rely the common law doctrine of frustration to discharge the contract if it has become illegal or impossible to perform or performance has become radically different. Look at how events are defined in the force majeure, hardship or other clauses, and decide whether coronavirus fits the definition. If neither epidemics nor pandemics are mentioned, the clause could still be triggered where it covers labour and supply shortages (which are caused by coronavirus) or broadly defines events as exceptional, beyond one party’s control, unavoidable and not attributable to the other party.
Reliance on a force majeure clause does not necessarily mean termination of the contract altogether and depending on the drafting of the clause, the performance of the contract can be suspended or be otherwise postponed for a certain prescribed period.
- Implementation
To rely on force majeure or on the contractual provisions that excuse performance of obligations, the event that you rely on must be the only one affecting contractual performance (unless clearly stated otherwise). In other words, “but for” coronavirus, a party must have been willing and able to perform.
If the link between Covid-19 and the non-performance is clear, you need to notify the contractual excuse to the other party. These will definitely differ from contract to contract. Once a force majeure event is notified, for example, the effects will vary depending on how long the performance is affected. The contract may allow for the right to suspend, seek an extension of time, or for either party to terminate it if necessary.
Whether you decide to trigger a force majeure or hardship clause, you must ask yourself:
- Is an initial notice of the force majeure/hardship event needed?
- Must I supply supporting details and evidence of the event and its effects?
- By when and in what form should notices (initial and subsequent) and supporting documents be served?
You must also respond quickly to notices received from the other party. Failure to do so within the stipulated contractual time limits may constitute acceptance of the other party’s force majeure or hardship claim.
- Guidance
Properly record and store evidence of all communications with your counterparties about the disruption and its effects, including order or service cancellations. Mitigate the effects of a force majeure event so, document reasonable steps taken to do so.
If force majeure has been claimed, agree with your other party a date when obligations will resume after the event and its effects have ended, especially if the contract is unclear.
Suppliers definitely need time and resources to resume operations or clear backlogs and the party claiming force majeure won’t want to be in breach once the event is over. There may, in limited cases, be room to explore (or a contractual right to request) a further extension of time for performance. However, you are more likely to get relief during the remobilization period by highlighting to the other party that the event is over but the preventing effects are still being felt.
As the effects of coronavirus are felt at different times, force majeure notices could continue to be issued after it is downgraded from a pandemic. Is the location of the force majeure event mentioned? For example, would your clause be triggered if there were still an epidemic at the place of delivery but not the place of production?
- Summary and Covid-19 Lessons;
- Draft New Contracts: Depending on your contractual position (for example, as a supplier or a customer), ensure that your new contracts have a boilerplate clause on force majeure and consider whether the clause should include pandemics or curtailment of transportation services or utilities as a supervening event. Ensure that the clause provides for a notification requirement and deals with the issues that may arise if a force majeure event (such as COVID-19) occurs e.g. care of the project pending completion works. On the other hand, you may also rely on breach of contract where the contract does not contain a ‘force majeure clause’ and the other party does not or delays the performance of their contractual obligations.
- For existing Contracts, parties should review their existing contracts to identify whether their force majeure clause covers pandemics such as COVID-19 and the notification requirements and remedies agreed between parties. In the event that the contracts do not have provision for pandemics, parties should initiate mitigation measures such as amending/varying or entering into consensual agreements on potential liabilities that may arise. In addition, businesses should initiate the force majeure requirements under their existing contracts such as notifying their counterparties, in the event of delayed or impossibility of performance.
Assess your supply chain contracts so you know which party is likely to be affected by coronavirus (if they haven’t already) and by other future obstructive events. Engage with them early to plan how to manage these situations andthink about amendments to prepare for future outbreaks.
Reach us via Email: legal@adelante.co.ke for all your contractual service needs.
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