Exploring the way forward for contractual obligations and breaches; Corona Virus as an Event of “Force Majeure”

  

The current global Covid-19 pandemic and ensuing governmental responses have spared no sector or industry of the economy. More importantly, the spread of Covid-19 has heavily disrupted the normal and reasonable way of running business worldwide. The Government of Uganda through the Minister of Health, issued various Statutory Instruments under the Public Health Act. These Statutory Instruments have provided the legal framework for the various restrictions that were put in place in an effort to minimize the risk of the spread of the Covid-19 virus.

As a result of this restrictions, almost every single business and sector across Uganda have either had their business operations completely shut down or massively limited. Such restrictions have definitely affected the ability or capacity of various businesses and individuals to meet or honor their contractual obligations and or duties. Such obligations range from the performance of the various contractual terms to the payment of any contractual financial obligations. Such a state of affairs is definitely bound to result in some contractual disputes and the potential triggering of contractual disputes resolution mechanism.

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

It is against the above background that businesses ought to start considering their potential contractual exposure and risks in relation to their existing contracts and furthermore, start to reconsider the nature and contents of the contracts that 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 concept commonly contained as 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 the 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.

In determining whether a party can rely on a force majeure clause, the first essential step is a review of the of the contract’s force majeure clause, if any. A typical force majeure 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 event, 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 in order 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 has the burden of proving 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.

The rationale behind force majeure clauses is that there will always be events that cannot be anticipated and addressed, and for which neither party to an agreement is responsible.

It is important that the clause also sets 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.

In cases where a contract does not contain a force majeure event, the parties can promptly consider amending or varying the existing contract to include a pandemic as a force majeure event. The parties can also explore entering consensual agreements with each other on the anticipated liabilities. Such a consensual approach will help the parties to explore alternative avenues for the continued performance of their core contractual obligations without resorting to the termination of the contracts.

It should be noted that a party’s specific approach to a force majeure clause will vary greatly 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.

The consequences of a determination that this pandemic amount to a force majeure event will include the following;

 

• 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 by a particular party.
• Extended periods of force majeure can also lead to a right for one or more parties to terminate the contract hence the need to hold discussions before the deadline on a “without prejudice” basis to avoid being caught unaware.

It is nevertheless important for any person considering the use of Force majeure, to give notice of invocation of force majeure. Such invocation will definitely place the burden on proving the key issues discussed above on such a party.

Frustration

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

Frustration is provided for under the Contracts Act of Uganda which emphasizes that 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 takes place where an event occurs without default of either party and for which the contract makes no sufficient provision, which significantly 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 it incapable of performance or the circumstances render performance radically different from what was contemplated by the parties at the time they entered into the contract.

An example is if performance is required to be by way of 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 preventing the same.

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

Therefore 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. In such circumstances, the law declares both parties to be discharged from further performance.

The consequence of frustration of a contract is that any roles on ether party are suspended in the interim and any monies payable in such instances shall cease to be payable. The law proceeds to declare that both parties in that instance shall be discharged from further performance of their duties.

If the spread of COVID-19 Has affected your business and its ability to perform its contractual obligations, the time to be proactive and mitigate the negative impacts is now. Business partners need to review their current business agreements for force majeure clauses and communicate with counter parties as soon as possible and as clearly on the possible impact of COVID-19 on your businesses ability to perform.