Contracts Tainted With Coronavirus - What You Should Do Now

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Thursday, March 19, 2020 /03:08 PM / by Balogun Harold / Header Image Credit: GS Chambers

 

This is a very critical time for not just business owners and investors but also for business, commercial and investment lawyers. If you are in-house counsel, chief investment officer or other C-Level executive, we think that now is a good time to put a team together (Perhaps, a remote team) to identify and review ALL the Force Majeure Clauses in ALL your Company's contracts.

 

We expect that this legal exercise would happen within the context of a broad-based, reasoned and documented PESTLE analysis that senior management should commission and oversee.

 

Overall, it is important to assure that the wording of Force Majeure clauses are not ambiguous and that they sufficiently protect your company from the suspensive effects of the Coronavirus outbreak.

 

If the outbreak of the Coronavirus is beginning to affect your business or likely to affect a performance of your obligations under a contract, you should be triggering the relevant sections of the contract relating to force majeure provisioning and providing your counter party with the relevant notification.

 

If you do not give the required Force Majeure notice to all relevant counterparties, you may be exposing your Company to avoidable litigation and a potential claim for monetary compensation in the form of damages when normal business activities resume.

 

Please bear in mind that:

  • It is important to act swiftly. To the extent that a supervening event has been set in motion in the form of a pandemic, time is now inversely related to contractual liability. The prospect of a "failure to perform" is plausible. Contractual breaches, which may crystallize in litigation is plausible as well. It is very common for businesses to contest the failure to perform a contract, when normal business operations begin. In the absence of an executive declaration or market interventions in the form of Force Majeure certificates, we do not expect the courts to interpret the mere fact of the Coronavirus outbreak, as a  legitimate excuse from the performance of a contract.

  • The importance of a Force Majeure Clause is to allow either party to a contract to suspend or terminate the performance of its contractual obligations when certain circumstances beyond their control suddenly occur.

  • In some cases, it may be strategic to renegotiate other key clauses in your contract and/or replace with a new contract.

  • If there is no Force Majeure Clause in your contracts, as of date, counsel should take steps to contact the necessary counter-parties with the aim of negotiating a Force Majeure Clause that suits your peculiar circumstance, your business operations and revenue model. We have provided a draft of a Force Majeure Clause via this link.

  • If a contract is silent on force majeure provisioning and litigation eventually results as a result of a "failure to perform", courts would generally render their decisions applying the doctrines of reasonability and foreseeability. In other instances, the courts may apply the legal principles relating to the frustration of contracts. However, if the parties allocate the risk of the specified event, in the clearest possible terms, there should be no room for a court to inquire into the foreseeability or reasonability of that event. In our considered view, waiting for the courts to determine the effect of a 'failure to perform" is not advisable. For this reason, it would be prudent for counsel to take steps to negotiate a Force Majeure Clause where necessary.

  • We fully expect counter-parties who have, prior to occurrence of the CoronaVirus outbreak, been in breach or have proven difficult or demonstrated malice and bad faith, to take  unfair advantage of the party who has already performed its obligations under a contract. It is therefore important for counsel to be proactive and to be alive to such issues.

  • The legal principles relating to the frustration of contracts, in the law of contracts has its own limitations. Although the courts will generally excuse the performance of a contract, where subsequent to its formation, and without fault of either party, the contract becomes  incapable of being performed due to an unforeseen event, a long line of judicial decisions support the view that courts are unwilling to find that a contract has been frustrated unless it has been so drastically altered as to be entirely different from that entered into.

  • It may useful to also review any such contracts and consider arbitral resolution of disputes, in the event that there are no arbitration clauses in a contract. We believe that arbitration of contractual disputes arising from the failure to perform will provide better utility in terms of timing, privacy and sound judgement, to contractual parties.

 

Proshare Nigeria Pvt. Ltd.


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