The impact of Covid 19 on contractual obligations

COVID-19 IMPACT ON PERFORMANCE OF CONTRACTUAL OBLIGATIONS

The first case of coronavirus (Covid-19) was reported late last year in Wuhan and since then governments across the world have taken various measures such as forced quarantine, lock downs, travel bans and restrictions, to control the spread of the virus.  These measures have generally slowed down business activities and in worst scenarios led to closure of some businesses.

Therefore, having in mind that contracts form a key part in business activities, it is expected that the performance of contractual obligations will be interfered with. This might reflect on a wide range of contracts such as construction contracts, supply of goods, supply of services, loan agreements, real estate agreements, employment agreements etc.

As is norm in law of contract, failure to perform obligations may amount to breach of a contract and attract legal liabilities. In this difficult moments, a contracting party unable to complete its contractual obligations on the basis of the impact of covid-19 may consider the following avenues for relief:

1. Invoke force majeure clause. Force majeure is a contractual clause which suspends performance of contractual obligation so long as there exists supervening event creating difficulties in discharge of obligations. For a contracting party to rely on force majeure, the force majeure clause must be expressly included in the contract. Different clauses have different wordings on what constitutes a supervening act. Clearly, as at now, the outbreak of covid-19 cannot be one of the expressly stated supervening events in a force majeure clause. Nonetheless, where a force majeure clause contains the wordings “epidemic” “pandemic “or “government actions/measures”, contracting parties can infer such words to cover the covid-19. The burden of proof lies on the party that intends to rely on the clause.

2. Doctrine of Frustration. For contracting parties that do not have the force majeure clause in the contractual agreement, they can rely on the common law doctrine of frustration. As opposed to force majeure, frustration is a common law legal principle and it need not be expressly included in the contract. Frustration holds that a party is completely discharged from performing their contractual obligations if there are supervening circumstances that render the performance to be physically or commercially impossible.

Since frustration leads to termination of a contract, a party opting to rely on this principle has a higher burden of proof. The party must prove that the circumstances are so superior that they would cause tremendous hardships or difficulties in performing the contractual obligations. The Court usually looks at the both sides of the case and it is unlikely to rule on application of frustration if such ruling would be commercially disadvantageous to the innocent party. Therefore, as an example, it is unlikely that the principle can be applied to terminate a loan agreement. Notably, the principle can be applied in a contract for sale of goods, especially perishable goods, or in instances where the delivery of goods is to be executed overseas.

In conclusion, we are living in unpredictable times, and the outbreak of covid-19 is a lesson to contracting parties to consider including a force majeure clause to future contracts. Nonetheless, it is not over for contracting parties that had not included the clause in existing contracts. These parties can consider relying on frustration. Alternatively, they can consider entering into an addendum and amend/supplement the existing terms to suit the circumstances. Also, the parties may make informal arrangements on how to go about the discharge of their obligations.

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