The outbreak of coronavirus (COVID-19) has been declared a global pandemic by the World Health Organization (WHO) and its impacts are being felt in many sectors, including the transport, manufacturing, sports, tourism and gaming industries.
In Kenya, the first case was confirmed on Friday Morning. Countries have adopted various measures to curb the spread of the virus and these measures are negatively affecting ongoing business contracts and projects. Governments in the affected have been issuing travel restrictions with others issuing directives for complete lock downs.
Against this background, one of the issues that businesses are grappling with is the impact of the COVID-19 (and government directives issued to contain it are) on businesses’ contractual obligations. As a result of the outbreak, many commercial contracts are likely to NOT be performed and one thing that will spread as fast as the virus itself is disputes arising from claims of breach. Indeed, some organizations have already begun invoking the force majeure clauses, which excuse non-performance in the event a force majeure clause occurs. Yesterday, insurance companies clarified how, due to force majeure clauses in their standard agreements, their policies do not cover epidemics such as the coronavirus, obviously due to the massive losses they would be exposed to in the event every one came calling. In this article, we discuss the legal principles that are often invoked in the event of epidemics like the present one and share insights that could help business manage legal risks under their agreements.
What constitutes a Force Majeure event?
A “force majeure” event by definition, is an event whose occurrence relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. These events may include natural disasters such as floods, earthquakes and other “acts of God,” as well as uncontrollable events such as war or terrorist attack.
In order to avoid legal claims where parties are hindered from performing their obligations due to a force majeure event, lawyers often include the force majeure clause in their agreements. Notably, non-performance on account of a force majeure event should be invoked only if there is an express provision included in the particular contract. Courts tend to interpret such clauses narrowly and only the events listed and those similar to the ones listed will be covered.
In invoking force majeure, courts have held that:
- The event in question must fall within the scope of the force majeure clause in the contract;
- There must be an actual causal link between the non-performance and the claimed force majeure event; and
- The party seeking to rely on the force majeure clause must show that there are no reasonable steps that they could have taken to mitigate or avoid the effects of the force majeure event.
Does the COVID -19 outbreak amount to a Force Majeure event?
To find out whether the outbreak amounts to a force majeure clause, you need to confirm whether a disease outbreak/pandemic is included in the force majeure clause. Most contracts will include epidemics as a relevant event and thus where it is included as such, a party may be excused from performance.
Is a party bound to perform where the contract does not provide for a Force Majeure event?
In the absence of a force majeure clause in the contract, parties whose performance of their contractual obligations is hindered by the outbreak, may resort to the English legal doctrines of frustration. The doctrine applies where an event occurs, which renders performance by one party impossible. Noteworthy, frustration is subject to a very high threshold and rarely results in excuse of performance. It should be invoked only where you are clear that the outbreak of the virus has rendered your performance of the obligations impossible, not just difficult.
What should a business do if performance of its obligations is hindered by the outbreak?
If any of your contracts or projects are exposed to negative effects caused by the coronavirus, you may consider taking any of the following:
- Identify key provisions in material contracts to confirm whether the outbreak would fall under force majeure that would excuse your performance;
- Identify the applicable requirements related to notification of the event and steps you may need to take before being excused from performance;
- Consider whether there are alternative means to perform contractual obligations or proactive steps that can be taken anticipating the potential future effects of the outbreak
- If the contract has no force majeure clause, consider taking reasonable steps to issue notices of the frustrating event;
- Understand the local regulatory actions and restrictions to determine whether they require the company to take steps or make decisions that may affect contractual commitments;
- Analyze the potential consequences of a breach and/or default;
- Contact a lawyer for appropriate legal advice suitable to your circumstances.
With new cases reported every day, it is highly likely that the effects of the outbreak will play out for a longer time in the future. Consequently, if you are involved in projects or contracts with parties that may be affected by the outbreak or your business is itself affected, it is prudent to assess your contractual exposure and take all necessary actions to ensure that your contractual rights are correctly and timely invoked. Should you like to discuss any of the issues raised in this alert, feel free to contact us and our network of lawyers will assist in this respect.
Article By Hillary Kariuki
This publication is meant for general information only and does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates. For particular expert advice on any matter dealt with above, please contact us.