IMPACT OF THE COVID-19 VIRUS ON COMMERCIAL AGREEMENTS

In response to the global pandemic of COVID-19, the Government of Kenya has set out a number of measures and directives to try and curb the further spread of the virus in the country.  Some of these measures include travel restrictions, business closures, cancellation of events and closure of borders.

The implications of these measures and restrictions have, and will, continue to cause significant disruption to both individuals and businesses, as commercial activities both locally and internationally become harder to perform.

In this article, we explore the various options available to both individuals and businesses to mitigate and/or alleviate some of the commercial obligations in these unprecedented times:

Force Majeure

Most contracting parties will often include a Force Majeure clause in their commercial agreements. A force majeure clause relieves parties from the consequences of non-performance in the event of

circumstances beyond the control of either party.

There is no statutory or common law definition of what amounts to a Force Majeure event, and therefore during contract negotiations the parties are free to agree what will constitute a Force Majeure event, and what the consequences shall be.

Therefore, the starting point in considering whether a Force Majeure clause can be relied on, is the actual wording of the clause itself.  How widely is it drafted? What is the language used to define what constitutes a Force Majeure event?

It is common for Force Majeure clauses to list the events that will constitute a Force Majeure, but also stipulate the amount of disruption required to invoke the clause. For example, the event must ‘prevent’ or ‘prohibit’ performance.   Consequently, the Force Majeure event must therefore be the sole reason for the failure to perform one’s obligations; it should not be because it is more expensive or more difficult to perform the contractual obligations.

As evident from the above, the effect of Force Majeure clauses will come down to the interpretation of the contractual wording and the impact of the circumstances on the party’s ability to perform its obligations.

If the clause can be relied on, it is likely to allow the parties to suspend performance while the Force Majeure event continues or terminate the contract all together.  It is worth noting that the party seeking to rely on the clause shall have the burden of proof. They must seek to show that the Force Majeure event was beyond their reasonable control and was provided for under the contract.

FRUSTRATION

In the circumstance that contracting parties did not provide for a Force Majeure clause, or that the clause is deemed not to apply, they may resort to the doctrine of frustration due to the impact of COVID-19. Frustration occurs when a contractual obligation cannot be performed without fault of either of the contracting parties.

A party must show that the frustrating event was unforeseeable and that it was by no fault of either party. Parties must also show that in their contractual relationship, they never agreed to be bound in the fundamentally different situation that had unexpectedly occurred.

Further, parties must show that as a result of the frustrating event, it is physically or commercially impossible  (not merely more difficult or not economically viable) to perform the contractual obligations.

Different to the effect of a Force Majeure clause, Frustration will lead to the parties being entirely discharged from their contractual obligations, rather than a suspension of those obligations.

Conclusion

In the event a well drafted Force Majeure clause exists in the contract, it should be explored before the doctrine of frustration.   The doctrine of frustration is not lightly invoked and should be considered carefully.

Given the global and far reaching impact of the pandemic, it is likely the majority of businesses will, if not already, feel the economic impact of the virus.  Businesses and individuals should review all of their contractual relationships and begin planning a strategy given the effect and potential longevity of COVID-19 in Kenya.

While not always achievable, a reasonable strategy for all contractual relationships, and particularly those of long-standing, would be to negotiate a share in the exposure and financial impact by agreeing on a sensible, pragmatic and fair way forwards.

Either way, parties should be clear on their contractual rights and obligations as Kenya continues to negotiate its way through these difficult times and note to carefully word their Force Majeure clauses in the future.

The above is a general summary of the potential factors in relation to commercial agreements and should not substitute tailored legal advice.

For further guidance or advice, please do feel free to contact us.

6 April 2020