- COVID-19 has hit hard and unexpectedly, drastically reducing our mobility and economic activity. Many of our businesses are built on key contracts with customers and suppliers. Some of these contracts cross national borders. What happens to contracts in a pandemic?
- Fiji’s economic response to this crisis is likely to be slower and weaker than in its major and closest trading partners. Within Fiji different business sectors will recover at different rates. When cashflow is crashing, each party to a contract wants to position itself in the best way to lower its exposure and to strengthen its rights. There will not be enough money to go around; the ends will not meet. The crisis will end. Perhaps only then will the legal disputes begin in earnest. So parties to contracts must think ahead.
Start thinking now
- Few of us remember – or have even read – the fine print of our contracts. Some of the legal aspects we should be thinking about now are:
- does my contract have a force majeure or “Act of God” clause? If so, is this crisis covered by it? If not, what does this mean?
- how is the other party to the contract responding to the crisis? Does it look at this crisis in the same way as me? If not, what does that mean?
- do I want to stay in the contract for the long term or do I need to just get out now?
- what do I need to be saying/doing now to protect my position when this crisis is over (or the other party says it’s over)?
- which country’s laws cover my contract? Which courts may decide it if there is a dispute?
The starting point – a contract is a contract
- Common sense may say that unusual times demands unusual responses. Contract law may not see it that way. The starting point is that contracts mean what they say. So the real question is whether a specific contract is affected by particular events – specifically, the current crisis.
Do you have a clause at all?
- In the current situation, many contracting parties think first of force majeure (“superior force”). This is a well-known concept under which specific events may lead to changes in contract terms. But force majeure does not generally apply unless your contract provides for it. So first check your contract to see if it has a force majeure clause at all. If not, then at first sight, you are legally bound under the contract, come what may.
Force majeure clauses are different
- Force majeure clauses come in different shapes and sizes. They also impose different process requirements. Once those processes are followed, these may create different legal outcomes. Custom and practice in different industries may also affect those outcomes. So these clauses are not “one size fits all”. Check them carefully.
- Force majeure clauses will generally apply to specified events such as earthquakes, accidents, acts of war or terrorism, strikes, government actions or major utility outages. Sometimes there is a catch-all phrase such as extraordinary events or circumstances beyond the reasonable control of the parties. The World Health Organisation has categorised COVID-19 a global pandemic (available here) – but is a crisis of this kind covered by your contract? Or has the crisis triggered some other event, such as the suspension of international travel, that might fit within the bounds of your force majeure clause?
- Force majeure clauses generally allow you to suspend (and in some cases extend the term of) a contract while the force majeure event continues. In some cases, if the event continues for a specified period of time, the clause may allow a party to renegotiate the terms of the contract or terminate it entirely. However these rights are not automatic. They normally require parties to give notice at each point, and for specific conditions to be met before notices can be given. Importantly:
- a notifying party should not assume that a notice will simply be accepted by the other side. In an extreme case, the other side may even treat the notice as a breach
- force majeure clauses are usually (but not always) mutual, meaning either side can give notice. There may be advantage in moving first. But remember also that force majeure may affect the parties differently. The facts may work for one side but not the other
- invoking a force majeure clause may start time running against you. For example, it may begin a fixed period (say 30 days) after which the other party has the right to terminate the contract.
- So it is important to:
- think through (and if necessary get legal advice on) the rights and obligations that exist under force majeure clause and
- plan for possible for future consequences.
“Let’s just get out of this”
- In some cases, a party may not want to suspend or prolong the life of a newly onerous contract – it may just want to escape it altogether. What might it do?
Termination for convenience
- Some contracts have “termination for convenience” clauses. These clauses allow a party (sometimes both parties) simply to give notice under the contract for a fixed period (say one month) to bring it to an end. This may be a certain and convenient way for a party to cut its losses and quit. However these clauses do not exist in every contract.
- A party may be able to claim that a contract is “frustrated” – that is that an event (or events) which are not the fault of either party has led to the obligations under the contract becoming different from the ones the parties originally contemplated. The effect of frustration is that the contract comes to an end. It is not suspended; frustration does not give either side the right to re-negotiate it.
- However, the fact that the event has made it more difficult or costly for one side to perform it does not give that party the right to claim that the contract is frustrated and therefore at an end. The event must have a more fundamental effect than that.
“Manufactured” breaches and other desperate measures
- Crises frequently produce desperation. Imagine a battle between the Blue Corner and the Red Corner. Blue may fear it is trapped in a contract; so Blue may try for a quick knockout, by claiming that Red has breached the contract. Blue may refer to a past issue or minor non-compliance by Red and say “Red has breached the contract; therefore we’re terminating it now”. This can be risky because Red may counter-punch. Red can say to Blue “your claimed termination was wrong. So you are in breach – and we choose to sue you for damages.” This is a time for having your lawyers on speed-dial.
Waiver or variation
- Often, in the teeth of a major crisis, the parties will need to move fast and pragmatically. This is not a time (they say) for lawyers and fine print. So they may agree to suspend obligations for a period of time (one side may waive its contractual rights) or to vary them.
- Waiver and variation both have legal consequences. In the heat of the moment, the terms the parties agree may not have thought of everything (VAT and other tax consequences are often overlooked); or they may have not thought through the legal effect of later events. There may even be a misunderstanding about what the specific terms of the waiver or variation actually were.
- Most contracts require waivers or variations to be in writing before they are legally binding. They usually also provide that just because a party waives its rights once does not mean that it must waive them again. So even temporary re-arrangements of terms should be reviewed at the earliest time so they do not become a source of future disputes.
- Sometimes the parties can use a crisis as a time to fully review their relationship and completely re-negotiate it. A full contract re-negotiation is better done in “clear air”, not in a hurry. A poor re-negotiation, like a hurried waiver or variation, may create long-term challenges, particularly if fast-moving events again change unpredictably.
Arbitration or court proceedings?
- Increasingly, international arbitration is the norm for dispute resolution of major contracts. International arbitration can move at a much faster pace than ordinary court litigation. So a bad decision now leading to future litigation may be expensive and inconvenient – and an important factor to take into account when thinking through what you are going to do next.
Law and jurisdiction
- Contracts generally say they are governed by the law of a particular country and that disputes under the contracts will be decided under the jurisdiction of a particular country (usually – but not always – the same one). However that jurisdiction may be exclusive or non-exclusive. And regardless of what a contract says, a judge in a different country can always say (usually following previous court decisions) “I will decide this dispute anyway.” So knowing these parameters – and whether you may be put to the time and cost of fighting a court case in a country other than Fiji – is also an important consideration.
- Crises rarely produce perfect outcomes for contracts. Frequently they create winners and losers. So in a time of uncertainty it is important to understand your rights and obligations under your key contracts – and plan ahead.
The information and opinions in this Legal Alert are for general information purposes only. They are not intended as specific legal or other professional advice and should not be relied upon or treated as a substitute for specific advice. Munro Leys can accept no responsibility for any loss arising from reliance on the general information contained in this Legal Alert.