In our last post, we considered some of the issues faced by businesses in the wake of the pandemic and the various options available for mitigating its effects on the operation of your business. Today we will be considering a major issue faced by businesses which is the difficulty in fulfilling contractual obligations due to Covid-19.
If you took out loans before the outbreak of Covid-19, you are most likely facing the possibility of not being able to service your loan as a result of reduced revenue generation and cash flow and this may hinder your ability to comply with obligations under your loan agreements. Now, loan agreements are just one of the many agreements that businesses often enter into, other agreements include supply agreement, lease agreements, service level agreements etc.
We should point out that Covid-19 does not absolve you from fulfilling your obligations in an agreement. You need to consciously protect yourself and your business from eventual liability for breach of contract caused by Covid-19. There is a need for you to identify the contracts more susceptible to the negative impacts of Covid-19 and decide on the appropriate steps to avoid liability.
You can mitigate the impact of Covid-19 by reviewing those key contracts and paying specific attention to the following clauses:
- Force Majeure (FM)
- Events of Default
- Material Adverse Change
- Further assurance
- Price review
- Termination etc.
You probably need a lawyer to provide you with a detailed review and implications of the terms listed above. Nonetheless, we will consider the implications of Force Majeure in a contract.
A lot has been said about the significance of a force majeure clause (which literally means “superior force”) in a contractual agreement. In simple language it means when a superior force i.e. specified events identified in the agreement which makes it difficult to fulfil contractual obligation occur.
In other words, you can rely on the application of the clause to excuse the non-performance of your obligations or even potentially terminate a contract if certain specified events occur. However please note that you can only rely on a force majeure if it is expressly contained in a contract, if it is not included in a contract, then you cannot rely on it. However, for loan agreements, you’d hardly find force majeure clauses included in them and rightly so because lenders want their moneys returned irrespective of any unforeseen events or circumstances that may occur.
In the instance where a contract does not contain a force majeure clause, the common law principle of Frustration can be relied on as a ground for a party’s inability to fulfill its contractual obligation. Frustration happens where certain unanticipated events make performance of a party’s obligations under a contract impossible. As a business owner, you must be able to prove that a Frustration has occurred, and this is because a court would not grant this relief if the frustrating event complained of has merely made the performance of the contract more expensive.
It is therefore imperative for you to carefully consider the applicability of force majeure and the principle of frustration in your contracts. This is because the court interprets them strictly because of their impact on parties’ rights and obligations.
Renegotiating Contractual Agreements
As a business owner you should consider renegotiating some of these contracts to cushion the effect of Covid-19 on your business. Renegotiating relevant contractual terms particularly those identified earlier with the other party is a step in the right direction. It is important to do this because the extent of disruption that covid-19 can cause has not been fully ascertained, you can therefore save yourself the drama by going back to the drawing board. Please put into writing any negotiated changes or amendments to an existing contract.
I know some business owners particularly those in the supply chain and retail sector do not have a formal contract with suppliers. This is the time to save yourself form potential liability by adopting negotiation as a tool. It is important for you to negotiate and renegotiate the terms of the oral understanding you have with suppliers, partners or other service providers. Trust is never enough, put that understanding into writing.
In our next post, we will consider financing and other related matters
By: Abimbola Adekoya