Justine Collins | Impact of the coronavirus pandemic on commercial contracts
OP-ED CONTRIBUTION: COVID & COMMERCE
THE HIGHLY contagious COVID-19 coronavirus has resulted in a series of travel bans on persons travelling to heavily affected countries and stringent policies aimed at containing the virus, inclusive of ‘social-distancing’ measures; restrictions on the opening of entertainment establishments; and the encouragement of individuals to work remotely from their residences.
The global economy has already been experiencing the negative impact of the pandemic. More than 80 countries have imposed travel bans, which have had serious implications for the airline, hotel and tourism industries.
The pandemic has had an adverse impact on commerce and trade, as travel bans have disrupted supply chains, caused import restrictions on certain raw materials or goods, and social-distancing requirements have caused employee unavailability.
Markets have been declining, reflecting the worry and fear of investors, consequent to disrupted supply chains and businesses.
Within this context, many businesses may question how they will still be expected to honour the various contractual obligations in their commercial contracts. The outbreak of the novel coronavirus was probably not an occurrence that parties to a commercial contract would have foreseen when they first agreed to the terms. Businesses which are not able to perform the contracts may need to seek some sort of relief for the non-performance, or delay in performance, of the contract.
While there are a variety of contracts which may be impacted by the pandemic, this article focuses solely on contracts for services.
Frustration and force majeure
There are two primary methods under contract law which businesses may consider: frustration of contract; and whether the contract in question has any provisions regarding force majeure. Depending on the possible outcome, you may wish to consider both.
Frustration of contract occurs when the law recognises that an event occurs – without either party's fault and for which the contract makes no sufficient provision – which so significantly changes the nature of the outstanding contractual obligations from what the parties could reasonably have contemplated at the time it was made, that it would be radically different from what was stated in the literal wording of the contract.
If the contract is more expensive to perform, or more difficult to perform, is not enough to prove frustration of contract.
The outbreak of the coronavirus pandemic is an event which may render certain obligations impossible to perform or radically different, especially with its consequent travel restrictions and limitations on the productivity of the workforce.
The effect of frustration is that the contract is discharged so that the parties do not have to perform the contract, and sums paid, or payable, may be recoverable, subject to any provisions in the contract and the provisions of the Law Reform (Frustrated Contracts) Act.
Frustration of contract can release businesses from further performing their obligations, so it is not a remedy which is successfully claimed, and cannot be lightly invoked.
Many contracts have a section that expressly excuses performance if it is rendered impossible in a predefined category of unavoidable events that are outside the reasonable control of the parties. These may range from war, riots, civil disorder, earthquake, fire, explosion, storm, flood or other adverse weather conditions, strikes, lockouts or other industrial action or acts of God.
This is typically called a force majeure clause. Each clause attempts to enlist a number of events as the parties try to predict events which may render the contract impossible and seek to provide a predefined course of conduct or remedy, which may include termination, if it occurs.
Most force majeure clauses may not necessarily contain express provisions for pandemics. It is possible that it may, however, qualify as an ‘act of God’ which is typical in standard force majeure clauses. This is defined as “an extraordinary occurrence or circumstance which could not have been foreseen and which could not have been guarded against or, more accurately, as an accident due to natural causes, directly and exclusively without human intervention, and which could not, by any amount of ability, have been foreseen, or, if foreseen, could not, by any amount of human care and skill, have been resisted”.
Additionally, consumer contracts may be subject to certain statutory controls on the invocation of force majeure clauses.
Section 38 of the Consumer Protection Act requires that any such clause in which claims to render a contractual performance substantially different from that which was reasonably expected of him in a consumer contract, be subject to the requirement of reasonableness. Entertainment organisers may wish to consider this requirement of reasonableness in their cancellations and/or postponement of events and the effect on consumers.
However, whether the outbreak of the coronavirus pandemic and any of the governmental actions are force majeure events will depend on the interpretation of the actual clause by a court and the circumstances, including the impact of the pandemic and the intention of the parties.
Renegotiating contractual obligations
In any event, the current economic and public health context provide a level of uncertainty in the performance of contractual obligations which may have seen possible but for the outbreak of the coronavirus pandemic.
Many commercial contracts were predicated on the anticipation of certain revenues which may have been feasible for the business, but social distancing and travel restrictions may now see a drastic reduction in these projections. Jamaica, in particular, with its reliance on the tourism industry, may begin to see some businesses be negatively impacted.
The nature of the ‘disaster’ declaration may lend itself to a context within which businesses may wish to renegotiate or suspend payments in certain situations. Parties may wish to ‘revisit the drawing board’, given that the pandemic has affected the global environment.
Whether you operate a large conglomerate or a smaller business, it is likely that you will have to evaluate the impact of the coronavirus pandemic on your contractual obligations.
Useful tips to manage the risks:
1. Review your contracts to see whether you have any force majeure clauses presently in them. Evaluate them to see whether they list pandemics and resultant commercial disruptions;
2. Review your business continuity/disruption policy to see whether you are insured for any outbreaks of epidemics or pandemics, and the amount of any coverage;
3. Consult your business, accounting and legal advisers to see whether the force majeure clause is applicable in the present circumstances;
4. Improve language in your future commercial contracts, if applicable in the circumstances, have force majeure clauses which are extensive and exculpatory effect by using very wide language, especially if the performance of the contract may be affected by events beyond the reasonable control of the parties;
5. Create or improve on your risk management/business continuity plan to provide internal processes in the outbreak of pandemics to minimise your losses;
6. Where possible, attempt to mitigate the losses which you may have incurred from the pandemic, by employing self-help remedies. Mitigation is one of the considerations which a Court may consider in deciding whether to uphold a force majeure clause. Can you still perform the obligations using technology or electronic means? Document and record all the steps which you have employed to mitigate against the effects of the pandemic in your business.
7. Ensure that you have effective messaging and communication to your suppliers or customers showing the steps you have taken to mitigate and manage the risk posed.
Justine A. Collins is an attorney at the law firm Hart Muirhead Fatta.