How to Protect your Company Contracts from COVID-19: Key takeaways from MEST Presents with MyLaw
This post was written by MEST’s Head of Community Relations, Lundie Strom, for MEST.
Across the continent and around the world, many contractual obligations are now difficult or impossible to honor due to current circumstances. In addition to increasing stress on business owners personally and professionally, consequences including forced closures, reduced or no revenue, costs and expenses rising, and the inability to deliver or meet targets might also have significant legal implications.
On the May 6th edition of the MEST Presents weekly webinar series, Isochukwu Michael of Legex Partners and MyLaw Nigeria joined MEST Africa to discuss the legal implications of COVID-19 on businesses, and how to better protect yours from them.
Keep reading for some easy-to-understand explanations of four legal clauses and principles you should consider during COVID-19 (or any unforeseen circumstance in the future), and how you can use them to legally protect your company.
THE FORCE MAJEURE CLAUSE:
A contract’s force majeure clause protects a party from their requirement to perform a contractual obligation, if there is something unforeseeable and uncontrollable that stops him from doing so (looking at you, COVID-19).
In order to be protected under the force majeure clause, the situation must pass three tests:
- Unforeseeable → you did not anticipate this situation would happen.
- Uncontrollable → there was nothing you could do to prevent or change the situation.
- Intolerable → you are currently unable to endure the situation and move forward.
Major events such as war, natural disasters, government policy, and (you guessed it), a pandemic such as COVID-19, successfully check all of those boxes.
Isochukwu outlined three possible action plans:
- Renegotiation of terms → sit down and talk (in this case, virtually!), with the other party in order to change or extend the performance deliverables based on what is still possible under the current circumstances.
- Suspension of contract → pause the contract and then resume it again once the current circumstances have subsided or changed to allow for its success.
- Termination of contract → if circumstances persist for an extended period of time or past the original length of the contract, you can cancel it altogether.
“I own a business in Accra which delivers my products to customers on a monthly basis. Both I and my customers sign a contract outlining terms of payment and delivery. Due to the government’s restriction on movement during COVID-19, I am unable to deliver my products, and therefore, I’m not able to hold up my end of our contract.
Can I be covered under the force majeure clause?”
YES. Because you did not foresee COVID-19 interrupting your ability to complete your work, and now the situation is beyond your control, you are protected under this clause and can tell your customers you will suspend your current contract until you are able to safely deliver your products to them again.
The force majeure clause looks to protect both parties, Isochukwu explained, and requires the clause to be explicitly stated in the contract to protect you.
So, what if you’ve made a formal agreement with someone, but never signed a contract?
THE PRINCIPLE OF FRUSTRATION:
While the force majeure clause can only be relied on if explicitly listed in a contract, Isochukwu explains that frustration is a more all-encompassing common law principle that can come into play in situations where there are no force majeure provisions in your contract, or when your contract is verbal.
The principle of frustration is available to both parties when certain unforeseen and uncontrollable circumstances (similar to those required by the force majeure clause) are met.
While the force majeure clause gives parties some flexibility in how they want to change/adapt the contract terms, the principle of frustration allows both parties to jump straight to ‘termination’ immediately, and restore them to a position they would have been as if the ‘frustrating’ event had never happened in the first place.
“I recently made an agreement with a local cafe that I would paint a mural on their storefront for 50k NGN, but never signed an official contract. Due to government restrictions, the cafe has since had to close. Do they still have to pay me?”
NO. The cafe can claim the principle of frustration as its justification for no longer honoring your agreement. Due to the imposed restrictions of COVID-19, the circumstances that the agreement was made under no longer hold, and therefore the agreement can be terminated.
Now, what if you’re still technically able to hold up my end of the contract, but it’s just extremely difficult for you to do so?
THE HARDSHIP CLAUSE:
The hardship clause provides that the parties can renegotiate a contract if a continued performance of one party’s contractual duties have become burdensome due to an unforeseen event beyond the control of that party.
The key difference here is that although performing the contracted obligation is increasingly difficult, it is still possible (unlike the force majeure clause, which requires the tasks to be rendered impossible).
In this case, both parties still want the contract to be implemented, but take the new circumstances into account to renegotiate, change, add to or remove from the contract as it stands. The goal is for the contract to still stand.
“Due to food shortages and lack of delivery options during COVID-19, the government imposes a tax liability on a product of 60%. At the time of the contract signed with my supplier, it was only 10%. Can I ask my supplier to readjust the contract?”
YES. In this case, the hardship clause allows you to take into account the difference in pricing (or mode of delivery, etc) and allows you to renegotiate the contract terms in order to ensure both parties can continue to implement them successfully.
And finally, what about if once this all subsides, you realize one of your contracts will no longer give you the same profit you were expecting?
THE PRICE REOPENER CLAUSE:
Finally, Isochukwu told us, comes the option of the price reopener clause. “The most conventional of all four considered, the prince reopener clause allows parties to reopen a contract and reconsider or renegotiate prices at any time.”
The requirements for doing so are much less strict than for the force majeure or hardship clauses. In this case, any time one party realizes that the contract will no longer be profitable to them as it stands, this clause can come into play.
Unlike the previous clauses, this one does not require a grand unforeseen circumstance or a major change in difficulty to apply. As long as both parties agree, you can use this clause to propose a renegotiation of pricing terms, at any time.
“My sub-contracting business has agreed to do a job for a company for $1,000, plus give me a showcase table at one of the company’s large events in order to gain exposure for my brand. Due to COVID-19, the event has been canceled. Can I ask for the value I’m losing out on to be added to my monetary compensation instead?”
YES — if the company agrees. Using the price reopener clause, you can ask the company to reconsider adding to your payment in exchange for the value you are no longer getting from the in-kind item.
In all cases, any time you aim to reopen or renegotiate a contract, Isochukwu recommends you always:
In order for any renegotiations or reconsiderations to take place, you need to openly and professionally communicate your asks to the opposing party, your customers, or your team. Don’t leave out any key details, and be clear in your requests and concerns to avoid any misunderstandings or confusion.
Get it in writing.
Always ensure your negotiations are documented in writing to clearly outline what has been agreed to and to refer back to down the line when necessary. Even when the need for a contract is questionable, Isochukwu suggests you at least execute an MOU (Memorandum-Of-Understanding) and ensure both parties sign (during this time of social distancing, use a legitimate online signatory platform).
Seek professional assistance if you need it.
Not sure which of the above applies to your situation? Head to mylaw.ng to access legal advice, services, and lawyers from all over the world.
Check out what’s next up on the MEST Presents webinar series here. See you next week!
Learn more about MyLaw and how you can access their legal services to speak to a lawyer here.