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Effects of COVID 19 on Commercial Contracts – Force Majeure and Doctrine of Frustration

Effects of COVID 19 on Commercial Contracts – Force Majeure and Doctrine of Frustration

Introduction

On 11th March 2020, the World Health Organization (WHO) declared the Corona Virus (COVID-19) as a pandemic. The Kenyan Government on 14th March 2020 reported the first case of COVID-19 in Kenya. The Government has subsequently issued directives aimed at containing the pandemic. This will lead to disruptions of many businesses, unfulfilled obligations and provision of services.

Owing to the numerous directives issued by governments across the world, there is a possibility that contracts entered by parties may become temporarily or permanently impossible to perform. This ultimately raises the question, how does COVID 19 affect the performance of contractual obligations and can the force majeure clause or the doctrine of frustration be called up in the upsurge of the COVID-19 pandemic?

Force Majeure

A force majeure clause is found in most commercial agreements that relieves parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal or impossible. The effect of the clause is that the defaulting party notifies the other party of its inability to perform its obligations under the contract in order to be excused from performance for a period. It acts as a defense for a party unable to perform its obligations under the contract.

The party seeking to rely on a force majeure clause will need to be able to demonstrate that the force majeure event is captured by the clause; and that it is linked to the party’s inability to perform the contract.

Exceptions

Generally, under contract law, force majeure will not apply:

  1. If the contract does not have a force majeure clause;
  2. If the force majeure clause does not cover an event being claimed by a party (for instance, if a force majeure clause does not include events such as pandemics, a party may not rely on it to cite the effect of COVID – 19);
  3. Where a contract is entered into after the force majeure event; and
  4. Force majeure event occurs after the affected party’s delay in performance.

Doctrine of Frustration

In the event that the contract does not include a force majeure clause or the force majeure clause does not include a pandemic or epidemic such as COVID – 19, it is possible for parties unable to perform their obligations to invoke the doctrine of frustration. A party seeking to terminate a contract under the doctrine of frustration should be able to demonstrate that an event has occurred which:

  1. Was not foreseen;
  2. Is beyond the parties’ control; and
  3. Makes the performance of the contract impossible or radically different from that which the parties contemplated at the time of entering into the contract.

Final Thoughts

It is important to ensure that a contract contains a well drafted force majeure event in order for parties to be able to rely on the same in the event of catastrophic cases such as the COVID – 19 pandemic.

Similarly, in order for parties to be able to rely on the doctrine of frustration to terminate a contract, they should ensure that the frustrating event “significantly” changes the nature of the outstanding contractual rights or obligations rendering it impossible for parties to proceed with the implementation of the contract as previously envisaged.

In the event that performance of contracts is affected by COVID – 19, parties have several options to consider such as:

  1. Suspension of contracts where feasible under force majeure clauses;
  2. Reliance on contractual clauses to exclude liability;
  3. Extension of long stop dates and performance deadlines;
  4. Negotiation of standstill arrangements;
  5. Mutual variation of contracts; and
  6. Termination of contracts under contractual clauses and the doctrine of frustration.

If you have any queries regarding the effects of COVID – 19 on commercial contracts and other related matters, please do not hesitate to contact Bernard Musyoka at bmusyoka@mwc.legal.

 

 

 

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