Contracts and Covid-19 ― Shalini Ganendra

MAY 16 ― Loss is the  overarching construct during the horrific trajectory of this Covid-19 pandemic ― loss of life, loss of liberty,  loss of security, loss of financial support and loss of physical connection.

The economic repercussions are extensive, as seen more immediately with stock market declines and record unemployment rates.

What comes next? Now we will see an unfolding legal narrative with players being nations,  corporates, organisations and individuals with the increases in loss of lives, revenue, profit and other damage. 

Who did what to whom, and who should pay for it. 

What are the  legal ramifications of the pandemic on our contracts, and specifically the performance of these contracts. 

In construction, for example, who is liable for delays and consequential losses? What payments are due even in the event of such delays? 

What happens if the contract cannot be completed? A minefield for litigation and a field day for legal academia. 

The basic contractual  principles that apply here are those of force majeure and frustration. Laws relating to these principles are country specific, so in this article, the author will briefly consider common law principles and Malaysian law, coupled with strident advice to consult with counter party and non-litigious legal counsel.  

Even before such consultation, in the interests of efficiency and information, consider these steps.  

First and foremost, know your contract in detail. Review the terms carefully, individually and as a whote. Then consider these. 

1. Force majeure: A contract must specifically state the application of force majeure for this principle to apply at all. Even if so stated, its application  to any set of circumstances should  be considered based on a reading of the full contract ― essential terms and the spirit of the agreement.  (For eg.  What are the objectives of the contract? How is the contract performed? What alternative methods of  performance are feasible and would have been permitted during the period in question? )

Thus, each contract should be viewed specifically because a blanket application of force majeure is not possible. Ask the question ― how is this contract performed and what does it depend on for delivery?  How then has the pandemic affected this delivery? Could delivery methods have been legally modified to continue despite the restrictions of the pandemic? What is the result we want for the contract? How do we want to see it go forward?

So, for example, a contract that can be performed or easily adapt to virtual and digital means to perform, would not be as affected by the pandemic as a contract that requires close human proximity and engagement. 

If the force majeure clause is to be invoked, a notice of the same must be given by the invoking party (the “Invoker”) to the other contracting party. The Invoker must take reasonable steps to mitigate the adverse effect of the pandemic and to be able to show that such steps have been taken. We see here the overarching jurisprudential concept of good faith and best efforts which should dominate our psyches during times of crisis. 

Usually, a force majeure clause only suspends the performance of the contract for the period that the covered event subsists (though sometimes the contract may provide for automatic termination).

2. Frustration: If  the contract does not have a force majeure clause, then parties can only rely on the  doctrine of frustration. Refer here to the statute codifying common law. Section 57(2) of the Contracts Act 1950 provides: “[a] contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

The doctrine of frustration has similar effect to a force majeure clause, in that it relieves a party from contractual obligations if an intervening event has disrupted continued performance of the contract. But, case law shows that  the frustration principle is justifiably applied sparingly such that a contract is not frustrated just because it becomes more difficult to perform. 

Importantly, note that when a contract has been frustrated, the performance of the contract ends permanently, as opposed to the effect of a force majeure clause which depends on the source contractual provisions.   

Now is the time to also plan for the future. Going forward, contractual drafting should consider in detail contemplated possibilities of force majeure events and cover the same with specificity and clarity. Covid-19 today but what will tomorrow bring?  

Better still ― include in contracts contemplated and alternative methods of delivery, performance and payment, in the event of repeat scenarios.

Now is the time to amend existing contracts and revise standard forms, to incorporate such mindful consideration of, inter alia, the what, when and how.  

Clarity of terms, provision of alternatives with adaptability, statements of possible solutions ― all support preventive contractual dynamics to support continuing relationships and delivery.   

Litigation is expensive and comes with opportunity cost. With fair legal review of contracts, compromise, consideration of relationships, healthy doses of goodwill ― mutual and holistic  analysis can lead to agreement and settlement that not only saves time and money, but also builds and continues good relationships to carry productivity forward. 

Certainly, one of the biggest take-aways from this pandemic should be that our relationships are ultimately personal, whether the contract is between individuals or organisations.

Everything ultimately has a human face. Appreciation of this personal essence will keep our communities and economies alive and well, figuratively and literally.     

* Datin Shalini Ganendra is a qualified Barrister and New York Attorney.  She read law at Cambridge University, and has an LL.M. from Columbia University Law School, and practised corporate finance law with a Wall Street firm before the establishment of her eponymous international cultural advisory.

** This is the personal opinion of the writer and does not necessarily represent the views of Malay Mail.

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