Contractual solutions to help maintain your client base and safeguard your business
May 12, 2020
By Mustafa Khalid
It is fair to say that, currently, most businesses are focused on sustaining operations rather than contemplating the risks of being unable to carry out their contractual obligations. However, it is essential for businesses to begin assessing such obligations affected by Covid-19 and evaluating how to manage the actual and potential legal implications which may follow.
In this regard, an overwhelming majority of legal analysis surrounding Covid-19 has been focused on discussing “force majeure”, a previously obscure protection clause commonly found buried in the fine print of a contract. Briefly, force majeure is an event which is beyond the control of a party to a contract and which prevents that party from performing its obligations under the contract. While there is no doubt that reliance on this clause may now be critical to the survival of certain businesses, it is important to consider that most force majeure clauses will not provide a “one-size-fits-all” defence to businesses that are unable to perform their contractual obligations as a result of Covid-19. For instance;
- Force majeure clauses may not be drafted so specifically as to reference terms that apply to Covid-19 such ‘Epidemic’, ‘Pandemic’ or ‘Act of God’
- A force majeure clause may contain several conditions, such as requiring the affected party to first minimise or mitigate the impact of the event on its ability to perform.
As such, in situations where invoking force majeure is not a viable option, it would be useful for businesses to proactively manage their contractual relationships in order to reach a mutual agreement on their obligations.
From the outset, businesses should engage with counterparties in good faith, in order to renegotiate the terms of their contract. Alternatively, they may seek to execute transitional agreements which suspend their existing contracts and solely govern their relationship during the current crisis. In both scenarios, businesses should embed sufficient flexibility in their contracts to accommodate any further instability that may be caused by the current pandemic.
This can be actioned by incorporating the following:
- Alternative procurement methods based on redistribution of costs and risks;
- Exit mechanisms where it can be demonstrated that costs have increased exponentially, or materials have become impossible to find;
- Prioritising resources which are less susceptible to restrictions on movement, such as local labour and locally produced goods;
- Flexible payment terms where interest or loan repayment may be waived;
- More stringent co-operation and information obligations;
- Temporary suspension of the application of force majeure; and
- Provision for the gradual return to the original agreement and what constitutes sufficiently normal conditions once the crisis abates.
Additionally, businesses should consider appropriate Business Continuity Plans (BCP) and while renegotiating, include clauses to ensure that a counterparty has robust BCPs in place. In the current scenario, it is imperative that a BCP appropriately accounts for the risks associated with a pandemic and is comprehensive enough to anticipate a disaster that is global in its scope and impact. Similarly, it should support long-term solutions, with contingencies for foreseeable risks, such as factory and office closures and emergency lockdowns, that can be reactivated at any time. Given the fluid nature of BCPs, contracting parties should ensure that there are stringent reporting and communication obligations whereby a party would be required to notify the other of any material changes to the BCP and provide an update when the same has been invoked.
Whatever the chosen approach, contracting parties should ensure that any new terms agreed upon are clearly phrased to limit the possibility of challenges at a later stage, due to the fact that Article 265(2) of the UAE Civil Transactions Code (Federal Law No. 5 of 1985 of the UAE), states the local courts may enquire into the intentions of the parties, the nature of the transaction and current business practice to interpret the contract in the event that the parties contractual obligations are not adequately spelled out.. As such, contracting parties should ensure that any amendments to or substitution of their original contract are well-documented and sufficiently capable of defining each party’s revised contractual obligations during the current crisis.
Resolution of actual or potential disputes by proactively managing contractual relationships is consistent with the current business and societal imperative to maintain normal business activity and preserve market stability as far as possible. Additionally, doing so will ensure that further goodwill is created between the parties, leading to future business opportunities when ‘normality’ resumes.