For startups: 6 common legal questions on pandemics, contractual obligations answered

by | Apr 15, 2020

If you have been paying attention in the past month since COVID-19 was declared a pandemic, you may have noticed the popularity of the legal concept of ‘force majeure’.

Force majeure refers to the occurrence of an event which is outside the reasonable control of a party, preventing said party from performing its obligations under a contract.

As businesses look to soften the blows of the pandemic, they keep asking whether they can avoid obligations under existing contracts by claiming the COVID-19 pandemic and the shutdown orders as force majeure events.

These are some answers to their questions.

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Does the COVID-19 outbreak constitute a force majeure event?

contract

First, if there are no force majeure provisions in the contract then it cannot be relied on.

Second, the pandemic in and of itself will not amount to a force majeure event, except the contract expressly states a disease outbreak as a possible a force majeure event.

However, the lockdown orders by the federal and state governments, such as border closures, lockdowns, and travel restrictions, which make it impossible for a party to perform their obligations under the contract may amount to a force majeure event.

What if the contract does not have a force majeure clause?

No force majeure clause? No problem. A party may can rely on the legal concept of frustration.

Frustration acts as a device to set aside contracts where an unforeseen event either renders contractual obligations impossible, or radically changes the party’s principal purpose for entering the contract. Invoking frustration acts to terminate the contract completely.

Can my company suspend its obligations to pay for services under a contract, considering the pandemic?

This has been a popular yet complex question. Force majeure does not protect a party if the force majeure event only makes payment of monies difficult or more painful for example, as a result of reduced earnings.

Making payments has become easier in an increasingly cashless world. This makes it difficult to rely on force majeure provisions to suspend payment obligations especially where the other party is willing to continue providing services under the contract.

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Companies having this problem may consider discussing a temporary suspension of the contract with the other party rather than going the force majeure route.

Can a party rely on force majeure to suspend its other obligations under a contract, considering the pandemic?

To be able to rely on force majeure, the party must show that the occurrence of the pandemic has made it physically or commercially impossible to perform obligations under the contract.

Government-imposed measures such as lockdowns and restriction of movements are reasonable factors capable of preventing the performance of certain contractual obligations.

We have entered a commercial arrangement like a share acquisition which is not yet completed. Can the outbreak of the pandemic entitle a party to terminate the agreement or delay completion?

A lot will depend on the effect of the pandemic on the business or asset in question. Where the asset has been greatly affected, the buyer may rightly argue that a material change has occurred, which entitles them to abandon the contract.

What if a company does not agree that the pandemic justifies the failure of the other party to discharge its contractual obligations?

If a party believes that the pandemic does not justify the non-performance of the counterparty’s obligation under the contract, it may bring and action that party for breach of contract, in addition to other claims allowable under the contract.

We will be seeing a lot of these matters in court after this season. Companies looking to invoke the current pandemic to avoid obligations under existing contracts must consider taking competent legal advice before doing so as it might open the gateway to court suits and claims for damages.

DISCLAIMER: The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

Featured image by ready made from Pexels

Enyioma Madubuike is a legal consultant with experience in providing support to companies in Africa, Europe and the Middle East. He leads the team at Lawrathon.com, a legaltech company providing 24/7 support to African technology businesses.

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