Corona & contracts

13 Apr 2020

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The writer is a lawyer.
The writer is a lawyer.

THE current pandemic has exposed the Pakistani economy to one of its greatest challenges in recent times. As various businesses calm their nerves and begin to pick up the pieces of what remains of their respective operations, big issues relating to what is next and how to restart activities are looming.

In the coming days, issues in relation to contract performance will be in focus. In other words, businesses will be looking at their options of how to get out of costly contracts. As the length and severity of the lockdown increases, the commitment of every business to fulfil its pending contractual obligations will be tested.

Several questions will inevitably arise. Would an economic downturn in and of itself be sufficient to exempt or excuse oneself from fulfilling commercial commitments? If the current situation has resulted in a lack of cash liquidity, would that be enough to show impossibility of performance? If not, then what if the pandemic has made a commercial transaction financially unfeasible? If nothing else, how about in a situation in which carrying out the contractual obligation would have the effect of putting the company out of business?

All these questions are extremely pertinent to the times, and in order to answer them, a look at the contract in and of itself would be very important. In Pakistan, as well as in other common law jurisdictions, complex and high-stake contracts tend to contain what one calls a ‘force majeure’ clause. In simple words, the clause is inserted to safeguard against unforeseen events which are beyond the control of the parties in question. It earmarks specific events, which if resulting in non-performance, shall cause the latter to be excused or pardoned.

What does the pandemic mean for businesses?

These clauses are interpreted keeping in mind a variety of factors, including the language and phrasing of the clause, the nature of the non-performance, as well the link between the force majeure event and the non-performance in question. However, unless specifically catered for in the clause itself, generally, such clauses do not include financial difficulties or an economic downturn per se as a reason or excuse not to perform. In fact, such clauses are read narrowly and conservatively, so as to save the contract, as opposed to rendering it futile.

For example, in situations where intense and absolutely unforeseen price hikes or fluctuations have rendered a contractual obligation unfeasible, or ‘commercially impossible’, courts have often been seen to consider such an issue as falling outside the purview of such clauses, specifically because the commercial viability of a contractual obligation relates more closely to commercial inconvenience than to legal or physical impossibility.

Hence, in essence, even if the pandemic has resulted in a situation in which a business is unable to make payments to a vendor, whether in light of a disruption in revenue, or just on account of the strain on one’s working capital needs, this factor alone may not be sufficient for invoking force majeure.

This is not to say that no situation whatsoever would be covered by such clauses. Although the clause is often narrowly construed, it is possible that the present lockdown may provide grounds for its being invoked.

For example, if in light of the lockdown, the closure of offices and ban on movement, parties are physically unable to render certain payments due under a contract, as such performance would be ‘physically impossible’, then it is conceivable that such circumstances may give rise to a valid invocation of the clause in question. However, as noted, multiple factors would be considered.

Alternatively, where a force majeure clause does not figure in a contract, the parties may attempt to claim that the contract has been frustrated, and is therefore liable to be terminated, on account of an impossibility in performance. However, even in such a case, the test remains stringent, and amongst other things, physical and legal impossibility, as opposed to commercial impossibility, would have to be shown for the defence to have any teeth.

All in all, the lifting of the lockdown and easing of the pandemic concern after an extensive period of time, although welcome, would not be a panacea to the business community’s problems. Quite to the contrary, at the other end of the ordeal loom issues of contractual breaches and systemic defaults. In relation to such matters, and in order to protect itself, the community would have to think ahead and prepare its contingencies accordingly. If it fails to do so, the consequences would not bode well for the country at large.

The writer is a lawyer.

basil.malik@rmaco.com.pk

Twitter: @basilnabi

Published in Dawn, April 13th, 2020