MySay: Legal ramifications of the pandemic on our contracts

This article first appeared in Forum, The Edge Malaysia Weekly, on May 18, 2020 - May 24, 2020.
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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.

Recorded as starting in China, with much source information still unclear, the outbreak spread indiscriminately and the whole world is in shock. This photogenic virus has caused greater fear than most wars because it can touch everyone and in unforeseen ways.

The economic repercussions are extensive, as seen more immediately with stock market declines and record unemployment rates. Crisis management by world leaders has tested their organisational efficiencies, political, health and other administrative systems. Leaders of Germany, Australia and New Zealand get gold stars for stellar management, by issuing clear, transparent and frequent statements to the public — communications that reflected a realistic understanding of the situation, clever response to containment and firm control over the crisis. With what appears to fit in nicely with the saying “the truth will set you free”, these nations are now seen as case studies to emulate, making, of course, necessary adjustments for local cultural variations and institutional constructs.

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

On a sovereign level, Australia Prime Minister Scott Morrison is leading the charge for an inquiry into China’s handling of the pandemic. He has rightly noted: “Now, it would seem entirely reasonable and sensible that the world would want to have an independent assessment of how this all occurred, so we can learn the lessons and prevent it from happening again.”

However, claiming against China for actual damages resulting from any determined mismanagement of the pandemic will be a completely different scenario, mired by the realities of limited enforcement under public international law.

What affects us more immediately — as businesses and individuals — 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? It is a minefield for litigation and a field day for legal academia.

The basic contractual principles that apply here are the overarching legal concepts of force majeure and frustration. The law relating to these principles will be country-specific. So, in this article, I will briefly consider common law principles and Malaysian law, coupled with strident advice to consult with counterparty and non-litigious legal counsel. Before even such consultation, in the interests of efficiency and sanity, consider these steps.

First and foremost, know your contract in detail. Review the terms carefully individually and as a whole. Then consider the following:

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 example: 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 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 be able to show that such steps have been taken. We see here the overarching jurisprudential concept of good faith and best efforts that should dominate our psyches during times of crisis.

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

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.

So, now, let us plan for the future. Looking ahead, 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 to include in the contracts alternative methods of delivery, performance and payment schedules in case of such an event. Now is the time to amend operating contracts and revise standard forms, with mindful consideration of, inter alia, the “what”, “when” and “how”. Clarity of terms, provision of options showing adaptability, statements of possible solutions — all support preventive contractual cures and support continuing relationships and modified delivery.

Litigation is expensive, rarely cost-effective and has opportunity cost. With fair legal review of contracts, application of terms, compromise, consideration of relationships, healthy doses of goodwill, such mutual and holistic analysis can lead to agreement and settlement that not only saves time and money, but also builds confidence in relationships to carry productivity forward.

Certainly, one of the biggest takeaways from this pandemic should be that our relationships with people and institutions are ultimately personal and not faceless, with ramifications on our lives. Let us prepare, compromise, commune and pivot to grow lives and economies.

Datin Shalini Ganendra read law at Cambridge University, and has a master of laws from Columbia University Law School. She is a qualified barrister and New York attorney. She practised corporate finance law at a Wall Street firm for a number of years before the establishment of her eponymous international cultural advisory.

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