A road construction project. FILE PHOTO | NMG
Kenyans have been in a state of panic since the outbreak of the novel Coronavirus disease 2019 (Covid-19).
From
a projects perspective, contractors have been a particularly worried
lot, seeing as the pandemic has affected supply chains and their ability
to meet their contractual obligations.
The impact on
projects is already being felt with funding, project delays and even
requests for contract variation. With the Kenya shilling also coming
under pressure, there is a risk that some of the contracts denominated
in foreign currency (which is the case for most large infrastructure
contracts) could also go into payment default. The real question for
contracting parties therefore, is whether their contracts are robust
enough to withstand the effects of the Covid-19 pandemic.
Legal
teams across the globe have been busy analysing contracts so as to
determine the best way forward in instances where the Covid-19 pandemic
affects performance by a party.
The options available
to parties will depend on their specific contracts but the hitherto
unknown term “force majeure” is very widely being bundled around at the
moment. Force majeure relief is simply defined as relief where a party
to a contract is prevented from performing its obligations on account of
supervening events outside its control. The contract would need to
allow for such relief, in which case a number of considerations would
come into play.
First, the affected party must promptly
issue a force majeure notice to the other party. The notice must set
out in enough detail the nature of the force majeure event, how it
affects performance of its obligations and an estimation of the expected
duration of the force majeure event. The notice should also be clear,
as to the relief sought by the affected party.
The
party receiving notice will want to assess the claim and could agree to
proceed on the basis of force majeure. In the case that it does not, a
dispute may arise and the contractual provisions would guide on the
steps that the parties should take to resolve the dispute.
Assuming no dispute, the affected party shall need to mitigate
the effect of the force majeure event. This could mean partial
performance where that is possible and where not possible, taking steps
to minimise any loss until such time as the force majeure event is
cleared or cured.
If for example, a contractor was
relying on labour resources or equipment to be shipped from an affected
country, there would be an expectation for the contractor to try and
seek alternative sources that are comparable in terms of quality and
cost, where those exist.
The affected party should
provide regular updates on the state of the force majeure event and any
action that it is taking to remedy the situation or mitigate losses. It
would be unacceptable that after issuing the notice of force majeure, an
affected party goes mute leaving its counter party in the dark as to
how and when the situation is expected to normalise and for how long the
relief extended should continue.
It follows that the
affected party should also provide prompt notice to the other once the
force majeure event falls away, as it would be unfair for a party to
continue enjoying relief when there is no longer a hindrance to
performance. Subject to the specific terms of the contract, in cases
where the force majeure event prevails for an extended period of time,
parties may want to explore an extension of the period allowed for
performance under the contract or to terminate the contract as a last
resort.
The Covid-19 outbreak poses a unique set of
challenges. It has been declared a pandemic. Many force majeure clauses
will have envisaged acts of God, epidemics, endemics, plagues, among
others and the question will be whether a pandemic or resultant acts of
government such as closing its borders thereby affecting transport to
and from affected countries, fit within such criteria so as to qualify
for relief.
One must also presume that even as
contractors get to the point where they have to issue the force majeure
event notices, they will also be in turn receiving similar notices from
their subcontractors where they have subcontracted portions of the work.
It will therefore require a delicate balancing act to arrive at a
middle ground that works for all parties.
One of the
takeaways from the Covid-19 pandemic is that going forward, parties need
to take a fresh look at the force majeure clause to ensure that it is
robust enough to cover developing situations. In the current
circumstances, and considering that the Covid-19 pandemic is expected to
affect parties across the board, it is high time they conducted a
thorough review of their contracts to understand the implications on
them and engage with their counter parties on the best approach.
It
is worth noting that the Kenyan government and the Central Bank of
Kenya have taken measures to help affected businesses in a stimulus
package which includes concessionary tax rates, temporary suspension of
listing on the Credit Reference Bureau (CRB) for entities whose loan
account falls in arrears from April 1, among others. Hopefully this will
go some way towards helping affected businesses ride the storm.
Beatrice Nyabira, Partner and Head, Projects, Energy & Restructuring Practice, IKM Advocates
Eunice Mwikali, Associate, Projects, Energy & Restructuring Practice, IKM Advocates
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