COVID-19: Handling contract obligations, negotiations

On December 31, 2019, China alerted the World Health Organisation (WHO) to several cases of unusual pneumonia in Wuhan, a port city of 11 million people in the central Hubei province.  This pandemic, which started as a news item a few months ago, has taken its toll on the world’s economy as international trade has been affected.
The virus has killed about 27,250 people and infected more than 594,377 worldwide as of  March 28, 2020.
International and local trade has been adversely affected, but there is a need to realise that the most affected are the local entrepreneurs who are not well acquainted with the application of contractual terms and conditions. Ninty-five percent of supply chains are being significantly disrupted while businesses’ rights and obligations under contracts are coming into sharp focus. This article strives to enlighten the local contractors or suppliers who are undergoing a bad patch during this pandemic. This condition may be equated to the global recession of 2008/2009. It was a global economic downturn that devastated world financial markets as well as the banking and real estate industries. Most infrastructure development projects were affected and it called for a renegotiation of most contracts. During this period, I was working on a US$2 billion project dubbed “KDMP” in the mines. The project retained some well-experienced multi-national civil, electrical, mechanical and mining contractors (GLTA, Alstom, Siemag, FFE- India, MMS, Yangts Jiang, Wah Kong, T &E, Casar, etc), including relevant Consultants (FL Smith, KPMG). As a senior contracts administrator, I fully participated in the drafting and renegotiation of various contractual obligations with the contractors, suppliers, and consultants on the EPCM contracts. The global financial crisis of 2008 was a severe worldwide economic crisis that led to many projects around the world to invoke the force majeure clause for the survival of business bonds. The situation presented no other option but to renegotiate to achieve a win-win position during this recession period. A huge risk of project failure if the contractual renegotiation did not take place was imminent. There was a need to stabilise the supply chains and contractual relationships during this crisis. It calls for “Corporate Cowboys” to stand this situation! And you can be one!
A particularly frequently asked question is whether a force majeure clause excuses contractual parties from performing their obligations or from doing so on time. Is this the right time to invoke it? What is force majeure?
Force majeure clauses are contractual clauses which alter parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations (Neupane, 2018; Rajput, 2017).
Please note that this clause, Force Majeure, when loosely inserted in the contract, does not yield any positive results.
Many contractors and suppliers are still battling it out with their clients regarding this clause in courts of law. What is cardinal for any future contracts is the way the drafting of this clause is configured. The clause must be tailor-made to the geographical location of project activity and the nature of business. The clause must contain conditions such as excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate. If the clause is not well conscripted, it calls for mediators, adjudicators or arbitrators to interpret the clause, which is costly and more time consuming when litigation creeps in. As this Covid -19 pandemic continues to affect the contractual obligation, what is imperative for now is working through the possible consequences of a decision to be made. For instance, what might be the status of the business relationship with the counterpart post-force majeure?  Is there a possibility of the brand or corporate damage if the force majeure clause is invoked “unfairly”?
For now, regardless of what the clause states in your contract, the following recommendations can be of great help to recover your business relationship.
a.)    Strategic Decision Making – before invoking a force majeure clause or claiming that a contract is “frustrated” not making any business sense, there is a need to analytically study the situation. Effectively engage the key stakeholders involved in the project. If this is not done well, your counter-party/client may claim you have repudiated (rejected) the contract. This may give the counter-party the right to terminate and claim damages for the loss of the benefit of the contract. It happens a lot to local contractors and suppliers with inadequate knowledge of Contracts Law. Remember, do not burn the bridges! You need to maintain a professional business relationship.
b.)    Re-negotiating time – bring on board experienced and efficacious project team members with the ability to present all the underlying factors which are making the project unsustainable. Empirical and tangible evidence must be presented so that the client is convinced beyond a reasonable doubt that the contractual obligations cannot be met.
c.)    Contract price – The cost of raw material, spares and any the products have escalated highly during this pandemic. If the contractual price of supply items is less than what is being obtained on the market, the client must be presented with the current FOB and CIF prices so that an amendment is issued on that particular item. Please approach the client with evidence and assurance of commitment once the amendment contract is signed.
d.)    Effective Communication – Accurate presentation and contemporaneously documenting both the direct effects of the event unfolding before and during the crisis period is of supreme prominence. Transparency and integrity play a pivotal role in winning the needed support from the client. Communicate with the client on time and do not wait for the situation to get worse.
e.)    Works not within the battery limit – offer the clients to undertake some minor works not included in the scope but which can be done within the contractual battery limit. This may include some safety and health campaigns while at the site, disposal of waste, site cleaning, and support the client on some corporate social responsibility projects. This will enhance business continuity and relationship.
f.)    Dispute Resolution – At all costs avoid running to the courts. I have always taught my postgraduate students that project managers must avoid litigation at all costs. The resolution of disputes of this nature must be resolved by informal means. Mediation can be opted and ensure things are worked out co-operatively to maintain normal activity and preserve economic structures as far as possible.  Besides, even the courts are on a break because of this invisible predator – Covid-19!
Lastly, I would like to point out that this current situation faced by contracting parties is unique, but that does not mean that parties should act irrationally when deciding what their next step is under an existing contract or negotiating the terms of a new contract.  It is important to look closely at the contractual terms and carefully determine how to approach any suspension or alternative arrangements and what to say in any notices or communications to the other party.  This can help to ensure that the parties come out of this pandemic with their contractual relationship intact when normality resumes.  Oh, I forgot, I am under lockdown. I am signing off!

The author is a Ph.D. Candidate – Project Management.

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