Contracts may be voided in the face of virus pandemic

Companies can invoke coronavirus as an act of God to opt out on their contract terms that penalise delays or defaults.

Legal firm Bowmans says the country is likely to face business failures, insolvency cases, debt and mortgage repayment default, layoffs/redundancies, as a result of the slowdown, prompting companies to walk away from contractual agreements.

They say companies have the option of annulling the timelines and obligations by invoking the ‘force majeure’ clauses if it is in their contracts or should seek a mutual agreement in the face of the current disruptions.

“Parties should review their existing contracts to identify whether their force majeure clause covers pandemics such as Covid-19 and the notification requirements and remedies agreed between parties,” Bowmans said in an advisory to their clients.

“In the event that the contracts do not have provision for pandemics, parties should initiate mitigation measures such as amending/varying or entering into consensual agreements on potential liabilities that may arise,” the law firm said.

The aftershocks of the disruptions caused by attempts to arrest the spread of Covid-19 are only starting to manifest in the economy as demand falls with large sections of the working population staying at home and supply chains derailed by government lockdown across the globe.

As businesses struggle, employees’ incomes are in peril and home loans and SME facilities risk default, prompting the Central Bank of Kenya (CBK) to offer banks a window to renegotiate loan terms.

The CBK has allowed banks to issue moratoriums and extend payment dates for paying customers which will essentially allow for adjustment of the contracts without suffering the pain of increased non-performing loans.

Churchill Ogutu, an analyst at Genghis Capital, said that the move addressed borrowers but has not addressed banks which will now stop issuing loans.

It also signals that future contracts will have to protect the losing parties.

“There is also a dearth of information regarding new credit intermediation by the banks in the current environment. We suspect banks may hold back extending ‘new’ credit to avoid moral hazard (where borrowers would expect further relief in the future) and adverse selection (riskier borrowers being crowded in) risks,” Mr Ogutu said.