New Vuca world and need for business contract management

IT is now commonly accepted that Covid-19 is seriously impacting on business. Its effect is largely devastating. Amidst this, the agile entrepreneurs may be able to minimise the risks associated with this pandemic.

Cephas Mavhondo
Lawyer

In the legal context, the impact of Covid -19 can be viewed through the concept of force majeure commonly called an act of God.

In this article, I will consider the measures that can be taken by any agile organisation in managing its contracts to mitigate the risks of Covid-19 induced force majeure. It is becoming common for a party to a contract to seek to be excused from performing his contractual obligations based on Covid-19 related challenges.

Force majeure is a French term meaning superior force. In Latin, it is referred to as vis major. This term can be interchangeably used with the term casus fortuitus which means a fortuitous or unavoidable accident which no ordinary care or oversight could prevent. It has been said that there is no practical distinction between force majeure and casus fortuitus, which between them include any happening, whether due to natural causes or human agency, that is unforeseeable with reasonable foresight and unavoidable with reasonable care.

In simpler terms force majeure is a legal defence that a debtor raises against a creditor if he fails to perform his contractual obligations due to circumstances beyond human capabilities. In other words, once such a defence has been successfully raised, the debtor is absolved from liability.

With Covid-19, several challenges may arise such as failure to deliver imported goods or to perform certain services due to quarantines, lockdowns, and illness. The question to be answered is whether or not Covid-19 related challenges can be relied upon to mount a defence of force majeure? The answer to this question depends on the circumstances of each case.

In Zimbabwe, the defence of force majeure can be invoked in two instances. This defence can be invoked when it is provided for in a written contract. If there is no contract clause to that effect, such a defence can be invoked when the circumstances meet the requirements of the legal principle of supervening impossibility of performance.

Thus when a contract has a provision to the effect that in case of a force majeure, the party obliged to carry out a certain activity which has been rendered impossible by certain circumstances is discharged or excused from carrying out that obligation. In such cases, the contract may be delayed or terminated depending on the wording of the force majeure clause.

When the contract does not have a force majeure clause, either party is still entitled to rely on the common law principle of supervening impossibility. This simply means when the performance of the contract has been rendered impossible by force majeure, the party obliged to perform is excused from such performance and the contract is terminated.

Certain requirements must be established for the defence of supervening impossibility of performance to apply. The impossibility must be objectively impossible. It must be absolute as opposed to probable. It must be absolute as opposed to relative.

In other words, if it relates to something that can in general be done, but the one party seeking to escape liability cannot personally perform, such party remains liable in the contract.

The impossibility must be unavoidable by a reasonable person. It must not be the fault of either party. The mere fact that a disaster or event was foreseeable does not necessarily mean that it ought to have been foreseeable or that it is avoidable by a reasonable person.

Depending on the circumstances of each case chances are high that Covid-19 related challenges may lead to supervening impossibility.

To survive in this challenging environment, it is therefore advisable for businesses to take relevant measures. We are living in a Covid-19-related Vuca world.
Vuca is an acronym for Volatility, Uncertainty, Complexity and Ambiguity. It is a way of describing an unstable business environment.

One of the solutions to a Vuca world is the application of the Vuca prime model that is having the Vision to counter Volatility, Understanding to counter Uncertainty, Clarity to counter Complexity and Adaptability or Agility to counter Ambiguity.

For contract management purposes, there are proposed measures that a business organisation can take to minimise the risk of a force majeure. Such measures provide the required adaptability of agility in dealing with the Vuca world. In any business, there might be various contracts that require to be drafted, executed, implemented, or reviewed for example employment contracts, construction contracts, installment sale of land, insurance contracts, etc.

To start with a contract manager should establish whether or not the contract has a force majeure clause or not. When a contract has a force majeure clause, the manager should be clear whether the clause is covering Covid-19 as a pandemic or epidemic or a disease. It is critical to include such clauses when drafting contracts.

Furthermore, it is important to establish whether or not the contract has a termination and or suspension clauses. These clauses may give a party a right to terminate or suspend an agreement, with or without a lengthy notice period and without cause. If a party becomes aware they are not going to be able to perform under an agreement, it may make more sense to terminate the agreement rather than a breach that agreement and potentially face a damages claim.

Most legal agreements will contain a non-variation clause that stipulates that no amendments to the agreement are effective unless reduced to writing. If you are talking with your counterparties and agreeing orally to extensions on deadlines for performance or any other aspect that may amount to an amendment to the written agreement, it is important that these discussions be reduced to writing as soon as possible after that conversation and that the agreement is correctly amended in writing.

Similarly, most agreements will contain a no waiver clause. Again, if discussions are taking place in terms of which one party is agreeing to a relaxation, extension of time, latitude, or indulgence, be careful to have that reduced to writing as soon as possible.

Most agreements contain mechanisms that can swiftly and cost-effectively resolve any differences in interpretation of these clauses and resultant disputes between the parties.

Check the agreement’s dispute resolution mechanism for this and if the agreement does not provide for a swift dispute resolution mechanism, possibly involving an expert, consider reaching out to your counterparty to agree on a mechanism.

In conclusion, the impact of Covid-19 can have long-lasting effects on the systems that keep our economies running. Globally, schools, churches, and businesses are being closed down – inevitably affecting contractual obligations nationally and internationally.

In this new Vuca environment, businesses ought to be agile and remember to review their contracts to make sure that they minimise the risks associated with Covid-19 as a force majeure.

Advocate Mavhondo is a partner at Mhishi Nkomo Legal Practice and the current executive secretary of the Zimbabwe Economics Society (ZES). These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of ZES . — kadenge.zes@gmail.com or mobile +263 772 382 852.