COVID-19 on Contractual Performance & Penalties, a Curious Case of Tanzania
Legal Implications of COVID – 19: Contractual Performance & Penalties – A Curious Case of Tanzania
Corona Virus, scientifically known as COVID -19, has been declared by the World Health Organization (WHO) to have pandemic potential. The virus is spreading rapidly and according to the WHO, up until 29th February 2020, there have been 142,823 confirmed cases of the virus in China and 6,009 cases elsewhere, Africa included. With the alarming rate of confirmed cases, the virus is not only a major public health concern, but is already affecting businesses and trade, particularly those with operations or interests in China and other affected areas. In the case of Tanzania, no single case has been reported; moreover, as communicated by the Government, the scale of transmission elsewhere in the World poses a significant threat to Tanzania. In that respect, this legal update intends to highlight the potential legal challenges to businesses and trade, further proposing guidance on how to mitigate legal risks resulting from the pandemic.
Potential Legal Challenges
- Workers’ shortages; heavy government restrictions and travel bans by the Government of China will affect the World’s largest importer of raw materials and exporter of finished goods. This will cause shrinkage of trade, resulting from delays in shipments and cancellation of contracts. Tanzania, just like the rest of the world, taking into consideration its volume of trade with China and other affected areas, will be significantly impacted. With the current circumstances, how would one handle a situation where they have a credit facility or contractual arrangement, of which its performance depends on sourcing materials / services from China?
- There is likelihood that Chinese companies, as well as all other local companies sourcing their products from China and other affected areas, will invoke force majeure clauses to avoid Contractual obligations. In this respect, what is force majeure and how can this situation be handled?
- If you have a credit facility, consult your bank in writing and inform them how your trade or business has been impacted by the COVID-19. Most importantly, inform them on the steps that have been taken to avoid the impact of the virus, garnering evidence of the same, where appropriate. Furthermore, you may prefer to request for the freezing of accruing interest and general restructuring of your facility.
- Where a company intends to invoke force majeure, the following should be put under consideration:
- Notably, force majeure can only be invoked if there is an express provision in the contract.
- The force majeure clause must expressly state that which constitutes ‘force majeure’. This means that the spread of a virus/disease, such as COVID-19, must be captured in the clause for one to rely on it.
- Alternative to (b), one can rely to generic clauses usually included in force majeure clauses, such that the COVID-19 is an ‘act of God’.
- The force majeure clause should not be abused. There should be sufficient events to warrant one to invoke the clause.
- Invoking the force majeure clause should be taken as the last resort. A party relying on the clause must be able to show efforts towards avoiding the impact of the COVID-19. Note: The burden of proof is on the party relying to use the force majeure clause.
- A party relying on force majeure must comply with the contracted notice period in relation to force majeure.
What Should Businesses Do?
- Contingency Planning – investigate the options available to address the supply chain disruption; consider alternative suppliers
- Consider the financial and legal implications of supply chain disruption to your business and stakeholders. Put in place strategies of mitigating legal risks
- Engage your stakeholders – employers, lenders, contractors, etc.
- Review Insurance Policies to understand the scope of coverage and relevant notification period
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This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Afrilex Associates, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.