Renegotiating contractual obligations post-Covid-19

by Chee Jo-Ey

THE movement control order (MCO) imposed to curb the Covid-19 pandemic has not only deterred businesses from operating but also exposed them to liabilities for not being able to honour their contracts.

Many businesses have come to realise that most of the agreements entered did not anticipate the occurrence of such a pandemic and its effect.

Singapore has introduced the Covid-19 Temporary Measures Act 2020 to “offer temporary relief to businesses and individuals who are unable to fulfil their contractual obligation because of Covid-19” by, among others, giving legitimacy to a temporary deferment of contractual obligations and to raise the bankruptcy and insolvency thresholds for individual and corporation respectively as temporary reliefs.

The act covers the following types of agreements – construction contract, event contract, supply contract, tourism-related contract, lease or licence for non-residential property and contract for loan facility granted by a licensed bank.

As for the situation in Malaysia, Wong Mun Hoe, a practising lawyer with the MyLegal Response initiative, advises business owners to examine their agreements with a fine tooth comb.

There are plenty of clauses in a well-contemplated agreement that one can rely on, namely the price adjustment clause, variation clause, hardship clause, material adverse change clause and force majeure clause (relevant clauses).

The example of the relevant clauses is event-specific and can provide an indication to the parties as to what steps may be taken at the occurrence of certain events and what to expect next and whether one is excused from performing their contractual obligations due to the MCO.

Even if the above clauses do not exist or are not applicable, the agreement has to be scrutinised in full to enable a holistic approach to be tailor-made for each unique situation.

“The non-performance in an agreement due to the MCO could also trigger the event of default clause. Once the event of default takes place, the process of termination may be triggered and the defaulting party could be liable for damages.

“Ultimately, it is only prudent as a business owner to know the exposure that you will face,” said Wong.

As for mid to long term survival, all parties to the agreement must renegotiate. For the comfort of both parties, the options must be transparent. An agreed instrument can provide such advantage.

Examples of instruments include the supplemental agreement which is for the parties to agree and amend existing terms and to add new terms.

It allows the defaulting party to negotiate with the non-defaulting and to agree to new payment terms, while a novation agreement allows the transfer of the rights and obligations of the existing parties under the original agreement to a new third party, which is useful should you manage to find a replacement to step into your shoes to continue to perform the obligations under the agreement.

“It is not the end of the world if you have decided to take court action or if you face a legal suit initiated by your counterparty in the agreement. You may continue with the negotiation still.

“What is worth highlighting is that even after the suit is filed, court-assisted mediation may be arranged for the parties to go through a discussion with the intention of settling the dispute.

“If mediation is successful, it is usual for the parties to enter into a consent judgment, with terms reflecting the fruit of the parties’ negotiation just like an agreement,” explained Wong.

It is the same for some disputes in relation to employment. For a complaint that has been lodged at the department of industrial relations for unfair dismissal, the department will arrange for reconciliation sessions between the employer and employee.

The case can ultimately be referred to the Industrial Court. The parties should take full advantage of the opportunity to negotiate for a settlement.

The parties may also consider appointing a third-party mediator to take on the role of a facilitator to assist parties’ discussion and solution-finding. Third-party mediation may be commenced at any point in time.

Any resolution achieved from the mediation may be recorded in the form of a settlement agreement.

However, it is always advisable for the dispute to be resolved out of court at the soonest. Unnecessary costs and expenses may be incurred if the matter is dragged on, especially when there is an impending court proceeding, which may be a factor to hinder the chance of a settlement. – April 25, 2020

Subscribe and get top news delivered to your Inbox everyday for FREE