Covid-19 Contractual Conundrums – Renegotiating the Road Ahead
Updated: Sep 21, 2020
The current unprecedented Covid-19 pandemic, coupled with the Movement Control Orders (MCO) imposed by the Malaysian government, have a sweeping influence across different industries, impacting big corporations and small enterprises alike. A major issue affecting various companies is performance of their contractual obligations pursuant to their written contracts.
It is opportune to consider the possibility of parties renegotiating their contracts to achieve a suitable and commercial way forward in maintaining commercial relationships. Here are a few key points to consider in the renegotiation of contracts: -
Renegotiation is a Commercial Practice - Renegotiation of contracts is a commercial practice, not a right provided under the law unless the contract itself stipulates otherwise. Therefore, whether re-negotiation will be commercially beneficial depends on the terms contained in the individual contracts and the situations of the parties on a case-by-case basis.
When Should Companies Consider Renegotiating Their Contracts:
Where there exists a long-standing business relationship to be maintained;
Where grounds for termination of contract such as breach of contract by the other party, doctrine of frustration under section 57(2) of Contracts Act 1950, and force majeure provision have not been fulfilled or are not expressly provided in the contract; and/or
Where a business decision dictates that the costs of termination outweigh its benefits, e.g., high penalties for termination without valid reasons.
Circumspection is Required in Renegotiating – A thorough examination of your contract is important to ensure that before entering into a renegotiation of its terms, you are aware of your rights and liabilities under the said contract. and executed to avoid any future disputes on the same. Communication with counter-parties to a contract should also be approached carefully and with tact, especially when the renegotiation of the contract is aimed at benefitting your existing position and to avoid any admission of liability. It is prudent to ensure that all amendments agreed to by parties should be in writing
Examples of the terms which should be incorporated or renegotiated:
Force majeure provision - words such as "disease", "epidemic", or "pandemic" should be included to encompass the current situation.
Extension of time to perform legal obligations - a new timeframe to be complied with or grounds under which extension of time or rescheduling of deadlines may be allowed should be specified.
Suspension of specific obligations - grounds under which performance of certain obligations may be suspended should be included, for e.g., the imposition of the MCO.
Payment terms - the payment sums or intervals should be varied based on the financial circumstances of the parties to achieve a win-win situation.
Termination clauses - grounds for termination and the rights and liabilities of each party following termination should be specified.
Waiver - parties could also agree for a waiver or reduction of late interest penalties or agreed damages.