How to navigate legal landmines in job and business contracts

Peter Maina preaches the Covid-19 safety measures gospel to residents of Kibera in Nairobi yesterday. [David Gichuru, Standard]

The spread of Covid-19 has had a global impact, where the human toll has been significant, and the economic cost is expected to be exponential. We are at the infancy of the pandemic and its full cost is yet to be known. In the foregoing, there is need to examine the existing legal environment in respect of employment and contracts and how to navigate it today and the morning after it is over or under control.

Some of the Statutes and Regulations that will be most relevant to persons and businesses in Kenya at this time are the Constitution, Employment Act 2007, Companies Act 2015, Capital Markets Act, Cap 485A, Public Health Act Cap 242, Health Act No 21 of 2017, Public Order Act Cap 56, Preservation of Public Security Act, Judicature Act Cap 8, Penal Code Cap 63 and Fair Administrative Action Act 2015

In respect of contracts, the law o?ers a limited range of remedies, for avoiding contractual obligations viz common law doctrine of frustration and the force majeure clause.

The common law doctrine of frustration will operate to terminate a contract automatically when a subsequent event occurs beyond the control of the parties; and makes performance impossible or renders the relevant obligations radically di?erent from those contemplated by the parties at the time of contracting.

The threshold at which an epidemic or pandemic, or events associated with them, can trigger the frustration argument, is when they render performance impossible or illegal or “radically different”.

Given the dramatic impact of the Covid-19 pandemic, there would appear to be scope for the doctrine of frustration to apply in many cases, depending on all the circumstances.

A party might argue that one or more of the following established grounds operate to found a claim that a contract has been frustrated by Covid-19: temporary unavailability, failure of a speci?c source, impossible method of performance and illegality.

Contractual parties also have recourse to force majeure clause in their contracts. Such clauses excuse one (or both) parties to a contract, from performance of their obligations following the occurrence of unexpected events or circumstances which are outside of that party’s control. Force majeure is also referred to as act of God or casus fortuitus.

Contractual obligations

A typical force majeure clause will provide that a party is excused where it is prevented, hindered or delayed from performing its obligations due to the occurrence of an event beyond their reasonable control. Force majeure clauses are designed to help insulate companies from the shock of the unforeseen.

In grappling with the unpredictability of the current pandemic, it seems we are indeed facing, for the moment, a force to be reckoned with, where the legal liabilities have yet to be revealed.

A party’s success before the courts will ultimately depend on; the impact of the pandemic on the performance of the contractual obligations, the precise wording of the contract and both the doctrine of frustration and force majeure clause, as to whether the relevant triggering event must “prevent” performance or meet the lower standard of “hinder” or “delay”. Given the fact-speci?c nature, this is likely to result in disputes.

The pandemic may also give rise to attempts by parties to invoke other contractual provisions such as price adjustment clause, limitation or exclusion clause, change of law clause and material adverse change clause.

Where a contract has become uneconomic or undesirable as a result of the pandemic, a party may wish to limit its losses by terminating it. In these circumstances, it will be important to consider the express termination provisions under the contract and the entitlement to terminate under common law as a result of a party’s breach.

The right to terminate under an express termination clause depends on the exact wording of the provision in question. Is there, for example, a right for one or both parties to terminate on notice and without cause, or are there specific termination rights for one or both parties that are triggered in the circumstances that have arisen (outside of the force majeure or MAC clauses). If so, then the entitlement to terminate will be clear.

Even where a contract contains express termination provisions, a party may be entitled to terminate under common law as a result of another party’s breach. There will be a right to terminate if a party is in repudiatory breach of contract; that is, if the effect of the breach is to deprive the innocent party of substantially the whole benefit of the contract or has clearly demonstrated an intention not to perform the contract in some essential respect.

Due to the negative effect on businesses, legal issues will arise with respect to employment contracts that will lead to salary deductions, redundancy, terminations, dismissals, leave and furlough.

An employer cannot unilaterally change the terms and conditions of an employee’s engagement where such a change is detrimental to the employee. If an employer wishes to implement salary reductions, it would need to obtain the employee’s written consent.

A number of employers will need to declare certain employees redundant. In Kenya, redundancies are popularly referred to as ‘retrenchment’.

Section 35(1) of the Employment Act 2007 provides that termination of employment can be initiated by either of the parties to a contract of employment. Lawful termination of employment under common law includes termination by agreement, automatic termination, termination by the employee (resignation) and termination by an employer.

The Employment Act provides for rights and duties in employment, which include annual leave, maternity leave and sick leave. The employer may utilise these leaves during this pandemic period.

Though not in our statutes, the US has developed a practice called furlough in which in extra-ordinary situations, employees take leave of absence without pay. This is a new tool that employers in Kenya can take recourse to. Both employer and employee have to reach a mutual agreement to this situation with promise of return to work when the pandemic ends or is under control.

Employee’s consent

Should an employer be forced to adopt reduction of work hours and should such reduction in work hours be associated with a pay reduction, the express consent of the employee will have to be sought and obtained.

The Employment Act requires that employment contracts should state the place of work and it is likely that many existing employment contracts have place of work provisions. Where employees opt or are requested to work from home or remotely from work because of the outbreak, they are likely to be in breach of this provision.

To avoid any legal issues in the future, employers should enter into temporary agreements/addendums with their employees allowing for the work from home protocols associated with the mitigation of the spread Covid-19.

Covid-19, like any other pandemic, doesn’t need major legislative changes. The Constitution and Law Statutes have sense of permanency. The CSs for Interior, Treasury, Education and Health, the Chief Justice, CBK Governor, Capital Markets Authority CEO and Registrar of Companies may by ministerial orders or practice guidelines allow flexibility in application of existing law. The parent laws affecting these sectors and other sectors don’t need changing or court intervention.

In 1660, English scientist Robert Hooke discovered that displacement of materials under a load was proportionate to the force. Under the Law of Elasticity thus established by his theories, an object returns to its original position once the load is removed. This return to original form presupposes the fluidity and elasticity of the object.

In the Covid-19 era, companies have to adopt the Law of Elasticity such that when the pandemic is under control or ended, they revert to the situations ante. This therefore demands that companies employ their best legal tools to navigate its contracts, both business and employment.

My advisory gives contracting parties, employers and employees the legal tools to negotiate, re-negotiate and even void the contracts. It also enables entering into fresh contracts with employees, suppliers, debtors and creditors. This can be achieved by mutual agreement, litigation or arbitration. The law is firm but fluid.

 

 - The writer is a lawyer in Nairobi. [email protected]