Covid-19 – A Sunset Law to Excuse Contractual Obligations?

According to current estimates, 115 out of the 150 (operating) resorts in the Maldives are closed. Only about 2000 tourists remain in the country. The business revenue forecast for quarter 2 from April to June 2020 largely remains at zero. That is the forecast for the “industry average”.

This crushing downturn has resulted in loss of employment, wages, and expected income for resorts and employees alike – at least for the foreseeable future.

Due to the nonexistent footfall, the story remains largely the same for tourist guesthouses and liveaboard industries of the Maldives as well.

The sum of these adverse developments and uncertainties looming over the immediate future of the Maldives tourism industry has caused the Maldives economy (which monumentally depends on tourism receipts) to be in freefall.

Of course, the government is doing what it possibly can to combat the raging downturn. It has introduced relief packages for businesses including tourism properties.

Legal Impact on Industry

The shutdown of the tourism industry does not only speak of loss of revenue for the industry. It can have cascading effects on a host of other businesses and industries allied with the tourism industry. One area of legal relevance is contracts.

Almost every tourist resort, with very minor exceptions, would have a catalogue of contracts to maintain. Some of these may include lease agreements, sublease agreements, hotel management agreements, food and beverage agreements, loan arrangements, tour operator contracts, material supply contracts, construction contracts, goods and services contracts, telecommunication contracts, fire and security contracts, pest control contracts, hire purchase agreements, insurance contracts, air and sea transportation contracts, commercial leases, and of course employment contracts.

All these agreements create obligations for all sorts of payments to be made to various counterparties or face penalties in the form of fines, liquidated damages, late payment fees and the like. Each of these contracts would directly relate to the revenue stream of another business. Nonpayment can turn into an ugly mountain of accounts payable versus accounts receivable spread across a landscape of interdependent commercial relationships. In the end, any serious disturbance to this interdependence can cause several allied businesses to be added to the list of Covid-19 fatalities.

The loss of this equilibrium has the undeniable potential for a landscape filled with defaulters of all sizes and shapes. Demand letters, legal notices, civil suits, and enforcement action may become the new order of the day. Fines, interest payments, liquidated damages, late payment fees and compensation may become the currency of the new era.

Force Majeure

Except for very few instances, the Maldives businesses have had an uncanny reluctance to insist on force majeure clauses that could aid in instances of frustration or impossibility of performance.

Even where they are used, they are very limited in scope and applicability, or they represent the language and ambit decided by the stronger party to the contract.

Commercial frustration is definitely a no-go in most instances.

An appropriate example may be tourism lease agreements where impossibility of performance is limited to physical destruction of the property. Even if a host of force majeure events are cited in the clause, including events beyond the control of parties (that could include pandemics), the language is such that it prevents applicability of the clause unless and until consequent physical destruction of the property occurs either entirely or partly. It does not recognize force majeure events causing loss to business and revenue directly by any of the triggers listed in the clause. In other words, for the clause to apply, there ought to be consequent physical loss to property to set aside contractual obligations.

Impossibility of Performance

Impossibility of performance is recognized in the Maldives, though in an embryonic form. Section 22 of the Maldives Contract Act says that where an event unforeseen by parties to a contract intervenes, or a legislative enactment renders it impossible for parties to a contract to perform their obligations under a contract, the contract would be deemed to have come to an end.

However, the same section limits the scope of impossibility of performance to exclude enhanced difficulty or increased costs associated with performance of a contract from being relied on to set aside a contract.

Frustration of Purpose

There is another important factor to consider. We often confuse the impossibility of performance with the doctrine of frustration. Despite the fact that there may be similarities or overlapping circumstances, a very clear legal distinction exists between the two.

Simply, frustration relates to the commercial reason or purpose for entering into the contract while impossibility relates to performance of obligations provided in it.

Therefore, it may not be very accurate to hold that the doctrine of frustration exists under Maldives law, and that s 22 of the Contract Act embodies the principle of frustration of contracts.

A safer reading of the clause would be that s 22 of the Contract Act is a clause for impossibility of performance rather than frustration (assuming that frustration refers to frustration of purpose or commercial frustration as opposed to the act of performing a contract).

Proposal for a New Sunset Law

The motivation behind this post is to suggest the introduction of time-bound legislation – one that can address the disastrous consequences that may potentially be created by the large-scale defaulting of contracts due to Covid-19 related difficulties.

It is encouraging that the government is providing some working capital assistance to the tourism industry. However, arrangement of short-term capital may be one crucial element of the relief package. The other essential aspect may be plugging holes for legal action arising purely and directly out of defaults attributed to Covid-19.

Such a bill may be a relief measure in itself and considered as part of the larger government response package for Covid-19.

If acceptable, such a law may recognize Covid-19 as an event of hardship and grant temporary relief for a limited period.

A sunset legislation can effectively block penalties being levied in events of default whether in the form of interest, liquidated damages or late fees.

It can prevent action being taken to terminate contracts, sue for breach of contract, ask for specific performance, proceed with enforcement action, or initiate other forms of adverse action.

A time-bound relief as suggested may instill a degree of necessary calm on parties involved in the myriad forms of interdependent contractual arrangements within the tourism industry.

Similar legislative intervention has occurred in comparatively advanced jurisdictions like Singapore.