‘People enter into transactions with a pious hope of fulfilment, but unexpected developments dash their hopes’-
These words resonate in my mind every time I have to counsel a client, friend or partner on a transaction. Over time I have noticed the often-overlooked importance of remedies in mitigating the risks associated with every business arrangement. Remedies are a key part of the transaction process, as they tend to address what happens when transactions fall through. While it is up to the parties to propose, negotiate and decide on the remedies that they will implement should the need arise, parties for many reasons including, the adrenaline associated with closing a deal, the faith and trust in the judicial system and above all their cherished aspirations, ambitions and belief that business transactions do not fall through, fail to negotiate on the remedies that should bind their dealings.
A valuable remedy planning process should commence during the initial negotiation stage between the parties. The rudimentary aspect of the remedy planning process will be identifying the likely scenarios that may lead to a breach of the underlying agreement governing the relationship between the parties. For example, within the context of the global pandemic, a contract for services in which most of the employees are guided by non-immigrant experts cannot currently be performed because of the travel restrictions currently imposed by the Government of Ghana due to Covid-19. The situation we face today was highly unforeseeable and as such it is unlikely that any agreement drawn up previously would have taken into account such circumstances. Therefore, the effect had on such an agreement cannot be wholly remedied by the usual remedies available to parties under the laws of the land. In light of the travel restrictions, specific performance will be rendered nugatory as borders are closed and no one will be allowed in or out of the country without a special exemption.
Going forward, the lesson from the global pandemic will require parties to utilize an appropriate remedy planning process for similar agreements bearing in mind the current circumstances and those peculiar to their dealings. The remedy planning process must therefore identify such issues during the negotiation process and propose solutions including finding local experts that will work hand in hand with foreign experts via virtual communication should the need arise, as well as including comprehensive liquidated damages clauses in the agreement or on the contrary having a comprehensive and impenetrable force majeure clause.
This piece for the purposes of generally informing the public will focus on everyday dealings between contracting parties, with particular reference to purchase and sale agreements. In order to consider adequate remedies arising out of such transactions, it is proposed to consider the understated three-pronged test:
(1) identifying the most likely concerns that parties face;
(2) identifying remedies and strategies that can appropriately address those concerns; and
(3) deciding on which remedies and/or strategies to avail. (subject to considerations of time and cost)
The most likely concern that parties will face in a purchase and sale agreement will be the inability of a party to fulfil its part of the agreement. By way of illustration, in a contract for the sale of land between the seller (A) and the buyer (B) wherein the sale is to be made in accordance with a payment plan spread over four equal instalments. B makes the first two instalment payments on time and due to externally induced circumstances is unable to meet the subsequent payment obligations, thereby resulting in a breach on his part. In another scenario, B makes all the payments but only the first two payments were made on time, the remaining payments were both made outside the agreed period.
Presuming that the rights of the parties under the agreement are subject to the laws of Ghana, from a host of cases, the remedies available to A will be damages or in the alternative specific performance. These remedies are in accord with the settled principle of restitution in contract law, where upon breach the innocent party must be restored to the position, they would have been in but for the breach. Every victim of a breach of contract, in this case A, is entitled to compensation for any losses occasioned by the breach. Should the parties fail to agree on the appropriate amount of damages to be paid based on a breach, a court of law or any alternative dispute settlement panel’s decision on the amount of damages to be paid will have to be complied with.
On the other hand, specific performance as the name suggests, is an order issued by a court or any alternative dispute settlement panel compelling a contracting party to fulfil their contractual obligations. In its nature specific performance is a discretionary remedy; it is not available as of right but is subject to the discretion of the court taking into consideration all the surrounding circumstances including time, rising costs, depreciation of the local currency, amongst others and will only be granted if it will be just and equitable to do so considering all the circumstances. The court’s discretion in granting Specific performance is also circumscribed by a number of rules. For instance, it will only be granted where damages won’t suffice, or where a party cannot get an adequate substitute.
Negotiating against the backdrop of cost efficiency and business efficacy the parties will have to decide what amount of damages will suffice for any or all contemplated breaches. Thus, for instance, A may negotiate that for every late payment B will pay a certain percentage for each day that is outstanding as damages. A may also negotiate for a fixed sum based on the complexity of the transaction and the time value of money.
As noted earlier specific performance is a remedy that can only be granted by the courts or any alternative dispute settlement panel. The time a case will take from trial to a final decision by the Supreme Court will span over a couple of years. The effect of this is that by the time a party will obtain an order of specific performance it will have expended so much time on such a long period of disputation, that the order will be of no real value to them. Using several transactions as a reference, to avoid this parties may either opt for comprehensive liquidated damages clauses or comprehensive specific performance clauses that require that specific performance cannot be sought until after there has been substantial performance of the agreement. The parties will in that case have to assess and negotiate the sums involved regarding the liquidated damages clauses. Alternatively, parties will have to negotiate on what constitutes as substantial performance, for instance B may have to make at least three instalment payments before seeking for specific performance.
This notwithstanding, parties may opt for other means of mitigating risks in their dealings by using certain strategies that aren’t traditional remedies for breach of contract. That being the case, parties may create or designate an interest-bearing account into which instalment payments will be made until the total amount is paid. In such a case, should either party breach the agreement the innocent party may be entitled to the interest and the breaching party will be entitled to the monies paid so far. This is akin to an escrow account and as such should the circumstances demand an escrow account can be utilised.
Force majeure clauses are contractual clauses which alter parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations. Depending on their drafting, such clauses may have a variety of consequences, including: excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate. These may include events such as war, terrorism, earthquakes, hurricanes, acts of government. Prior to the global pandemic a typical force majeure clause did not cater for situations covering global pandemics. However, lawyers are currently updating force majeure clauses to reflect the current environment by using the terms epidemic, plagues or pandemic in the list of events. Additionally, an act of government will have occurred where a government body has imposed travel restrictions, quarantines, or trade embargoes, or has closed buildings or borders thus catering for the current environment. Parties may therefore in their remedy planning process ensure that their agreements have comprehensive and impenetrable force majeure clauses that mitigate the risks associated with their dealings.
The choice of approach in putting together a remedy strategy is not singular. Parties and their lawyers must therefore strive to understand the complexity of transactions and address all the red flags that arise during initial negotiations in order to ensure that, upon failure by a party to perform its obligations, the remedies and strategies utilised in mitigating risks will be appropriate, convenient and reasonable .
The writer, an Associate at Kulendi @ Law, is a young, diligent and detail focused lawyer who understands his role and strives to make legally sound deals. He holds an LLM in International Business and Economic Law, as well as a Certificate in International Arbitration and Dispute Resolution from the Georgetown University Law Center. Faisal is also an Associate member of the Chartered Institute of Arbitrators.