The current pandemic situation is affecting companies that, due to the economy slowdown, will have less cash inflow, thus risking the compliance with its contractual obligations.
Having in mind that the State of Emergency in Mozambique was extended for the second time, until the end of June, the impact in civil, commercial and employment contracts will be, in certain cases, severe. Considering this new reality, companies may take in consideration the following recommendations.
Each company shall analyze the impact of Coronavirus in its capacity to comply with its obligations, as well as the potential impact in its economic partners (Clients/Suppliers), so it may anticipate with clearness, future difficulties and problems and duly prepare for them (for example, sustaining investments and evaluating available response mechanisms in case of non-compliance by the counterpart).
In order to do so, the companies shall assess if the contracts with suppliers and clients have:
- force majeure and/or change of circumstances clauses, its coverage and consequences, with special attention to clauses that require the parties to notify the counterpart;
- clauses for the suspension or extension of deadlines related with non-attributable events;
- if such contracts have cross-default clauses (clauses that provoke immediate default in of all its obligations) since these are very severe clauses to the debtor, who shall have a previously prepared response in the event of non-compliance with the contract, which would trigger such
Moreover, companies should keep a detailed record of Coronavirus impact in the company (in its internal functioning and impact on the transactions), registering all communications with employees, clients and suppliers. Companies may also assess contracted insurance policies, to check if they cover pandemic/force majeure situations and if they do, understand how such policies may be successfully triggered.
Where contract negotiating is not possible, companies may, on a case-by-case basis, allege impossibility to perform their obligations, avoiding the need to compensate the counterparty, either definitively, case in which the law foresees the expiry of the obligations, or temporarily, if the performance deadline is delayed, case in which the debtor is not liable for any damages caused by the delay.
Companies may also allege that a given obligation has become excessively burdensome, if the circumstances in which the parties entered into the contract have changed due to COVID-19.
Companies may also allege that the Coronavirus affected their suppliers, justifying the breach of contracts with third parties where impossibility or excessive burdensome to perform obligations is duly justified (v.g., my supplier fail to supply due to the shutdown of its factory).
At last, companies may react to contract defaults by claiming loss of interest in the obligation’s performance, entitling the creditor to terminate the contract without compensation (v.g., the performance is not possible because the supplier is legally obliged to shutdown).
In cases in which the debtor wants to comply, but the creditor does not accept or does not perform the necessary acts for the compliance, it is possible to consider the existence of creditor’s delay; in these circumstances, the risk of potential impossibility to comply with the contract, falls on the creditor. Therefore, the creditor is not exonerated from his obligations and may be liable for costs incurred by the debtor when offering to comply with the obligations and/or storing the contract’s object.
Lastly, please note that to claim any of the above mentioned solutions, it is required that the link between the circumstances caused by Coronavirus pandemic and the impossibility of complying with contractual obligations is duly proved, and that it was not reasonably possible to foresee this event nor its consequences when the contract was signed, having in mind the contract’s natural risks, its specific clauses, equity of the proposed/adopted solution and respect of good-faith principle.
These effects are not automatic, being always required solid proof. Considering this, it is essential that adequate means of proof are gathered, specifically, documents, to cover the possibility of being necessary to claim one of the above-mentioned solutions.
Employment Contracts Recommendations
In order to maintain their staff, the companies may explore the following legal alternatives:
- Temporary modification of employees´ functions, meaning that the employer may transfer employees to another work post, without affecting the employee’s salary or hierarchic position;
- Suspension or reduction of the employment agreements – since this pandemic may temporarily prevent or exempt the employers from receiving work (v.g., shutdown or decrease of the company’s activities).
These are two legal alternatives that the companies should choose instead of the termination by objective causes. Furthermore, companies shall have in mind that a prohibition to terminate employment agreements on account of absence of the employee due to Coronavirus related events has been approved.
Cash-Flow Management Recommendations
Companies may take advantage of the penalties’ pardon and reduction in the default interests due for missed or delayed payments of the mandatory social security contributions, applicable to debts constituted before April 23. It applies to small and medium companies, to those with debts’ proceedings and those with social security debts partially paid. Taxable persons who voluntarily settle the debt will benefit from a total pardon of the penalties and a reduction of 98% in default interests. The taxable person who requests instalment payment benefits from a total pardon of the penalties and a reduction of 75% in default interests, given that the instalment payments are made until 31st December of 2020.
Moreover, companies may take advantage of tax facilities, such as the waiving of corporate income tax payments on account due in May, July and September of 2020, and postponement of the corporate income tax special payments on account due in July, August and October of 2020 to January, February and March of 2021. At last, concerning Value Added-Tax, companies may benefit, until 31 December 2020, from authorization of the offsetting of claims.
Article by Duarte Marques da Cruz
Duarte Marques da Cruz
Duarte Marques da Cruz is partner of the Portuguese law firm MC&A, specialized in international business advisory, with a special focus in Lusophone markets. With extensive experience in the Energy sector (Renewables and Oil & Gas) and in International Taxation, he has supported international companies in major upstream, midstream transactions and projects, including in implementing, exploration and development programs. Duarte has also supported international clients in other areas of practice, namely, Mining, Transport & Logistics, Regulatory Compliance and Mergers & Acquisitions in Mozambique, Angola and Portugal.