The news of coronavirus outbreak has dominated headlines all over the world in recent times. The deadly virus has been declared a pandemic and adjudged “the worst health crisis” in over a century. Still rampaging, the virus has brought the world to its knees and the world is on lockdown. Borders and airports have been closed, exports have been banned, movements have been restricted and businesses have been cancelled while the world, through the aid of medical professionals and scientists try to contain the virus and find a solution to the ravaging pandemic.
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To contain the spread of the virus, Nigeria and many other countries across the globe have ordered non-essential service providers to stay at home for either a stated number of days or until further notice. Key players in the global economy have adopted other stringent measures to curtail the spread of the virus and this includes, cancellation or postponement of travels, businesses, conferences, sports and games, court hearings and so on. For instance, there is a partial closure of all courts in Nigeria. Similarly, the International Court of Arbitration has postponed all hearings and meetings scheduled to hold at the ICC Hearing Centre in the French capital, Paris, until 13 April 2020. In the field of sports, all the major football leagues in Europe have also stayed action until further notice; and the Tokyo Summer Olympics which the Japanese government has invested over 21 billion dollars has been postponed to 2021 summer.
The impact of the deadly coronavirus outbreak has been far-reaching. A number of industries and businesses have been hit hard by the COVID-19 pandemic. Oil prices have slumped to its lowest since June 2001; travel and airline industries have closed operations; the tourism industry has collapsed; In China alone, auto sales has plummeted by 92%; gold which is considered a “safe heaven” for investment has tumbled; the sports industry has been badly injured; betting companies and casinos are in a dilemma; stock markets have crashed; operators of food and restaurant services are licking their wounds; retail, manufacturing and supply chain industries are facing a threat of collapse; hospitality and tourism industries are currently experiencing “isolation”; a good number of small businesses are at crossroads; and many other non-essential service industries are equally suffering the overwhelming negative impact of the coronavirus crisis. Although the damage caused by COVID-19 is still ongoing and its scale and extent yet to be assessed and ascertained, in a world connected by trade and commerce, it is clear that governments, corporations, investors, small businesses and individuals will suffer unquantifiable economic losses as a result of the pandemic.
In any event, how governments, businesses and individuals manage the crisis within the sphere of their competence remains a personal decision and burden for each actor. But the key question many experts and stakeholders are struggling to answer at the moment is: how to equitably resolve existing legal obligations which could not be met as a result of the outbreak and impact of the COVID-19 pandemic?
For instance, should an organization be compelled to pay interest on a loan even though its commercial operations have been shut down by the government during this period? What measures should commercial flight operators adopt to mitigate its losses during this period? Should passengers be made to pay extra money for rescheduled or cancelled flights? Is Mr. A who has resigned from company X to resume work at company Y entitled to salaries from company Y even though A has not resumed work due to the pandemic? How could losses incurred as a result of the pandemic be mitigated or avoided entirely?
For big businesses which cannot perform their contracts (particularly where they are time-bound) due to market instability, travel restrictions, inflation and currency fluctuation or supply chain disruption, and in the absence of any insurance policy cover for the outbreak or its effects, how does one negotiate a fair settlement without incurring consequential damages?
Limitation and Exclusion Clauses in Commercial Contracts
“Whether a party will be legally excused from its contractual obligations or able to terminate a contract will depend largely on the terms of each contract” and the facts or circumstances of each case. Most commercial contracts contain protection, limitation or exclusion from unforeseen liability clauses such as force majeure, frustration, quantum meruit and material adverse change. These clauses are designed and intended to protect contracting parties from losses and damages which should ordinarily accrue where the performance of a contract becomes extremely difficult or impossible as a result of events or circumstances known as “Act of God.”
An Act of God is a defence in both contracts and torts. It refers to “operation of natural forces, free from human intervention.” Thus an “extraordinary “violent storm, wind or tide like typhoon and hurricane are good examples of Acts of God. In the English case of Nichols v. Marshland (1876)2 Ex. D.1., the court held an extraordinary rainfall “greater and more violent than any within the memory of a witness,” which broke down embankments and the rush of the escaping water sweeping bridges away to be an Act of God. But the courts are reluctant to uphold a plea of an Act of God unless the party relying on same to avoid legal obligations proves that human foresight and prudence could not have reasonably recognized and averted such an event. Or as captured in The Mostyn (1928) A.C. 57 at p.93., that the event proved to be “an irresistible and unsearchable providence nullifying all human effort.”
More applicable to commercial contracts and often relied upon by defendants in a suit is the doctrine of frustration. The doctrine provides for “discharge of a contract where subsequent to its formation, a change of circumstances makes it legally, physically, or commercially impossible to fulfill the contract”. Lord Radcliffe captured it succinctly in Davis Contractors Ltd. v. Fareham U.D.C. (1956) A.C. 696 when he held, “…frustration occurs whenever the law recognizes that without default of either party, a contractual obligation has become incapable of being performed…”
Thus a contract is frustrated if and only if the supervening events occur under circumstances that are completely out of control of the contracting parties and the intervening event must be so fundamental as to be found by a tribunal “both as striking at the root of the agreement and entirely beyond what was contemplated by the parties” when they agreed. This is a question of fact –examined on case by case basis-and determined solely by a court. Courts decide it ex post facto – on the actual circumstances of the case – Lord Wright in Denny, Mott & Dickinson v. James B. Fraser & Co. Ltd. (1944) A.C. 256.
Although several theories have been advanced by authors and courts to justify the doctrine, these theories merely represent the stages of a court’s reasoning process before arriving at a just determination of a case. But what is the fate of parties who failed to insert a frustration clause in their agreement? The common law has graciously provided the implied term theory to their rescue. Thus, while it is advisable and tidy to insert a frustration clause in a commercial contract, its absence is not fatal upon the occurrence of such event. It follows that the clause will be implied in the event of frustration.
Is COVID-19 an Act of God or an Event Capable of Frustrating a Contract?
Subsequent legal changes; an outbreak of war; destruction of the subject-matter of the contract; government requisition of the subject-matter of the contract; cancellation of an expected event; and miscellaneous events have all been held in deserving cases to constitute frustrating events. However, in recent memory, no disease outbreak has had such a crippling global effect like the COVID-19 pandemic. Thus in the months and years to come, arbitration tribunals and courts around the world will be invited to answer the foregoing question, to wit: Is COVID-19 an Act of God or an event capable of frustrating a contract? Put differently, should a party be excused from any legal or commercial obligation not performed due to the outbreak of the COVID-19 pandemic? In reference to the time for performance of a contract or any obligation, should the period of the COVID-19 outbreak be reckoned with or should it be treated as a period of a public holiday? If the answer is in the affirmative, what date and time should be reckoned with? Is it from December 2019, January, or March 2020? What day of the month should become relevant?
The foregoing questions are to be answered by the courts, and it will be interesting to see how courts will move to resolve these questions against competing interests while holding the balance during a legal fiasco. Until then, one is of the view that in deserving cases, courts should be more willing than reluctant to construe the pandemic as a frustrating event or an Act of God. In a digital world, however, contracts that can be performed virtually cannot be said to have been frustrated by the pandemic unless it can the shown that the party to perform such service was incapacitated by either sickness or the absence of key working facilities.
Conclusion
It is suggested that contracts with provisions for adjustments and renegotiation should apportion risks arising from the outbreak, while lawyers and non-lawyers currently negotiating a new contract should try to include terms to cover the risk arising from the pandemic. Also, where possible, rather than go into full-blown legal suits or arbitration, parties affected by the pandemic should explore negotiated settlements. State actors faced with claims can always fall back on treaties or customary international law defences which stem out of public policy under such doctrines as public health and security, necessity or force majeure to avoid liability. In addition, it is suggested that various central banks should come up with stimulus policies and relief packages to save many businesses on the brink of collapse as a result of the pandemic. Already, the Malaysian Central Bank has announced a 6 months moratorium on all loans; while the US Federal Reserve and the Bank of England have slashed interest rates in a bid to strengthen their economies. Even though these noble economic safeguards will not eliminate legal actions that are bound to arise as a result of failed contracts and other legal obligations occasioned by the outbreak of the coronavirus pandemic, it is however hoped that these economic palliatives will cushion the impact of the pandemic on commercial concerns and obligations affected by the pandemic. Moving forward, in a world of uncertainty, it may become imperative for commercial concerns to take out insurance cover to cater for events like this pandemic in future. Such measures will no doubt reduce the number of actions that may arise as a result of failed contracts caused by a sudden appearance of similar situations in future. The coming months will be interesting in the legal world. What do you think?
Anselm Okoli, LL.B., B.L.,. Is a Nigerian Lawyer practising in Lagos, Nigeria. Email: anselmemeka@gmail.com, Phone: +2348166655541
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