ABSTRACT

In the wake of the outbreak of a deadly virus in Wuhan, Central Republic of China, the World Health Organization acting swiftly on March 11, 2020, declared the virus which is now infamously known as COVID-19 a pandemic. The virus constitutes a public serious health risk as its spread is global, infecting people and causing the death of many. Tackling it, therefore, requires a coordinated international response[1]. So, in a bid to contain the rapid spread of the virus globally, countries across the world quickly imposed various containment strategies that have unarguably affected local and global trade, with companies, employers of labor and employees at the receiving end.  As expected, the ability of corporate institutions and individuals to fulfill contractual obligations entered into is now seriously in doubt as the economic fortunes continue to dwindle across the globe. From the closing down of schools, operation of restaurants and bars, and prohibiting gatherings of more than 20 persons to a total lockdown through the enforcement of social distancing and ban of free movement of persons locally or internationally, it is unlikely to find parties honouring contracts. This paper examines the potency of the COVID-19 pandemic as a complete shield, exculpating a contracting party from performing its contractual obligations under the concept of force majeure and under the common law doctrine of frustration.

Keywords: Covid-19, frustration, force majeure, breach of Contract.

INTRODUCTION

A contract confers reciprocal legal obligations on parties to do or not do a particular thing.  The beauty of contract lies in it sanctity and performance. The concept of “sanctity of contract” finds expression in the long aged Latin maxim “ Pacta Sunt Servanda” which literally means parties are bound by their contract. In other words, parties to commercial contracts are mutually bound by the terms and the Court has a duty to enforce performance, as any breach will attract damages. However, COVID-19, an unprecedented global health crisis, may bring about significant implications on organizations’ legal and contractual obligations.[2]The human and economic toll of the outbreak has already eclipsed other major crises in recent memory and the situation is rapidly evolving.[3] Given the fact that the virus is one that constitute a public health risk globally through the international spread of disease and potentially require a coordinated international response[4].  Governments all over the world are putting stiff measures in place to stem the spread of the pandemic across the world. As expected, both local and global trades have been halted, with several companies shutting down, employers laying off employees and local businesses remaining under lock and key  with the ability of contracting parties to fulfill contractual obligations freely entered into  now  threatened. Thankfully, Contract law has long recognized and accommodated situations where performance is made impracticable[5]; what is more, the definition of the term breach of contract is one that accommodate lawful excuse as a defense to shield  a non-performing party from liability. While stating what amount to a breach of contract, the Nigeria Court of Appeal stated in the case of Kemtas Nig Ltd v. Feb. Anich Nig Ltd [6]robustly as follows:

A breach of contract is committed when a party to a contract, without lawful excuse fails, neglects or refuses to perform an obligation he undertook in the contract or either performs the obligation defectively or incapacitates himself from performing the contract or by wrongfully repudiating the contract”. (Underling mine for emphasis)

From the foregoing, it is inexorable that where there is a lawful excuse to avoid the performance of a contract, such failure, neglect or refusal to perform the contract will not be treated as a breach of contract from which the other party would be entitled to damages. Such lawful excuse would serve as a shield to protect the defaulting party from the wrath of the law in any event there is a law suit at the instance of an aggrieved party.  Two of such lawful excuses are the concept of Force Majeure and the doctrine of frustration. While the former is expected to be inscribed or encapsulated in a contract entered by the party who seeks to rely on it, the later is a common law doctrine which will avail a non-performing parties even where a force majeure clause is missing in a contract or where the force majeure is so narrow that COVID -19 cannot be safely imported into it without the court embarking on the forbidden act of rewriting contract for parties[7]. Notwithstanding the seeming blessings and relief for contracting parties, both the concept of force Majeure and Doctrine of Frustration is not free for all, as certain legal conditions must be met.

COVID -19 AS FORCE MAJEURE

A Force Majeure clause is included in a contract to enable one (or both) parties to be excused from performance of their contractual obligations, or to suspend or delay performance, upon the happening of a specified event or events beyond the party’s control. [8]For the defence of force major to operate as an exculpating factor, it must be contained in the contract itself. In the landmark case of Gen. Elec. Co. v. Metals Res. Group. Ltd[9].parties’ integrated agreement contained no force majeure provision, the court made mincemeat of the defendant argument by holding that there is no basis for a force majeure defense.  What is more, the role of the Court in a case of contract is nothing but to give effect to the intention of parties as expressed in the contract agreement. In the case of Lingnes Aercennes Congolaises v. Air Atlantic Nigeria Ltd[10]the Court beautifully held thus:

“There is no doubt that parties to a contract are allowed within the law to regulate their rights and liabilities themselves.

 The Courts do not make contracts for the parties.

The duty of the Court is to give effect to the intention of the parties as it is expressed in and by their Contract”.

In the case of Facto v. Pantagis[11]it was held that “A force majeure clause, such as contained in the defendant’s contract, provides a means by which the parties may anticipate in advance a condition that will make performance impracticable. Thus, the party who wishes to rely on the Force Majeure clause must prove the facts bringing the case within the specific terms of the clause[12]. They must prove that one of the events referred to in the clause has occurred and that they have been prevented, hindered or delayed (depending on the specific wording used) from performing the contract by reason of that event.[13] It must not escape mention that a party cannot rely upon any event which it has itself caused and, where possible, it must take reasonable steps to avoid or mitigate the consequence of the event[14].

In considering the applicability of force majeure, courts look to whether:

(1) the event qualifies as force majeure under the contract; in the case  of Kel Kim Corp. v. Cent. Markets Inc.[15], it was held that force majeure defense is narrow and excuses nonperformance “only if the force majeure clause specifically includes the event that actually prevents a party’s performance”.

(2) The risk of nonperformance was foreseeable and not able to be mitigated; and

(3) Performance is truly impossible.[16]

The court’s inquiry largely focuses on whether the event giving rise to nonperformance is specifically listed as a qualifying force majeure in the clause at issue.

Interestingly, even if a party can surmount this requirement, it cannot invoke force majeure if: (1) it could have foreseen and mitigated the potential nonperformance, and (2) performance is merely impracticable or economically difficult rather than truly impossible(unless the specific jurisdiction or contract at issue specifies a different standard).

In re Cablevision Consumer Litig.[17]The court noted that force majeure clauses are “construed narrowly and will generally only excuse a party’s nonperformance that has been rendered impossible by an unforeseen event”.  It must be underscored that inability to sell at a profit is not the contemplation of the law of a force majeure event excusing performance and a party is not entitled to declare a force majeure because the costs of contract compliance are higher than it would have liked or anticipated[18] also, Nonperformance dictated by economic hardship is not enough to fall within a force majeure provision[19]

Thus, to safely determine whether the impact of COVID-19 pandemic can constitute force majeure, the agreement freely entered by the parties must be thoroughly scrutinized for a force majeure clause which can accommodate occurrence of a pandemic and must be weighed against the backdrop of the above requirements.  Where the above test is taking but failed, the court would be minded to refuse the excuse of force majeure as a defense, as it is not in the character of the court to rewrite contract for parties. This was the gist in the case of African Reinsurance Corporation v. Fantaye[20] where it was held that it is not the function of a court of law to make agreements for parties or to change their agreement as made.  However, where the test is passed, Nigerian Courts can draw inspiration from the case of Lebrun c Voyages à rabais (9129-2367 Québec inc.)[21] where the Court of Québec recognized that the Hini virus constituted a force majeure for an airline company.

COVID-19 AS FRUSTRATION

Like the doctrine of force majeure, frustration is concerned with the liability of ‘innocent parties, following an event which affects the performance of the contract. However, unlike force majeure, frustration is an established doctrine and does not require terms to be included in the contract for it to operate.[22]

It is now settled by the various decisions of the Nigerian Courts  that, frustration of contract is the premature determination of an agreement between parties lawfully entered into and in course of operation at the time of its premature determination, owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by law both as striking the root of the agreement, and as entirely beyond what was completed by the parties when they entered into the agreement[23].

The doctrine of frustration is a common law principle and need not be expressed by parties in their contract. However, for frustration of contract to occur, there must be in existence a lawful contract (oral or written) between the parties, and its premature determination, due to occurrence of an intervening event or change of circumstances that is so fundamental as striking at the root of the contract beyond the contemplation of the parties at the time they entered into the contract.[24] By the decision in Nwaolisah v. Nwabufoh[25] the events listed by the court that constitute frustration includes;

  1. a) Statutory impossibilities or legal charges.
  2. b) Outbreak of war.
  3. c) Destruction of subject matter.
  4. d) Government acquisition of subject matter.
  5. e) Cancellation by an unexpected event and the other party is incapacitated from rendering the service he has under taken.

It must be pointed out that frustration of contract does not occur where:

  1. The intervening circumstance is one which the law would not regard as so fundamental as to destroy the basis of the agreement;
  2. The terms of the agreement show that the parties contemplated the possibility of such intervening circumstance arising;
  3. One of the parties had deliberately brought about the supervening event by its own choice.[26]

 

Where a contract has been frustrated, the question of breach will not arise, as none of the parties can be held responsible for what happened. In effect where a contract is frustrated, further performance is excused only if ;

  1. The frustration occurs before the breach of contract;
  2. The frustration is without the fault of either party; and
  3. The frustration is due to a fundamental change of the circumstance beyond the control and original contemplation of the parties.[27]

INVOKING FORCE MAJAURE OR FRUSTRATION: CHECKLIST OF STEPS TO BE TAKEN BY A NON-PERFORMING PARTY

Where a contract has been frustrated or rendered incapable of performance due to force majeure, the question of breach will not arise, as none of the parties can be held responsible for what happened.

However, it is only appropriate that necessary steps are taken to mitigate the hardship such unforeseen circumstances might cause. So, companies with contracts affected by the coronavirus should take the following steps:

  • Review contracts to identify what force majeure and or frustration rights, remedies, and requirements may apply if a party’s operations are disrupted by the effects of COVID-19.
  • Identify the notice requirements and deadlines that have been or may be triggered as many contracts require the party invoking a force majeure clause to provide prompt written notice to its counterparty, often within a specific time period. Parties must be aware of these notice requirements, as the application of force majeure could be precluded absent compliance.[28]
  • Before deciding to invoke the contract’s force majeure clause, parties should assess and document alternative means of performance or the availability of steps that may be taken to avoid or reduce disruption to operations.[29]
  • Counterparties should communicate as early in this process as possible. The sooner the parties notify one another of concerns about performance or inability to perform , the greater likelihood of resolution of disputes. [30]

CONCLUSION

With the declaration of COVID-19 as a pandemic, and with its resultant effects, it is easy to predict disruption of contractual relationships in the coming days. Parties should be ready to invoke, and defend against, force majeure clauses and related doctrines that may operate to excuse performance[31]. If the shield of COVID-19is dexterously invoked by a non-performing party, the question of breach will not arise, as none of the parties can be held responsible. However as pointed out, a party who wants the court to excuse his nonperformance as lawful must be ready to pass the various acid tests already  laid down  by the  court.

* Uyi Samuel Oni, is a Lagos based Legal Practitioner in the law firm  of Praxis Legal , with core practice interest and appreciable experience in Corporate Law, Business advisory, Policy making and Social Justice Advocacy. He is Founder, Rehab Foundation. samueloni2014@gmail.com08161219912

[1]Tedros Adhanom Ghebreyesus, Director-General, World Health Org., Opening Remarks at the Media Briefing on COVID-19 (Mar. 11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020

[2]Céline Legendre et al COVID-19 pandemic: A force majeure under Québec civil law accessed https://www.osler.com/en/resources/regulations/2020/covid-19-pandemic-a-force-majeure-under-quebec-civil-law

[3] bid

[4].see supra note 1

[5]David J. Ball  et al,  Contractual Performance In The Age Of Coronavirus: Force Majeure, Impossibility And Other Considerations  https://www.natlawreview.com/article/contractual-performance-age-coronavirus-force-majeure-impossibility-and-other

[6](2007) All FWLR (Pt 384) 320, 342,

[7]It is not the function of a court of law to make agreements for parties or to change their agreement as made. See African Reinsurance Corporation v. Fantaye (1986) 1 NWLR (Pt.14) 113

[8]Peter Godwin & Dominic Roughton Trett Consulting  March 2006

[9]293 A.D.2d 417 (1st Dep’t 2002)

[10](2005) LPELR –5808

[11]390 N.J. Super. 227, 231 (2007)   cited in Paul, Weiss, Rifkind, Wharton & Garrison LLP,  UPDATE: Force Majeure Under the Coronavirus (COVID-19) Pandemic www.paulweiss.com

[12]Paul, Weiss, Rifkind, Wharton & Garrison LLP,  UPDATE: Force Majeure Under the Coronavirus (COVID-19) Pandemic www.paulweiss.com

[13]Ibid

[14]70 N.Y.2d 900, 902 (1987) cited in Paul, Weiss, Rifkind, Wharton & Garrison LLP,  UPDATE: Force Majeure Under the Coronavirus (COVID-19) Pandemic www.paulweiss.com

[15]see supra note 12

[16]Ibid

[17]  864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012) see supra note 12

[18]see supra note 12

[19]Ibid

[20](1986) 1 NWLR (Pt.14) 113

[21]Lebrun c Voyages à rabais (9129-2367 Québec inc.) and Béland c Voyage Charterama Trois Rivièresltée, cited in Céline Legendre et al “COVID-19 pandemic: A force majeure under Québec civil law?” accessed at https://www.osler.com/en/resources/regulations/2020/covid-19-pandemic-a-force-majeure-under-quebec-civil-law on March 28, 2020

[22]  HWF and 20 Essex Street, Force Majeure and Frustration. accessed at hfw.com

[23]Federal Ministry Of Health V. Urashi Pharmaceuticals Ltd  (2018) LPELR-46189(CA) see also Mazin Engr Ltd Vs. Tower Aluminum (Nig) Ltd (1993) 5 NWLR PT. 295 526. Ubn Plc Vs Omniproducts Nig. Ltd (2006) 15 NWLR PT. 1003 660.

[24]Ibid

[25]  (2014) NWLR ( PT 1268) page 631

[26]. see supra note 23

[27]Ibid see also MazinEngr Ltd V. Tower Alumunium (Nig) Ltd (1993) 5 NWLR PT. 295 526. Ubn Plc Vs Omniproducts Nig. Ltd (2006) 15 NWLR PT. 1003 660.

[28]David J. Ball  et al,  Contractual Performance In The Age Of Coronavirus: Force Majeure, Impossibility And Other Considerations  https://www.natlawreview.com/article/contractual-performance-age-coronavirus-force-majeure-impossibility-and-other

[29]Ibid

[30]Ibid

[31]Ibid

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