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COVID-19: The Contractual Effect

10th July, 2020 at 10:30am
covid-19-the-contractual-effect

Image: Levelset.com

INTRODUCTION

The World Health Organization declared COVID-19 a global pandemic on 11th March, 2020 when Dr. Tedros Adhanon Ghebreyesus WHO director-general said; "this is not just a public health crisis, it is a crisis that will touch every sector, so every sector and every individual must be involved in the fights". The ongoing world pandemic has forced governments into putting up measures to curb the spread of the disease. Nigeria like most other countries have taken measure at the federal and state levels releasing public health guidelines and tips, such as the closure of schools, places of worship, shut down of businesses not concerned with the provision of essential services, border closure, visa revocation, stock depreciation and a total stop on public gathering etc.

The President also in exercise of his power under the provisions of the Quarantine Act declared a lockdown in Lagos, Ogun and FCT Abuja from 30th March, 2020; this lasted for 28 days as a result on the extension of the initial 14 days lockdown.  These measures taken by the various governments of the world including Nigeria has led to a massive disruption of economic, commercial and social activities.  By so doing, parties to contracts have been unable to fulfill their various contractual obligations pertaining especially to the period of execution. This article is therefore aimed at discussing and bringing to light the elements of force majeure and frustration of contract, if parties are bound by their contracts and if they can be relied upon as defences for failure to perform their obligations.  

TERMS OF DISCUSSION

Contract: A contract is an agreement giving rise to obligations which are enforced and/or recognised in law. Contract is an agreement between two or more parties with a binding nature, that is, an agreement which is legally enforceable is said to be a contract. It creates and defines the duties and obligations of the parties involved. The process of a contract is that, first of all, an offer is made by one party to another, which may or may not be accepted and once accepted, it leads to an agreement, once that agreement is enforceable in a Court it is a contract.

For a contract to become legally binding, there are some essential elements it must comply with:

  • Agreement which is a result of an offer and acceptance.
  • Consent which must be free and not influenced by coercion, undue influence, fraud, mistake or misrepresentation.
  • The parties must have the capacity to enter into a contract, ie, age of maturity, sound mind, alien enemy etc.
  • Consideration means the price agreed upon which must be lawful and adequate.
  • The object, goods or services of the contract must be lawful, else the contract will be declared illegal and void.
  • The contract must be in writing with clear and unambiguous terms that will be interpreted wrongly by any of the parties; the parties must be in consensus ad idem.

Force Majeure: Literally means a "superior force". It has been defined as unforeseen circumstances outside a party's control which prevents that party from fulfilling its contractual obligations under the contract or at law. The term force majeure is not implied in a contract; hence parties must have expressly stated it in the said contract before they can rely on it. The case of Globe Spinning Mills Nigeria Plc v. Reliance Textile Industries Limited reiterates this point on the necessity of including the clause in the contract. The idea of force majeure excludes liability from events like fire, explosions, earthquakes, armed conflict or generally events that can be termed "act of God". In other to successfully plea force majeure, the party must prove with evidence why they were unable to perform the contract. The consequences or scenarios of force majeure must have been expressly provided for in the contract; and the party claiming force majeure has the onus to prove that it was due to those unforeseen circumstances that the contract was not performed as expected. Once a force majeure event is established, it gives the party the following options;

a.      Terminate the contract
b.     Refrain from performing the contract
c.      Suspend performance of the contract
d.     Claim an extension of time for the performance; or
e.      Any other action as maybe agreed by the parties to the contract.

In the case of Diamond Bank Ltd v. Ugochukwu, Rhodes-Vivour, JCA (as he then was) held that for force majeure to occur, there must be an event that changes the nature of the contractual right of the parties and it would have been unjust to expect the parties to perform those rights such as;

i.    Where the subject matter of the contract has been destroyed or is no longer available
ii.    Death or incapacity of a party to a contract
iii.   The contract has become illegal as a result of a new legislation
iv.   A contract can be frustrated on the outbreak of war; and
v.    Where the commercial purpose for the contract has failed.

Furthermore, the parties cannot on their own extend the list of force majeure circumstances and recognize it as such when they are in fact not extraordinary and unavoidable. Contracts usually provide for notice to be given if a party intends to rely on a force majeure clause. It is therefore important to review the terms of the contract and comply with the provision for notice.

Frustration of Contract: this varies from force majeure because it brings a contract to an end. Hence the obligation will be terminated by operation of law. It is not specified in the contract but applies when performance of the contract becomes impossible by an action which occurs after the contract has been formed. What this means is that where a contract is held to be frustrated by the court, neither of the parties will be held liable or forced to perform their obligation of the contract.  Nigerian courts have held that;

"Frustration of a contract occurs wherever the law recognises that without the default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it radically different from what was undertaken by the contract"

The courts have recognised the following circumstances as capable of frustrating a contract:

  • Subsequent legal changes or statutory impossibility
  • Outbreak of war
  • Destruction of the subject matter of the contract or literal impossibility
  • Government acquisition of the subject matter of the contract.

THE IMPLICATION

There has been established an existing legal contract to which parties to that contract owe an obligation in accordance to the terms of the agreement and the duties agreed upon. Following this, the present pandemic situation has put a hold of several commercial activities that has hindered, delayed or prevented parties to a contract perform their obligation. The concern however is if the covid-19 Pandemic is a force majeure event or the measures taken by governments are a force majeure event. As earlier stated, a force majeure even can only be relied upon if it was expressly stated in the contact of the parties. That notwithstanding, where the contract makes provision for disease, outbreak of illness, epidemic or pandemic; or is broad enough to accommodate a situation declared a pandemic, then it can be said that the COVID 19 event is a force majeure event. The concerns above will be best resolved by the courts, who would either determine that the pandemic is a force majeure event or the measure by the government is a force majeure event. In line with this, some countries have declared the COVID 19 pandemic as a force majeure event e.g Turkey and Mexico.

Given the situation, a contractual obligation which is likely to cease are those related to contracts with limited time frame under which the obligation has to be fulfilled within a specified period. These contracts are said to have been frustrated, because it has become impossible to perform.  Generally, it must be shown that the event such as coronavirus, is the cause for the non-performance. It won't be sufficient to show that it only made the performance more difficult or time consuming.

As a result of the above, a party will not be liable for breach of a contract resulting from force majeure event. So the performance is only suspended for the period of the event and can resume when the force majeure event is no longer in operation. The creditor may no longer want the contract to be performed even after the force majeure situation and go ahead to repudiate the contract.

The effect of frustration of contract is to bring the contract to an end and discharge the parties of any form of obligation. Although the Law was conscious of the fact that some money may have been expended or there had been some form of financial obligations before the contract became frustrated; and in that light, there are some provisions to provide for cases like that. For instance, Section 8 of the Law Reform (Contracts) Law of Lagos provides that;

"all sums paid or payable to a party in accordance with the provision, the before the time when the parties were so discharged ("time of discharge") will, in the case of the sums paid, be recoverable by the person who paid the and in the case of sums payable, cease to be payable"

What this means is that where a contract has become frustrated, and the parties have been discharged from further performance of the contract, all sums paid or payable to a party in accordance with the provisions of the contract before the contract became frustrated will in the case of sums so paid, be recoverable by the person who paid the sums, and sums payable shall no longer be paid.  Under Section 8 of the Law, the court may not order the recovery or refund of any portion of the contract sum that had been expended for the purpose of performance of the contract before the contract became frustrated. The provisions of section 8 are only applicable subject to section 7 of the Law which provides for the severance of a frustrated contract, while stating that this provision will not apply to a contract of goods by sea, charter-party, contract of insurance, and contract of perishable goods.

Generally, where a contract does not contain a force majeure clause, the party can rely on the common law doctrine of frustration of contract under the Nigerian law. However, the mere fact that the contract has become inconvenient to perform does not avail for frustration of the contract.

CONCLUSION

It is universally true that no matter how beautifully drafted legislation is, it cannot cover every foreseeable and unforeseeable circumstance and this applies to a large extent to contracts as well. COVID-19 is such an unforeseen circumstance that took the world by surprise, hitting it unprepared. With these effects, everyone must be cautious and proactive in finding ways to mitigate the effect of this pandemic, especially to contract. It is crucial to take proactive steps to mitigate the impact of losses caused as a result of the COVID-19 pandemic. Contractual obligations should be considered and future commercial activity should be carefully planned. In any event, it is vital that notices are issued, data captured and losses are tracked.

Where a contract contains a clause for force majeure, the party who would likely be held liable for non-performance needs to ascertain the terms of the clause and if it makes provision for the current situation, and where it does, the party concerned needs to take immediate steps to trigger the force majeure provisions of the contract by issuing the appropriate notice of force majeure. However, where the contract does not contain a force majeure clause, the concerned party is advised to seek legal advice on whether the peculiar situation of its case is in such a position that the contract can be deemed to have been frustrated. 

Written by: Chioma V. Basil Esq.
Associate, Michaelmas Chambers
Email: Info@michaelmaschambers.com
Phone No.: 0900008231
Twitter: @MichaelmasLaw
LinkedIn Profile: https://www.linkedin.com/in/michaelmas-chambers-5a4900146

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Quarantine Act Q2 LFN 2004.
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Stephenson Harwood LLP, "COVID-19: Legal and Contractual implications"  https://www.shlegal.com/insights/covid-19-legal-and-contractual-implications Accessed 13th May, 2020
Globe Spinning Mills Nigeria Plc v. Reliance Textile Industries Limited (2017) LPELR- 9335 (SC)
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Stephenson Harwood LLP, "COVID-19: Legal and Contractual implications"  https://www.shlegal.com/insights/covid-19-legal-and-contractual-implications  Accessed 13th May, 2020
Diamond Bank Ltd v. Ugochukwu (2008) 1 NWLR (pt 1067)
Resolution of the FAS of Moscow District dated 8th June 2007 r. No KG-A40/2771-07
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Ibid
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General Communique No. 518 on the Tax Procedure Law (Law No 213) ("Communique") was published in the Official Gazette on March 24, 2020 with number 31078 (Reiterated) https://www.legal500.com/development/thought-leadership/general-communique-no-518-on-tax-procedure-law/ Accessed 13th May, 2020.
Mexico's Federal Government Declares COVID-19 Health Emergency- Duane Morris https://www.duanemorris.com/alerts/mexicos_federal_government_declares_covid19_health_emergency_0420 Accessed 13th May, 2020.
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UUBO COVID-19 Research Hub; "The Impact of Coronavirus (COVID-19) Pandemic on Contractual Obligation in Nigeria".
Section 8, Law Reform (Contracts) Law (Cap. 66) Vol. III Laws of Lagos State 2015.
Ibid, Section 8.
UUBO COVID-19 Research Hub; "The Impact of Coronavirus (COVID-19) Pandemic on Contractual Obligation in Nigeria".
Section 7, Law Reform (Contracts) Law (Cap. 66) Vol. III Laws of Lagos State
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Stephenson Harwood LLP, "COVID-19: Legal and Contractual implications"  https://www.shlegal.com/insights/covid-19-legal-and-contractual-implications Accessed 13th May, 2020