Agreements Finance The Sport Axis Trade and Commerce

CORONA VIRUS: LEGAL IMPLICATIONS ON CONTRACTS – O. A. IDEHEN

“I do not think the reason given by the 2nd appellant explaining the circumstances the accident happened is tenable and satisfactory. He did not take the necessary action and precaution appropriate to the circumstances in order to avoid the accident. See Blyth v. Birmingham Waterworks (1856) 11 Ex. 784”.

INTRODUCTION

The Coronavirus (COVID-19) has been declared a global pandemic by the World Health Organization (W.H.O)[1]. Countries like Nigeria have taken protective measures and put in place movement and physical business restrictions in order to properly manage the COVID-19 outbreak and prevent its spread.[2] Paradoxically, these protective measures and restrictions have made it relatively difficult for businesses and counterparties to fulfil contractual obligations.

No doubt, COVID-19 has had, and will likely inflict adverse impacts on the global economy. Ranging from disruption of supply chains to restrictions on international travels and business operations, many individuals and corporates may be unable to fulfil existing contractual obligations[3]. Worst still, the restrictions and limitations arising from COVID-19 could lead to impossibility of performance of contractual obligations. In this critical commercial and contract situation, under what contract clauses or legal principles can parties find refuge? This article comprehensively examines the legal principle of force majeure and the common law doctrine of frustration. It concludes on the point that parties may find relief based on these two legal principles but would largely depend on peculiar facts.

FORCE MAJEURE

Force Majeure is an event or effect that can neither be anticipated nor controlled[4]. It includes both natural and human acts[5]. Force Majeure is a common clause in contracts that essentially releases parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs. Such event or circumstance may include war, strike/industrial action, riot, crime, epidemic or an event described by the legal term “Act of God” (hurricane, flood, earthquake, volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract[6]. A force majeure clause is a term in a written agreement that allows for the suspension or termination of contractual obligations based on a force majeure event or an Act of God.

For force majeure to apply, it must be expressly provided for as a term in an agreement. Where the force majeure clause is not a term or provision in the contract, the court or any competent authority (such as an arbitral tribunal) cannot on its own accord, imply the force majeure clause into the contract. In the case of Globe Spinning Mills Nigeria plc v. Reliance Textile Industries Ltd,[7] the Court of Appeal placed emphasis on the necessity of having the force majeure clause in a contract and held that it is not implied, but must be expressly contained in a contract. Where a contract does not specifically provide for force majeure, then force majeure cannot be invoked[8].

Furthermore, where the force majeure clause is expressly provided for in a contract, the words used in the clause must be specific for it to apply. In the English case of Peter Dixon and Sons, Ltd. v. Henderson Craig and Co., Ltd.[9], the Court established that the scope of a force majeure clause would be construed expressly and where necessary, by applying the ejusdem generis[10] rule of interpretation to clarify what the parties intended.

Another condition for the applicability of force majeure is that the reason for the inability to perform the contractual obligations must be directly traceable to the force majeure event as specified in the clause. Thus, in the case of Diamond Bank Ltd v. Ugochukwu,[11] the Court held, per Rhodes-Vivour, JCA, (as he then was), that for force majeure to occur, there must be an event which significantly changes the nature of the contractual rights of the parties in a way that it would be unjust to expect the parties to perform those rights such as: where the subject matter of the contract has been destroyed, or is no longer available; death or incapacity of a party to a contract; the contract has become illegal to perform as a result of new legislation; the contract can be frustrated on the outbreak of war; where the commercial purpose of the contract has failed[12].

In addition, where a procedure is enshrined in the contract to be followed before the force majeure clause can be activated, the party seeking to rely on the clause must adhere to such procedure. Force majeure may only apply at common law if there is a specific contractual provision which defines the type of occurrence(s) that might constitute a force majeure event. Often, the procedures that need to be followed when a party seeks to declare force majeure, and the consequences of force majeure events, are also set out[13].

The party is also under an obligation to prove that there was no reasonable step that could have been taken to avoid/mitigate the losses arising from the force majeure event. In Alphonsus Ibeanu & Anor V. Peter A. Ogbeide & Anor[14], the Supreme Court held thus:

“I do not think the reason given by the 2nd appellant explaining the circumstances the accident happened is tenable and satisfactory. He did not take the necessary action and precaution appropriate to the circumstances in order to avoid the accident. See Blyth v. Birmingham Waterworks (1856) 11 Ex. 784”.

COVID-19 and Force Majeure

From the foregoing, a party seeking to rely on force majeure must first show that a force majeure clause is contained as a term of the contract and that the said clause includes the outbreak of an epidemic, a medical pandemic or any construction that would fit the description of the COVID-19 pandemic. The party would also be required to show that Covid-19 actually rendered the performance of their obligation impossible, and most importantly that there was nothing the party could have done (i.e. no reasonable foresight or skill) to fulfil their contractual obligations.

In the context of COVID-19, reasonable preventive steps could include: quarantine protocols, increased sanitation, policies with respect to travelling, remote work capabilities, seeking guidance from public health officials, etc. Importantly, reasonable steps may change with the circumstances, particularly in the context of a public health crisis evolving daily[15].

FRUSTRATION

Frustration occurs where a situation has arisen for which the parties made no provision for in the contract and performance of the contract has become totally impossible. The Supreme Court in AG Cross River State V. AG Federation & Anor[16] defined it as the premature determination of an agreement between parties, lawfully entered into and which is in the 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 at the root of the agreement and entirely beyond what was contemplated by the parties when they entered into the agreement. The Court also held that the doctrine of frustration is applicable to all categories of contracts.

The party seeking to rely on the doctrine of frustration must show that the original purpose of the contract has been frustrated and that it would be unjust for them to be bound to the contract under the existing circumstances. The Court of Appeal in Diamond Bank Ltd. v. Ugochukwu[17] held that frustration would occur where it is established to the satisfaction of the court that due to a subsequent change in circumstances which was clearly not within the contemplation of the parties, the contract has become impossible to perform.

Moreover, Rhodes Vivour, JCA in the above case also noted that the doctrine of frustration has been restricted by the courts to a situation where the supervening event destroys a fundamental assumption. According to the learned Justice, an event must occur which significantly changes the nature of the contractual rights of the parties so that it would be unjust to expect the parties to perform those rights. Some examples are where the subject matter of the contract has been destroyed, or is no longer available; death or incapacity of a party to a contract; the contract has become illegal to perform as a result of new legislation; a contract becoming impossible to perform due to warfare; or where the commercial purpose of the contract has failed.

It should be noted that a contract would terminate automatically where a frustrating event occurs, i.e. parties would be discharged forthwith once the alleged supervening occurrence is deemed a frustrating event. This discharge is by operation of law, regardless of the intention of the parties to suspend or renegotiate obligations.

There are a variety of issues which may prevent the doctrine of frustration from occurring. Firstly, where one party is found to have been negligent, the doctrine would not apply. However, negligence per se does not strictly prevent frustration from occurring, as it is for the person claiming frustration to provide proof of the same.[18]

In addition, if it is found that the incident which is supposed to have been outside the control of the parties was, in fact, a consequence of the actions of a party, the doctrine would not apply[19]. Thus the frustrating event must directly change the contractual nature of the rights and obligations.[20]

Much like in the force majeure context, performance of the contract must become impossible; it is not enough that the contract become onerous or even significantly more difficult, but still possible to perform. In Nwaolisah v. Nwabufoh[21], the Supreme Court held that a contract is not frustrated merely because its execution becomes more difficult or more expensive that either party originally anticipated and has to be carried out in a manner not envisaged at the time of its negotiation.

DISTINGUISHING BETWEEN FORCE MAJEURE AND FRUSTRATION

From the forgoing, a few differences between the doctrine of frustration and that of force majeure can be deduced. A major difference is the flexibility of force majeure and inflexibility of frustration. While frustration operates to put an end to the entirety of the contract, force majeure will either suspend the contract for a period of time or mandate a renegotiation or any other effect which the parties choose to specify.

Furthermore, frustration is a question of fact which is left entirely to the discretion of the court while force majeure clauses allow the parties to set a lower bar by setting out specific incidences which would allow them to discharge themselves from the provisions of the contract in situations which might not amount to frustration in the eyes of the court[22].

The case of AG Cross River State V. AG Federation & Anor[23] is instructive in this regard: “the doctrine of frustration is applicable to all categories of contracts. It is defined as the premature determination of an agreement between parties, lawfully entered into and which is in the 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 at the root of the agreement and entirely beyond what was contemplated by the parties when they entered into the agreement. N. B. C. I v Standard (Nig.) Eng. Co Ltd (2002) 8 NWLR (Pt. 768) 104; and Mazin Engineering Limited v Tower Aluminium (Nigeria) Ltd (1993) 5 NWLR (Pt. 295) 526.

CONCLUSION

Keeping the above discussion into consideration, the implications of COVID-19 would have to be decided on a case by case basis. The precise impact of COVID-19 on many commercial contracts is presently uncertain. The specific wording of the force majeure clause will be critical. It is highly recommended that individuals and corporates:

  • review their existing contracts to identify any potential commercial risks and the potential legal impact of COVID-19;
  • review the force majeure clause in their contracts and consider whether or not it may apply;
  • identify any procedural requirements relating to existing force majeure clauses and consider the timing and condition required for following such procedures;
  • consider measures that may be taken to mitigate any potential consequences of COVID-19 in compliance with obligations under force majeure clauses;
  • review the dispute resolution clause in your contracts and consider developing a legal commercial strategy to try to resolve disputes that may arise as a result of force majeure events; and
  • if your contract does not include a force majeure clause, consider whether the doctrine of frustration may apply.

The unforeseeable disruptions resulting from COVID-19 are likely to influence how parties approach contractual negotiation and risk allocation in the future.

Any business that is affected, or anticipates that it may soon be affected in its ability to perform its contractual obligations, should seek legal advice as soon as possible to ensure the most favourable outcome.

If you require further information about anything covered in this briefing, or advise on how best to handle a breakdown in contract due to COVID-19 contact:

Osarumwenese A. Idehen

img_20200420_001233_580-938193690.jpg
Osarumwenese Idehen is a trained legal practitioner and chartered arbitrator with interest in dispute resolution, tax law, tech law and banking & finance. Ese has provided advisory and transactional legal services to multinational financial institutions. And was instrumental in a legal team that helped resolve an internal dispute between two merged financial institutions. Ese holds a Bachelors degree from the prestigious Obafemi Awolowo University, Ile-Ife, and is an Associate of the Chartered Institute of Arbitrators UK. Ese has interned with an array of reputable law firms such as Aluko & Oyebode and Adebiyi Tax and legal. Upon his call to the Nigerian Bar, he served as an Associate in Nigeria’s foremost maritime law firm, Olawoyin & Olawoyin

idehen_busayo@yahoo.co.uk

07033259523

[1] W.H.O, 2020, World Health Organization, accessed 10 April 2020, <https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen>

[2] For instance, the president signed the COVID-19 Regulation to prevent the spread of the virus.

[3] Mccarthy Tetrault, 2020, mccarthytetrault, accessed 7 April 2020, <https://www.mccarthy.ca/en/insights/articles/impact-covid-19-contractual-obligations-force-majeure-and-frustration>

[4] Garner, Bryan A and Henry Campbell Black, Black’s Law Dictionary (8th Ed. 2004) St Paul, MN: Thomson/West

[5] C.G.G. (NIG) Limited v. Anthony Augustine & Ors: (2010) LPELR-CA/PH/224/2008 Per EKO, J.C.A (Pp. 8-9, Paras. G-A)

[6] Babajimi Ayorinde, 2020, mondaq.com, accessed on 1 April 2020, https://www.mondaq.com/Nigeria/CorporateCommercial-Law/908634/COVID-19-Force-Majeure-And-Frustration

[7] (2017) LPELR-41433

[8] Babajimi Ayorinde, 2020, mondaq.com, accessed on 1 April 2020, <https://www.mondaq.com/Nigeria/CorporateCommercial-Law/908634/COVID-19-Force-Majeure-And-Frustration>

[9] (1919) 2 KB 778

[10] According to the Black’s Law Dictionary (8th edition, 2004) the principle of Ejusdem Generis is where general words follow an enumeration of persons or things, by words of a particular and specific meaning, such general words are not to be construed in their widest extent, but are to be held as applying only to persons or things of the same general kind or class as those specifically mentioned.

[11] (2008) 1 NWLR (Pt. 1067)

[12] Globe Spinning Mills Nigeria Plc v. Reliance Textile Industries Limited: (2017) LPELR-CA/L/732/2013 Per Abimbola Osarugue Obaseki-Adejumo, J.C.A

[13] Fenwick Elliott, 2020, fenwickelliot.com, 2 April 2020, https://www.fenwickelliott.com/research-insight/newsletters/international-quarterly/isis-daesh-force-majeure-frustration

[14] (1998) LPELR-SC.83/1994

[15] Mccarthy Tetrault, 2020, mccarthytetrault, 7 April 2020, <https://www.mccarthy.ca/en/insights/articles/impact-covid-19-contractual-obligations-force-majeure-and-frustration>

[16] (2012) LPELR-9335(SC)

[17] (2008) 1 NWLR (Pt. 1067) 1 at P. 28, Paras C-D

[18] Law Teacher, 2018, lawteacher.net, 1 April 2020, https://www.lawteacher.net/free-law-essays/contract-law/the-doctrine-of-frustration-contract-law-essay.php

[19] Maritime National Fish Ltd v. Ocean Trawlers Ltd [1935] AC 524.

[20] . AG Cross River State V. AG Federation & Anor (supra).

[21] (2011) LPELR-2115

[22] 2020, Esq-law.com, 2 April 2020, https://esq-law.com/the-applicability-of-the-doctrine-of-frustration-force-majeure-to-business-contracts-in-light-of-covid-19/

[23] (2012) LPELR-9335(SC)

5 comments

  1. The brilliance with which this insightful and eye-opening piece is delivered is an obvious pointer to the practical expertise and impecable communication skills of the author. The article is simple enough for a layman to grasp and deep enough for an expert to appreciate. Well done.

    Lekan M. Bello.

    Liked by 1 person

  2. Succinct, clear and informative. I hope such of more would be made clear to many outside the legal field.

    Implications of COVID-19 is indeed far-reaching, and touches the core of commerce. Companies and individuals would indeed need insightful legal approaches to circumvent complexities stirred up by the pandemic.

    Legal practitioners (and courts) are definitely going to get quite busy on contractual issues post-COVID-19.

    Liked by 1 person

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