Commercial Contracts, Force Majeure, Frustration and Covid-19

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Chidinma Ibe-Louis

It is no longer news that the recent outbreak and spread of COVID-19 world-wide has been declared a pandemic by the World Health Organisation (WHO), leading to the protective measures and restrictions put in place by virtually all countries around the world, including Nigeria in an effort to minimise the spread of the virus.

Sequel to that, parties to agreements may find themselves in precarious positions where the performance of their contractual obligations are now either arguably impossible or onerous to fulfil.
The impact of Covid-19 pandemics since its outbreak, has significantly disrupted Parties’ rights and obligations under commercial contracts.

Pursuant to these government restrictions due to the pandemic, parties to contracts may find it extremely difficult if not impossible to meet their obligations. Today, most businesses are either partially closed or completely shut down. The consequence could include breach of contracts.

These restrictions and limitations arising from the COVID-19 outbreak may provide a party to a contract, a seemingly legal platform to avoid its obligations by operating a force majeure clause and, or by invoking the doctrine of frustration or impossibility.

A “force majeure” clause (“superior force”) is a contractual provision which may excuse parties from performing their contractual obligations, when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.

It is therefore imperative to determine the type of circumstances that could be covered by the force majeure clause. It is essential to note that its provisions often cover natural disasters such as earthquakes, hurricanes, floods, and weather disturbances commonly referred to as “acts of God.”
Other covered events may include but not limited to insurrection, war, terrorism or threats of terrorism, civil commotions, labour strikes or disruptions, fire, national emergency, epidemics or pandemics, as well as governmental intervention by way of new laws or regulatory restrictions and or limitations, etc.

However, for a force majeure clause to engage, performance of the contractual obligations must become physically or legally impossible. Thus, the contract must expressly contain a force majeure clause which specifies a type of event capable of encompassing the COVID-19 outbreak.

It therefore follows that the clause cannot be implied. The defaulting or non performing party must satisfactorily prove that:
a. One of the events referred to in the force majeure clause has occurred.
b. It has been prevented, hindered or delayed from performance by that event.
c. Its non-performance was due to circumstances beyond its control.
d. There were no reasonable steps that it could have taken to avoid or mitigate against the event.

The effect of the foregoing is that the defaulting or non performing party cannot successfully rely on the defence of Force Majeure when the causative link to the non-performance is broken. Thus, where a party anticipates challenges or difficulties to meet its obligations, for instance due to the shortage of staff through self-isolation in accordance with government restrictions or issues with the supply of materials through the ban of transportation, it is crucial to explore whether other alternatives are reasonably available. It could contemplate alternative sources of labour or materials, including at higher cost, unless this involves the breach of other existing contracts.

Consequently, a party seeking to rely on a force majeure clause must also comply with all procedural requirements under the contract, such as the requirement to give notice of its intention to rely on the clause to the other party within particular timescales, including other formalities required for the service of notices.

However, if the force majeure clause does not envisage an event such as the COVID-19 outbreak or where the contract is silent on the clause, all hopes may not be lost as Parties may safely rely on the doctrine of frustration or impossibility, which presumes that in such circumstances, the contract is said to have been frustrated.

A frustrated contract is a contract that, subsequent to its formation, and without any fault of either party, is incapable of being performed due to an unforeseen event(s), resulting in the obligations under the contract being radically different from those contemplated by the parties at the time of making the contract. Thus, the frustrating event must significantly change the nature of the outstanding contractual rights or obligations.

A contract may be frustrated if an unforeseen event occurs after the contract is formed, which:

– makes performance impossible or radically different from that which the parties contemplated at the time of entering into the contract.
– the unforeseen event is beyond the Parties’ control and is not caused by either party’s conduct.
– the contract does not contain a clause intended to deal with the unforeseen event.
The effect of frustration is automatic termination of the contract. Thus, Parties can recover amounts paid under the contract before it was frustrated, however less the other party’s expenses.

While the foregoing analysis must be undertaken on a contract-by-contract basis, it is noteworthy to state that the principles discussed above are not only applicable to commercial contracts involving Multi-National Corporations (MNCs), bodies corporate but are also applicable to contracts involving Small and Medium Enterprises (SMEs), micro and macro entities, especially considering that the current restrictions issued by the government as a result of COVID-19 have had an impact on all businesses across the country. This has also forced the world to find a new normal as people navigate their lives around containing its spread as much as possible.

Consequent upon this foregoing, the law of contract gives parties the latitude to agree and bind themselves to any form of arrangement provided such arrangements are legal. COVID-19 pandemic is currently affecting every facet of the global economy and has placed businesses in difficult positions. Despite the provisions of an agreement which may strictly dictate the contractual relationship amongst parties to an agreement, parties are at liberty if they so wish and could consider re-negotiating in the post COVID-19 pandemic era. Of course, this must be in good faith in tandem with the existing provisions in light of the effects of the pandemic in an effort to mitigate each party’s respective losses.

By way of conclusion, in order to avoid the unsavoury legal consequences as a result of breaches, Parties should constantly engage and intimate the would-be-injured party on steps taken and are or being taken to ensure performance of the contractual obligations or mitigation of loss obligation, in view of the onerous burden of proof, as stated above. Further, if need be, These Parties should seek to review the contract with specific reference to the force majeure provision.

Ibe-Louis, ACIPM; ACIS; LLM; ACIArb; BL; LLB, wrote in from Lagos