Covid-19: Possible Effect on Contractual Performance Under Commercial Transactions – Edun Oluwatimilehin

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INTRODUCTION

The outbreak of covid-19 also known as Coronavirus disease (“the virus”) in Wuhan, Central China in 2019 where it was first discovered before it became a global pandemic, has put the government of various countries under pressure in sustaining their GDP and keeping their economy afloat. To this end, governments around the world have continued to implement various policies to help cushion the effect of the virus. In Nigeria, the Central bank (CBN) in its circular dated the 16th March 2020 to Deposit Money Banks and the General Public on the CBN POLICY MEASURES IN RESPONSE TO COVID-19 OUTBREAK AND SPILLOVERS had given the general overview on the adversarial effect of the virus on the Nigeria economy. The apex bank notified the general public on the significant adverse consequences and the unprecedented disruptions in global supply chains, sharp reduction in crude oil prices and the turmoil in global stock and financial markets. In the circular, the CBN stated various policy measures it was going adopted to help reduce the effect of the virus on the Nigerian economy. The essence of this article is not to discuss the global effect of the virus on various economies of the world rather its focus is to address and provide certain legal answers to some of the Legal issues arising from the contractual difficulties set to be encountered by parties to the commercial transactions as a result of the outbreak of the Pandemic virus.

CONTRACTUAL OBLIGATIONS

Since the outbreak of the Covid-19 disease, contractual performance continues to pose difficulties for parties as major manufacturing companies and factories around the world  shut down due to the spread of the virus. The effect of this development has significantly led to disruption in the supply of goods and services around the world.  In West Africa, Nigeria and other countries within the region have a strong reliance on imported goods from their overseas counterparts like China, the USA, and the UK. Etc. The governments of these non-African countries in combatting the virus have placed a strict restriction on the movement of persons thus making it almost impossible to conduct and or perform any business transaction. In lieu of the foregoing, the question of how practicable is it perform of contractual obligation comes to light[1].

It is elementary law that parties to a contract have contractual obligations; these obligations are usually in form of clause(s) inserted in the agreement binding the parties. These terms include different agreement which covers duration of the contract, dispute resolution under the contract and performance of contractual obligations by parties[2] etc.

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HOW DOES COVID-19 AFFECT CONTRACTUAL PERFORMANCE?

As the impact of covid-19 continues to ravage the world economy, its consequences disrupt contractual rights and obligations of parties[3]. One major question to be asked is whether covid-19 falls within the ambit of force majeure and if it qualifies as a sufficient ground to excuses parties from performing their contractual obligations during a difficult time.

WHAT IS A FORCE MAJEURE/CLAUSE?

A Force Majeure clause is a provision in a contract that relieves parties from performing their contractual obligation(s) when supervening circumstances arise. The very essence of this clause is to alter parties’ obligations and/or liabilities under a contract when extraordinary event beyond their control prevents one or all of the parties from fulfilling these obligations[4]. Force majeure generally is not a creation of the common law; however, its clauses are usually inserted in commercial transactions to be construed in line with the contract.

In the absence of a force majeure clause, parties to a contract are left with the common law principle of “frustration of contract” which rarely result in the setting aside of contractual obligations.

Under Nigeria law, parties have the liberty to design the terms of their contract including factors constituting a force majeure. Where a force majeure clause is included in the contract, it is common practice that the parties will specify the event constituting force majeure and their consequences thereto.

WHY IS A FORCE MAJEURE CLAUSE NECESS1ARY?

One of the  unique features of contract law is that, subject to certain exceptions, it leaves room for contracting parties to set out terms that will govern their contractual relationship. As much as a choice is flexible, agreed terms will not be altered by principles existing outside the contract itself. Notably, the foregoing is not to say that where parties intend to amend terms of their contract provision must be made expressly to accommodate the same.[5] Where this provision/clause is not expressly provided for in the contract, there are limited defenses in law that comes to the aid of the party whose ability to perform a contract is affected by external supervening events.

 FORMS WHICH A FORCE MAJEURE CLAUSE FOLLOW

A force majeure clause is usually drafted to reflect certain supervening events that render the performance of the contract impossible. In general terms, the most efficient way to draft this clause is to “firstly” define what constitutes a ‘force majeure event” and then provide an operative provision which deals with what happens when/if there is a force majeure event.

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WHAT CAN BE CLASSIFIED AS A FORCE MAJEURE EVENT?

The focal point for any force majeure clause is to define events that will trigger the application of the clause. To this end, lawyers tend to adopt a wide definition in referring to events or circumstances beyond human control of the party seeking to rely on the clause.

Alternatively, an exhaustive definition approach can be adopted wherein all the categories of events that are intended to be covered by the clause are listed e.g. Act of God, Government policies, Terrorist attacks, War, etc.  The only risk associated with adopting this option is that parties might not be protected by force majeure clause when an unanticipated event occurs which parties did not consider at the time the clause was drafted[6].

It is usually our advice that the best approach in drafting this clause is to have an inclusive definition that lists all force majeure events envisaged by parties and then inserts another ‘catch-all’ phrase which ensures that the definitions provided do not preclude the application of the clause to other similar events[7].

WILL COVID-19 QUALIFY AS A FORCE MAJEURE EVENT?

 In the foregoing paragraph, I have carefully explained acts that may constitute force majeure events. Given the unprecedented nature of the covid-19 and actions of government around the world to combat the spread of the virus, it is most likely that the virus would constitute a force majeure event. It is instructive to know that because a supervening event has occurred does not mean the parties are exempted from liability where they fail or delay in the performance of their contract[8]. Even though Covid-19 is an event that is capable of rendering contractual performance impossible the next line of question will be whether it qualifies as an act of God.[9]

Is Covid-19 an Act of God?

Whether a particular casualty qualifies as an act of God is a mixture of law and fact. For an event to qualify as an act of God it must be independent of any human cause and must not be reasonably predictable or avoidable[10]. However, when it comes to public health crisis such as the Covid-19, the significant question is whether the specific circumstances may warrant a “triggering event” in the performance of the contract[11]  thus the following questions will be crucial:

  • Does the contract define an Act of God?
  • Did the definitions include pandemic or epidemic diseases?
  • Could the non-performance be as a result of the outbreak of the virus or the as a result of government actions?
  • What laws govern the contract?
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Flowing from the above, the wordings in the contract might clearly explain if the above qualifies a force majeure event. If not parties might be a forced to rely on a generic phase included in the force majeure clause.

ATTITUDE OF THE COURT TOWARDS A PARTY RELYING ON FORCE MAJEURE CLAUSE.

Given the effect of a force majeure clause in a contract it may either suspend the performance or terminate the entire contract, it will be necessary for any party relying on this clause to lead evidence establishing Covid-19 as the sole cause of failure to perform its obligations.

Additionally, the burden of proof of how Covid-19 has affected the performance of contract will be on the party relying on the clause. Therefore, it is necessary for who seeks to rely on the clause to provide evidence on how the virus has affected performance of the contract.

In jurisdictions like China where the outbreak is on the high, the Chinese Council for the Promotion of International Trade (CCPIT) is now issuing force majeure certificates to Chinese Companies as it recognizes the virus as a triggering event of a force majeure clause. In a jurisdiction like Nigeria, the court will place parties intending to set aside or suspend the performance of their contractual obligation under the strict test of how humanly impossible it is to perform contractual obligations given the circumstances.

CONCLUSION

It is apposite that given the nature of the unveiling legal challenges arising as a result of the covid-19 virus, organizations, government, and other commercial enterprise are strongly advised to consult their legal advisers to review their contract where there are clear indications that performance of their contractual obligations will be made impossible as a result of policies adopted by the governments of various countries in a bid to put a check on the widespread of the virus.

Covid-19: Possible Effect on Contractual Performance Under Commercial Transactions. Edun Oluwatimilehin.S (LL.B, BL).

Footnotes

[1] https://www.pinsentmasons.com/out-law/guides/covid-19/force-majeure/clause

[2] https://www.venable.com/insights/publications/understanding-force-majeure-clauses/contract relationship.

[3] [3] https://www.legalmatch.com/law-library/article/contract-obligations.html

[4] Globe Spinning Mills Nigeria Plc v Reliance Textile Industries Limited (2017) LPELR-41433(CA)

[5] https://www.pwc.com.au/legal/assets/investing-in-infrastructure/iif-30-force-majeure-clauses-feb16-3.pdf

[6] https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—force-majeure-under-common-law/

[7] Okta Crude Oil Refinery A.D. v Mamidoil-Jetoil Greek Petroleum Company S.A. [2003] EWCA Civ 1031

[8] https://www.seyfarth.com/news-insights/georgia-law-an-act-of-godand-the-covid-19-pandemic.

[9] https//www.jdsupra.com/legalnews.com

[10] Goble v. Louisville & Nashville Railroad Company, 187 Ga.243,251(1938)

[11] Dlapiper.com/en/us/insights/publications/2020/02/when-an-outbreak-an-act-of=god-mitigatingcommercialand-operationalrisk.

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