The Implications of Covid-19 on Performance of Contractual Obligations – Owolabi Yusuf

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1.0 INTRODUCTION

The implications of the outbreak of the pandemic, codenamed “COVID’19” to businesses all over the world cannot be overemphasized. Businesses world all over have been compelled to navigate the disruption birthed by the wind-like spread of the deadly virus such as inabilities to fulfill contractual obligations and the likes. In the light of the prevailing circumstances, businesses have since been interrogating their legal chances of mitigating, if not escaping, the inertia brought forth on contractual transactions.[1] Flowing from the interrogation are questions like, would Mr. A still be contractually bound to produce goods for Mr. B? Or would event organizers still be bound by their contracts with vendors? These questions, inter alia, beg for answers among business owners in the world, to which some companies and business have already capitalized on “Superior Force clause” in their contracts to remedy the situation. For instance, DHL recently notified its customers that it might be unable to make deliveries as scheduled: similarly, the China National Offshore Oil Corp notified its suppliers Shell and Total that it would not be able to continue buying the agreed quantities of gas.[2] It is against this background that this piece shall be constructed.

2.0 PARTIES ARE BOUND BYTHEIR CONTRACT

The rationale for holding parties bound by their contracts flows from the mutuality of purpose and intention between them.[3] The law is that, once parties by their dispositions elect to be contractually bound with another, provided there is absence of fraud or illegality, such parties would not under the law be allowed to rescind or escape the performance of the obligations arising out of the contract.  This is represented with the maxim, pacta sunt sevanda (meaning, agreement must be kept)[4]. This principle was given judicial baptism in ATTORNEY GENERAL OF NASARAWA STATE V ATTORNEY GENERAL OF PLATEAU STATE[5], where the Supreme Court Per FABIYI JSC (as he then was) aptly restated the law as follows:

“There is also the principle of Pacta Sunt Servanda which means agreements of a party to a contract which are not fraudulent are to be observed”

See also, the dictum of Oputa JSC (as he then was) in SONNAR NIGERIA LTD V PARTENREEDRI M.S NORDWIND (Owners of the M.V Nordwind)[6] where the learned jurist held that,

“…Agreements which is neither contrary to law, nor fraudulently entered into, should be adhered to in every manner and details”

However, due to unforeseen contingencies, parties may by their contractual terms stipulate the appropriate measure, or what should govern the performance of their contractual obligations in case an eventuality occurs (Force Majeur clause). In the absence of such, the general principles of common law on frustration shall apply in states that have no law in place, while in Lagos State the Law Reform (Contracts) Law of 2015 shall apply.

Flowing from that substratum, this piece seeks to x-ray the outbreak of COVID19, the policy of quarantine and self isolation and their implications on parties performing their contractual obligations. Accordingly, can the outbreak of the epidemic qualify as an Act of God for the purpose of invoking (Force Majeur clause)? Or Can it be rightly said that, the outbreak of COVID19 frustrate performance of Contracts? This writer, shall, in the course of this discourse proffer answers to these thought provoking questions. 

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3.0 DO COVID’19 QUALIFY AS A GROUND TO INVOKE FORCE MAJEUR CLAUSE?

As stated above, parties may by their terms stipulate in their contracts what should operate in case of an eventuality. This is what is known in civil jurisdictions and most commonwealth countries like Nigeria as Force Majeur Clauses.[7] The Nigerian Court of Appeal instructively noted the scope and effect of the clause in GLOBE SPINNING MILLS NIGERIA PLC V RELIANCE TEXTILE INDUSTRIES LIMITED[8] as follows:

“Force majeure is a common clause in contracts which provides that one or both parties can cancel a contract or be excused from either part or complete performance of the contract on the occurrence of a certain specified event or events beyond their control…Force majeure is something that is unexpected and unforeseen happening, making nonsense of the real situation as envisaged by parties.”

Having stated that, it is plausible to note that, for a party to invoke the blessings of the clause, certain conditions must be met, they are:

  1. The clause must have been expressly incorporated as a term of their contract. This simply means, the provisions cannot be implied. Where per chance the parties failed to include the clause in the contract, then, force majeur cannot be invoked to discharge the parties from the contractual obligations due to the COVID”9. Parties would have to resort to the restrictive doctrine of frustration (discussed below).
  2. The phraseology of the words in the clause would also determine the invocation or otherwise of the clause. Where the phraseology of the clause include words such as ‘epidemic’, ‘pandemic’, ‘diseases’ and other analogous terms, then, it is submitted that COVID’19 qualify as a ground for a successful invocation of the clause due to its widespread destructive effects. The reason for this is because it is the attitude of the courts when construing force majeur provisions to construe same literally or restrictively. However, in the absence of such all embracing terms, a party may also succeed in invoking the clause if omnibus term such as ‘Act of God’ is included in the clause.
  3. The outbreak of the Pandemic occurred out of control of the parties, that is, unforeseeable. Here, the party would have to prove that the outbreak of COVID’19 is out of their control as it is unforeseeable. However, whether it is foreseeable or not would depend on the nature of the contract. For instance, in a long term commercial contract, it may be argued that since the outbreak of SARS (Severe Acute Respiratory Syndrome) of 2002/2003 in China, the outbreak of COVID’19 is foreseeable.
  4. The outbreak of the Pandemic must render impossible the performance or continuation of performance of the contract. It is submitted here that this condition is also satisfied by the outbreak of COVID’19 because since its outbreak, many countries of the world have took emergency measures such as:; closure of borders: restriction of local and international travel: total lock down in which both public and private employees have been ordered not to go out and their movements generally restricted in other to curtail its destructive spread. It is further submitted that this measures, including the quarantine and self isolation regime renders performance of the contracts impossible.
  5. The party relying on the clause must have taken reasonable steps to mitigate the aftermath consequences of the outbreak. Here, the party invoking on COVID’19 must have scrupulously adhered to any procedures laid down in the clause to avoid the damning effects of COVID’19 outbreak such as given notices to the other party, as exemplified by the DHL decisions above who after the outbreak of the epidemic notified their customers of their inabilities to make deliveries as scheduled.
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As elucidated above, the invocation of force majeure depend chiefly on its inclusion as a term of contracts between the parties, where the provision is not stipulated, the doctrine of frustration would apply. What then is the intercourse or, put correctly, how can a party successfully call to aid the blessings of the doctrine?

4.0 COVID19 AND THE DOCTRINE OF FRUSTRATION

The doctrine of frustration operates to discharge parties from future contractual obligations. As a prelude, the doctrine entails the occurrence of a supervening event which, without default of the parties renders the performance of contractual obligations radically, entirely and fundamentally different from what was agreed upon.  The Supreme Court of Nigeria in G.N NWAOLISAH V PASCHAL NWABUFOH[9] aptly restated the trite principle of law as follows:

“Frustration occurs where the law recognizes that without 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”

Delineating the instances in which the doctrine has been often invoked, the Court went further:

“The events which have been listed by the court to constitute frustration are: (1) Subsequent legal changes or statutory impossibility (2) Outbreak of war (3) Destruction of the subject matter of the contract or literal impossibility (4) Government acquisition of the subject matter of the contract (5)Cancellation by an unexpected event like where other party toa contract for personal service, dies or where either party is permanently incapacitated by ill-health, imprisonment etc. from rendering the service he hs undertaken. Davies Contractors Ltd. V Fareham DC (1956) AC 696, Akanmu V Olugbode (2001) 13 WRN 132,  NBCI V Standard (Nig) Eng. Co. Ltd. (2002)8 NWLR (Pt 768) pg 104, Obayuwana V The Governor of Bendel State (1982) SC pg 167, Taylor V Caldwell (1863) 3 B & YS 826, J.P Dawodu V B Anderson and Co, Ltd (1925) 6 NLR Pg. 105, Adu V Makanjuola (1944) 10 WACA Pg. 168” [10]

Furthermore, it is imperative to expediently asseverate that for a party affected by the outbreak of the pandemic to successfully invoke this doctrine, the following must be noted:

  1. An event must have occurred which radically change the obligations undertaken by the parties. It is submitted here, relying on the decision of the Supreme Court in the case cited above and fleet of other cases, that the outbreak of COVID’19 qualify as a frustrating event. Furthermore, the Latin term “Non haec in foedera veni” espoused in Davies Contractor Ltd V Fareham DC vividly played out as a result of the emergency measures employed by Governments of the world to curb the epidemic from spreading. It is to be noted however that the pandemic must not have merely imposes difficulty in performance. In other words, the pandemic must render the performance of the contract commercially and legally impossible, otherwise, the party would not be able to invoke the doctrine. This was the position of the law in G.N NWAOLISAH V PASCHAL NWABUFOH[11], where the apex Court Per ADEKEYE JSC at Page 36 paragraph C-E noted thus: “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. Davies Contractor Ltd V Fareham NDC (1956) AC 696. Tsakineglon & Co v. Noblee Thorh G.M.B.H (1962) A.C 93”

  2. The frustrating event must have occurred without the fault of either party. It is humbly submitted that the outbreak of this pandemic is without the fault of either of the parties.

    Having stated the above, a party relying on the outbreak of the pandemic is definitely in constant search for the legal implications or effects the pandemic would have on his performance of the contract, what then are the implications of the outbreak of the pandemic on the performance of contract?

5.0 LEGAL EFFECTS OF COVID’19 ON PERFORMANCE OF CONTRACT

The legal effect of the pandemic on contract would be determined by the remedy a party wants to invoke: if the parties are to invoke the force majeure provisions of their contract, then, the effects would be as it has was agreed between them. However, in the absence of the force majeure provisions, a successful invocation of the doctrine of Frustration would produce the following effects.

  1. The parties would be discharged from future obligations from the moment the frustrating event occurred. In this instance, the parties would be discharged from the day of the outbreak of COVID’19.
  2. Meanwhile, on the performance of obligations that have accrued before the outbreak of COVID’19, in states where the common law principles on frustration still operate, the decisions of the English Court in FIBROSA’s case[12] shall apply. However, in states like Lagos State, the extant provisions of the Law Reform (Contracts) Law of Lagos State 2015 shall apply.

CONCLUSION

The occurrence of unforeseeable events are customarily expected and envisaged by most businesses of the world, most especially in this 21st century business world. This accordingly requires business owners and contracting parties to be anticipatory of unforeseen circumstances when reaching contractual agreements or signing business deals. This is advisable because relevant provisions would have been included in their contractual terms, and that would suffice in mitigating the hardships or consequences of unforeseen circumstances like COVID’19 in the no distant future.

Owolabi, Yusuf Olatunji is a Law Student of Lagos State University yusufola.owolabi@gmail.com and +2349077554966

Footnotes

[1]https://www.nortonrosefulbright.com/en/knowledge/publications/844d7cf4/contract-performance-in-a-coronavirus-world.force-majeur-clauses-and-the-doctrine-of-frustration accessed on 30th March, 2020

[2]https://esq-law.com/the-applicability-of-the-doctrine-of-frustration-force-majeur-to-business-contracts-in-light-of-covid-19/ accessed on30th March, 2020

[3] The question that would be asked is, are the parties consensus ad idem?

[4] https://definitions.uslegal.com/p/pacta-sunt-servanda/ adapted on the 22nd March, 2020.

[5] (2012) LPELR-SC.214/2007

[6] (1987) 4 NWLR (PT 660 520

[7] Meaning Superior Powers

[8] (2017) LPELR-41433(CA)

[9] (2011) LPELR-SC.211/2003

[10] Per ADEKEYE JSC at Page 35-36 paragraph D-C

[11] Supra

[12] (1942) UKHL 4

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