COVID-19 has been declared a global pandemic by the World Health Organization ("WHO")1. It has become a threat not just to the existence of humanity but every activity imaginable. The rapid progression of this virus has resulted in lockdowns, border closures, visa revocations, stock depreciation, amongst others. As a result, parties are unable to fulfil their contractual obligations.
Based on these global business disruptions, the execution of contracts entered by individuals and corporate entities have raised pressing questions such as:
- Will manufacturers remain bound to produce and deliver goods?
- Will entertainers be bound to perform at events?
- Will event planners be bound by contracts between their vendors and venue owners?
- What is the extent of liability of parties unable to perform their obligations under contracts?
- What remedies are available to parties under these contracts?
The answers to these questions will depend on the provisions of each contract, mainly whether or not the contract contains a force majeure clause. This article seeks to explain the concept of force majeure and its impact on contracts.
The Principle and Purpose of Force Majeure
The literal translation of force majeure is "superior force". Force majeure is defined as unforeseen circumstances outside a party's reasonable control which prevent that party from fulfilling its contractual obligations under the contract or at law.2 Force majeure provisions are not implied into the contract but must be expressly contained therein. Therefore, where a contract does not explicitly provide for a force majeure clause, then it cannot be invoked by any party.
A standard force majeure provision excludes liability for non-performance caused by events like fire, floods, strikes, riots, famine, explosions, earthquakes, armed conflict or events generally referred to as "acts of God". Consequently, a party seeking to rely on a force majeure provision in the contract must show the following:
- Firstly, the party must ascertain, and retain evidence demonstrating, that they are unable to meet their contractual obligations. Force majeure may not be considered in a situation whereby the execution of the contract only became more expensive or difficult.
- Secondly, the party must demonstrate that the circumstances are considered a force majeure event at law or under the contract. For example, if a party wishes to allege earthquakes or its
- consequences as a force majeure event, 'earthquakes' or 'natural disasters' should be provided for in the force majeure clause in the contract.
- Thirdly, there must be a causal link. i.e. The onus is on the party relying on this clause and will be required to prove that the force majeure event caused the loss and the eventual inability to perform its obligations under the contract.
Furthermore, the party must establish that the force majeure event has occurred and that:
- the event was beyond the party's control;
- the event has prevented, hindered or delayed your performance of the contract; and
- the party has taken all reasonable steps to avoid or mitigate its consequences.
Once a party has established a force majeure event has occurred, it may give such party the following options:
- terminate the contract;
- refrain from performing the contract;
- suspend performance of the contract;
- claim for an extension of time for performance; or
- any other action as may be agreed by the parties to the contract.3
Force Majeure under Nigerian Law
Nigerian law recognizes Force Majeure. However, it is commonly referred to as frustration. Although the doctrine of frustration will not be discussed in this work, a few distinctions will be made between force majeure and frustration, these are:
- Frustration is factual, and its determination is left entirely to the discretion of the Court; this means it doesn't need to be expressly provided for in the contract. On the other hand, force majeure must be provided explicitly in the contract before a party can seek to rely on it.
- The doctrine of frustration will operate to discharge the contract entirely. In contrast, a force majeure clause might suspend the execution of the contract, postpone it to a later date or mandate a renegotiation; the parties will decide the effect.
In light of the differences above, it can be safely assumed that parties prefer force majeure provisions because it gives them some latitude in determining the effect of unforeseen circumstances in their contract, rather than having the contract brought to an abrupt end because of frustration.
In the case of Diamond Bank Ltd v. Ugochukwu4 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 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;
- A contract can be frustrated on the outbreak of war; and
- Where the commercial purpose of the contract has failed.
Similarly, in the case of A.G Cross River State v. A.G Federation & Anor,5 it was held that the Court has to state whether and when frustration has occurred. In other words, to determine the existence of frustration. Frustration occurs whenever the Court recognizes that without default of either party, a contractual obligation has become incapable of being performed.
The Courts recognized certain situations or events as listed below that constitute frustration, namely:
- Subsequent legal changes;
- Outbreak of war;
- Destruction of the subject matter of contract;
- Government requisition of the subject matter of the contract; and
- Cancellation of an expected event.
Again in the case of Globe Spinning Mills Nigeria Plc V. Reliance Textile Industries Limited,6 the Court of Appeal reiterated the necessity of having the clause in the contract.
Is COVID-19 Pandemic a Force Majeure Event?
The next important thing to ask is whether the COVID-19 pandemic is a force majeure event? As stated earlier, a major determinant for the suitability of a situation under force majeure is the express provision for it under the force majeure clause in the contract. A force majeure clause will set forth a laundry list of specific force majeure events.7
Depending on the language of the clause, the COVID-19 pandemic itself may not necessarily be considered a force majeure event. The scope of force majeure sphere might have been broadened in light of W.H.O's declaration of COVID-19 as a "pandemic" and the reactions by the government to contain the spread of the virus, which has had a ripple effect on the ability of businesses to perform their contractual obligations.
Courts may view COVID-19 as a force majeure event or see the government's action taken to combat the virus as the force majeure event as opposed to COVID-19. This decision will be left to the discretion of the Court. It is also important to mention that some countries have gone ahead to declare COVID-19 as a force majeure event, e.g. Turkey8 and Mexico9.
Where the force majeure clause specifies "disease", "outbreak of illness", "epidemic", "pandemic" or some other similar term, it is opined that the current outbreak would likely qualify by virtue of its scale and disruptive effects. In contracts where no specific clause relating to disease is used, it might still be a valid ground if an omnibus term such as "act of God" is included.
In either case, the fundamental requirements for invoking a force majeure would still have to be satisfied by showing that:
- The incident (outbreak of COVID-19) has occurred out of the control of the parties.
- It has made it impossible to continue the performance of the contract as usual.
- The party invoking the clause has taken all reasonable steps to avoid or mitigate the effect of the consequences of the incident.
It is universally true that no matter how beautifully drafted legislation is, it cannot cover every foreseeable and unforeseeable circumstance. To a large extent, this applies to certain contracts or clauses in a contract. COVID-19 is one such unforeseen events.
With far-reaching effects, everyone must be open-minded, selfless and take proactive steps in finding ways to mitigate the impact of this pandemic, especially as regards to contracts. This can be achieved by carrying out all or some of the following:
- Have a careful review of the contract by parties and their legal practitioners.
- Develop a business continuity plan
- Comply with notice requirements as agreed in contracts
- Take steps to mitigate consequences and seek alternative means to carry out contractual obligations.
- Evaluate the effects of the invocation of force majeure and
- Review and adjust insurance plans as necessary
2 COVID-19: Legal and contractual implications - Stephenson Harwood LLP, https://www.shlegal.com/insights/covid-19-legal-and-contractual-implications , accessed 7 March 2020
3 COVID-19: Legal and contractual implications - Stephenson Harwood LLP, https://www.shlegal.com/insights/covid-19-legal-and-contractual-implications, accessed 7 March 2020
4 (2008) 1 NWLR (Pt. 1067)
5 (2012) LPELR-9335(SC)
6 (2017) LPELR-41433(CA)
7 The COVID-19 Pandemic and the Contractual Force Majeure Landscape-HFW, https://www.hfw.com/The-COVID-19-Pandemic-and-the-Contractual-Force-Majeure-Landscape accessed April 3, 2020
8 General Communiqué No. 518 on the Tax Procedure Law (Law No. 213) ("Communiqué") was published in the Official Gazette on March 24, 2020 with number 31078 (Reiterated) https://www.legal500.com/developments/thought-leadership/general-communique-no-518-on-tax-procedure-law/ accessed April 7, 2020
9 Mexico's Federal Government Declares COVID-19 Health Emergency-Duane Morris https://www.duanemorris.com/alerts/mexicos_federal_government_declares_covid19_health_emergency_0420.html accessed April 7, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.