In the early days of January 2020, the world woke up to the devastating news of the emergence of a novel virus in Wuhan, a major industrial and commercial city and the capital of Hubei Province in the People’s Republic of China. The contagion crossed international borders at an accelerated speed owing to the significant position of China as the world’s major trading partner and the seemingly unpreparedness of a number of countries. The highly contagious disease immediately triggered a global public health crisis and consequently, a catastrophic impact on international trade and economy. On the 11th of March, 2020, the World Health Organisation (WHO) designated the contagion a pandemic. A pandemic is a large outbreak of an infectious disease over a large geographic area that can significantly increase the mortality and morbidity rate within a short period of time. The effects of a pandemic are severe disruptions in economic, social and political activities with a high degree of uncertainty.
A coordinated global response to contain and mitigate the effect of the Covid-19 pandemic resulted in the closure of international borders, implementation of quarantines and isolations, school closures, restrictions on mass gathering and the extreme measure of a lockdown of all economic, business and social activities. On the local scene, the Federal government empowered by the Quarantine Act 1926 also restricted social and economic activities in the FCT, Lagos and Ogun States as a measure to eliminate the transmission of the disease with many other states taking similar decisions.
It is apparent that these government-imposed containment measures has inevitably impacted economic and commercial activities adversely. Diverse sectors of the economy which include aviation, agriculture, manufacturing, carriage by sea activities, energy, retail and hospitality has suffered volatility of a huge magnitude. Aside from the economic turbulence occasioned by this outbreak, other issues that will rear its head is the legal implications of the sudden halt of business operations. It highly foreseeable in this evolving and uncertain clime that contractual obligations in areas of commercial, employment, banking and finance issues, real estate, construction and tax law would be severely affected eliciting a floodgate of legal battles. As the pandemic remain unabated, most business owners with existing contractual obligations are already reconsidering their positions. The management of contracts on issues bordering on timescales, prices, deliveries, payment delays, prioritisation, loan repayments and insurance are likely to arise.
The sanctity of every contractual agreement is its strict performance regardless of any intervening unforeseen circumstances. This rigid approach is to encourage legal stability and certainty, especially in business climates. Nonetheless, the applicability of this rigid approach of the law may become unrealistic in some situations due to the occurrence of a supervening circumstance which fundamentally affects the performance of the contract rendering it impossible either temporarily or permanently. In such situations, the options available to the affected party will be largely anchored on the provisions of the contract. In most commercial agreements carefully drafted, the inclusion of a Force majeure event clause is a standard provision. A force majeure event is the occurrence of an unforeseeable event which is outside the reasonable control of a party which prevents that party from performing its obligations under a contract. So the recurring question at the moment is if the Covid-19 pandemic will qualify as a force majeure event and the mitigations available if any? My answer to this question will be in the affirmative albeit depending on the individual circumstances of each contract. By all standards, the emergence of the pandemic which has invoked a phenomenal unforeseen disruption in many spheres of our lives and consequential restrictive measures imposed by the government is a classic example of what a force majeure clause should cater to in a contract.
However, it is instructive to state that not all contracts will be covered by this clause because of the scope of its application by the law. Under the Nigerian legal system, there is no generic provision for the concept of force majeure under the statutory and common law. The consequence of this non-inclusion is that parties to a contract are free to negotiate the inclusion and the scope of application of the clause in their contracts. However, the danger inherent is this approach is if it is not included in a contract, the courts will not imply such a clause into the contract not matter the adverse effects on the affected party. Further, the interpretation given to force majeure clauses by the courts is hugely anchored on the wording of each specific contract. Thus, it is advised that the first pointer in the right direction for businesses involved in existing contractual agreements at this critical time is to carefully scrutinize their contracts to determine if a force majeure clause is embedded in it and there are no ambiguities involved. The second consideration will be to decipher if the clause can be engaged in a particular circumstance depending on the wording of the clause. Many contracts will specify the level of disruption and hindrances that can trigger the relevant consequences under the contract. Acts of God, disease outbreaks, natural disasters, epidemics, or luckily the inclusion of a pandemic in the contract can capture this present situation. In some contracts, the fact that the pandemic will make the business economically unviable may not be sufficient to trigger the clause. The affected party may have to show the exceptional or severe circumstance that has indeed hampered the performance of the obligations or put the affected party in a precarious position to necessitate the activation of the clause. The bar for the trigger of the clause is usually high and herculean.
Another issue which must be considered by the affected party is the procedural requirements imposed by the contracts in order to rely on the force majeure clause. In most cases, the timely communication of the supervening event to the other party is fundamental to the invocation of the clause. The affected party must take active steps to notify the other party of the emergence of the unforeseen event which has adversely affected the performance of the contract and the steps which have been taken to mitigate the impact on the contract. It is conceded that the emergence of the COVID-19 pandemic is a notorious fact within the knowledge of almost everyone and organizations around the world. However, it is advised that such a fundamental step of communication of notice should not be taken for granted as it may prove to be fatal to the case of the affected party and the risk of litigation. Despite the fact that most businesses are closed or are operating from home, an email communication detailing the event may suffice in the situation.
Assuming the force majeure clause is successfully activated, the likely impact on the contract is to suspend the performance of the contractual obligations until the force majeure event abates with the hope that the contract will be revived after the situation reverts to normal. In some cases, if the performance is time-specific, the contract may be terminated completely thereby reliving both parties of further obligations without any liability for damages. Other issues that may be left for determination will be costs which had been incurred by one or both parties prior to the event and there is no specific provision for it under the contract. In mitigating such risks, insurance policies if any was taken out may be sufficient or arbitration.
It is not all doom and gloom for parties in a contract where the force majeure clause was excluded as the legal doctrine of frustration of contract is an alternative which may be relied upon by the affected party in dealing with the situation of changed circumstance. The doctrine may be relied upon where an unforeseen event either renders a contract obligation impossible to perform or makes the performance of the contract radically different from what was envisaged at the time of the formation of the contract. A successful reliance on the frustration of the contract also relives the affected party of any exposure to damages in the event of non-performance.
Regardless of the perceived similarities between the force majeure clause and the legal concept of the frustration of contract, there are some fundamental differences. The reliance on the frustration of the contract will likely result in a litigation as it is only the court that can decide if the contract was indeed frustrated or otherwise. Another difference is that the principles of the frustration of the contract are quite stringent. Parties relying on force majeure have the liberty to make the rules guiding the invocation. The court will only interpret the wording of the clause in each specific case.
The courts are generally unwilling to rely on the frustration except there is strong evidence that the outcome of the contract has been fundamentally altered to what was not envisaged at the time of the formation of the contract without the fault of either of the parties. The court will be reluctant to grant reliance on the doctrine as a tool to escape a bad bargain or that the contract had become more expensive or difficult to perform. The court is more concerned about the physical or legal inability of the performance rather than the economic viability. Where costs have been incurred, Law Reforms (Contracts) Law of Lagos state provides that all sums paid to the other party prior to the frustration of the contract will be recoverable by the party who paid the sum. An exception to that will be a cost which had already been expended in accordance to the contract by the person who received payment which is not recoverable.
The pressure of COVID-19 will also be felt immensely in the area of loan repayment and line of credits. The disruption has significantly hindered the cash flow and access to financing. Many SMEs will struggle to retain staff, ensure payment of fixed costs, and also make timely repayments of existing loan obligations. In this time of economic uncertainty, it advisable business owners and other consumers of bank facilities begin to engage their banks in meaningful conversations on the possibility of relief regarding restructuring, reduction of interest rates on loans, refinancing and deferment of loan repayments and extensions with no late fees charges. This will approach of negotiations is more beneficial to businesses rather than needless litigation battles.
In forthcoming editions, other areas of law which has been impacted by the pandemic will be discussed
Olamide Onifade is a practicing lawyer and the founder of Olamide Onifade & Associates.
2nd Floor, 149, Ogudu Road, Ogudu, Lagos
Tel: 09093335636
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Email:barristerolamideonifade@gmail.com
