YOUR CONTRACTUAL OBLIGATIONS; IS COVID 19 A VALID EXCUSE IN LAW?

Amidst the ripple effects of the Covid-19 Pandemic, businesses have found themselves unable to fulfill several contractual obligations;

Many organisations have been saddled with contracts which were not executed within agreed timelines, invoices left unsettled, and terms of agreements not adhered to.

This situation gives rise to a very  pertinent question: “Does the Covid-19 Pandemic operate as an excuse for not fulfilling contractual obligations?

As a general rule, parties are bound to adhere to the terms of agreements legally executed by them . Thus, any party who fails to so may be sued by the other party in a court of law, for damages.

However, the law recognizes situations where parties are unable to fulfil their contractual obligations as a result of unforseen intervening factors.

Typical examples of such situations lie in certain instances which the law recognizes as Force Majeure.

By way of explanation, a Force Majeure according to Black’s Law Dictionary is an event or effect that can neither be anticipated nor controlled.

Instances of such events are times of war, civil unrest, riots or Natural “Acts of God” such as earthquakes, blizzards, tornadoes, hurricanes, etc. This doctrine is covered by the Latin Maxim : Actus Dei nemini facit injuriam, literately meaning that the Act of God injures no one.

Most standard business agreements include Force Majeure clauses which protect the parties from such unforseen situations. The effect of inserting Force Majeure clauses in  Contract Agreements is to absolve the parties  from any liabilities which may arise from a failure to fulfill their  contractual obligations as a result of the Force Majeure.

Thus, the clause enables parties to suspend the performance of their contractual obligations where a Force Majeure has been established.

Interestingly, a cursory study of  most Force Majeure clauses in business agreements would show that epidemics were never envisaged as constituting a Force Majeure. The reason for this is not far fetched; never in the lifetime of anybody alive today, has a pandemic had the effect of shutting down the entire world; so much so that all business activities were effectively crippled.

This brings us to the crux of this study: Does Covid -19 qualify as a Force Majeure?

In the Nigerian case of Diamond Bank Ltd v. Ugochukwu (2008 1 NWLR (Pt. 1067) the Court of Appeal held per Rhodes-Vivour, JCA, (as he then was) that for a situation to qualify as force majeure , there must be an event which significantly changes the nature of the contractual rights of the parties; so much so that it would be unjust to expect the parties to perform those rights.

By implication, before a party can be absolved from his contractual liabilities based on a Force Majeure situation, such a party must establish that the Force Majeure event has occurred and that:

  1. the event was beyond the party’s control;
  2. the event has prevented, hindered or delayed the party from the performance of the contract; and
  3. the party has taken all reasonable steps to avoid or mitigate its consequences

From the foregoing therefore, it is clear that the Covid 19 pandemic qualifies as a Force Majeure event.

With the closure of local and international flights, ban on interstate movement, and shutting down of most businesses, schools, and general business activities, it goes without being said that no person would ordinarily have been expected to fulfil their contractual obligations during the time of the lockdown (especially at the peak of the lockdown)

So what happens where by an error or omission, parties do not insert Force Majeure Clauses in their Contract Agreement?

The law also makes provisions for such cases and allows parties to  rely on the common law Doctrine of Frustration.

The Doctrine of Frustration in this sense is an implied term in every contract which covers all situations where intervening factors make a contract physically or commercially impossible to fulfill.

The case of AG CROSS RIVER STATE V. AG FEDERATION & ANOR (2012) LPELR-9335(SC) explains this concept as follows:

The doctrine of frustration is applicable to all categories of contracts. It is defined as the premature determination of an agreement between parties, lawfully entered into and which is in the course of operation at the time of its premature determination, owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by law both as striking at the root of the agreement and entirely beyond what was contemplated by the parties when they entered into the agreement.

The conditions for applying the Doctrine of Frustration are also similar to that of Force Majeure.

Having established that the Covid-19 pandemic qualifies as Force Majeure, what should businesses do?

  1. Get Back to the Negotiation Table: With the interruption caused by the lockdown situation in many states in Nigeria, parties would need to sit down with their legal representatives and revise the terms of their contracts in line with the current commercial uncertainties brought about by the Covid-19 pandemic.
  2. Get The Right Insurance or Review Existing Ones: Most businesses usually take out Business Interruption Insurance Covers to indemnify them against unforeseen business interruptions. However, such insurance clauses usually exclude Force Majeure situations except where the Insured expressly asks for the inclusions and pays for it. This will be a good time to review existing Insurance Covers or where there is none, to make arrangements for one; bearing in mind that the Pandemic situation is far from being over.
  3. Take Steps to mitigate consequences:  During the intense periods of social distancing and travel bans in Nigeria (particularly in the months of March and April 2020), the performance of contracts were negatively impacted. It would therefore be necessary for parties to ascertain to what degree the subject matter of their contracts were affected and determine what remedies are available. Can the contractual performance timelines be revisited and readjusted? Or would it have to be cancelled, leading to a significant reliance on force majeure clauses in order to minimize further liabilities or losses? This activity should typically be handled by the legal representatives of the parties.

In conclusion, the law continues to evolve everyday as new circumstances continue to arise. All parties who have contractual obligations while this Covid-19 persists should be open minded about the challenges and should be willing to make compromises where need be.

Love,

Uloma


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