Written by: O. M. Atoyebi, SAN
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Written by: O. M. Atoyebi, SAN
The declaration of COVID-19 as a global pandemic by the World Health Organization (WHO), also reveals it as more than just a public health crisis, but a pandemic bearing grave social and economic consequences.
With the outbreak of this pandemic, there has suddenly been a rapid negative shift in the economy which inadvertently affects the economy. More so, with the restrictive measures placed by most countries; travel restrictions, lock down directives, closure of businesses etc, to flatten the curve, there would be severe financial consequences on commercial activities of companies/individuals.
One of the socio-economic consequences of these measures would be the performance of contractual obligations by a party whose obligations are affected by the pandemic. These obligations could take the form of financial, construction, supply and delivery obligations etc. For instance, from the perspective of financial obligations (existing loan) of companies and individuals, it is unlikely that such obligations would be met due to the outbreak of the disease.
A lot of companies need answers as to whether or not they would incur liability for non-performance caused by the pandemic. Consequently, it has become imperative to explore the rights available under such existing contracts.
Although, it is trite that a party is always obligated to perform its obligations under the contract and failure to perform would be a breach resulting in liability. An exception to this rule to release the party from its obligation is by taking shield under a force majeure clause, or by allowing equity to prevail; invoking the common law doctrine of frustration.
A force majeure clause usually set out situations where unforeseeable circumstances beyond the control of the parties may arise, preventing one from fulfilling its contractual obligations. Circumstances recognized as force majeure includes, but not limited to; acts of God, government restrictions, natural disaster, etc.
In order to be released from liability, the party must show that its inability to perform its obligation results directly from the force majeure event, and such event could not have been foreseen at the time the contract was made, and could not have been prevented.
The legal impact of force majeure is that both parties will not be liable for breaches of contract resulting directly from a force majeure event. However, it must be stated that the occurrence of a force majeure does not terminate the obligation of a party where it is possible to perform such obligation after which the force majeure ceases to have effect. Rather, the obligation to perform is suspended for the duration of the force majeure event and resumes once the force majeure ceases.
In a situation where the length of the force majeure event becomes impossible to perform obligations, a party may rather repudiate the contract.
Where the contract does not include a force majeure clause, or the force majeure clause does not cover the present situation, the common law doctrine of frustration becomes applicable. This comes under the principle that; “equity fulfils intention to fulfil an obligation”.
Frustration is 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 as entirely beyond what was contemplated by the parties when they entered into the agreement, as held in the case of N.B.C.I v. STANDARD (NIG.) ENG. CO. LTD. (2002) 8 NWLR (Pt. 768) 104 CA.
Thus, the doctrine of frustration would only apply to events that occur after a contract has been agreed, and it becomes impossible to do so. Where the doctrine of frustration is applied successfully, it terminates a contract.
It is important that parties to a contract are aware of their rights under a contract. Most importantly, individuals and commercial entities would need to seek legal advice from legal experts on issues whether or not a force majeure event would apply to specific contracts; reliefs that may be sought in such circumstance, when to terminate or suspend a contract, steps to mitigating the risks of similar epidemic in future contractual agreements etc.