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Effects of the coronavirus pandemic on existing contracts

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As at the 9th day of April, 2020, Nigeria has reported a total of 288 cases of the Coronavirus pandemic (Covid-19) with 51 discharged cases discharged and seven deaths. In reaction to the spread of the pandemic, the President of the Federal Republic of Nigeria passed the COVID-19 Regulations 2020 on the 30th day of March, 2020 pursuant to the Quarantine Act thereby placing a total lockdown of activities in Lagos and Ogun States, and also in the Federal Capital Territory, Abuja starting from 11pm on 30th March, 2020 for a period of 14 days.  This lockdown means the closure of schools, offices, businesses and banning of all public gatherings, among other measures. The only people exempted from the lockdown are businesses dealing in food, water, medicine & medical supplies, pharmacies and essential services.

Prior to the passing of the COVID-19 Regulations 2020 by the President, the Lagos State Government had on the 27th day of March, 2020, passed the Lagos State Infectious Diseases (Emergency Prevention) Regulations 2020 pursuant to the Quarantine Act and the Lagos State Public Health Law, which restricted movement in Lagos State save for transportation or movement of essential supplies such as food, water, pharmaceutical products, medical supplies and medicines, and any other essential supplies as the Governor of Lagos State may deem necessary.

The two regulations above, and the restrictions contained in them, have led to the very important discussion as to whether a party to a contract can be released from the performance of contractual obligations as a result of a ‘force majeure’ or the contract can be discharged by the doctrine of frustration. The answers to the below questions are vital to this discussion. 

What is force majeure?

Force majeure, which is a French term for ‘superior force’, is an event, effect or circumstance that can neither be anticipated, foreseeable nor controlled by the parties and which prevents a party from fulfilling his/her/its obligations under a contract, as such performance becomes impossible. For force majeure to be applicable to a particular transaction, there must have been a force majeure clause in the contract between the parties. This applies to all forms of contracts, including but not limited to employment contracts. A force majeure clause is basically a provision in the contract that allocates the risk if it is impossible or impracticable to perform an obligation under a contract as a result of an event or effect that the parties could not have anticipated or controlled during the term of the contract.

What are the different types of force majeure?

Force majeure may be acts of God/nature or acts of the people/government. Force majeure events may take the form of natural catastrophes such as hurricanes, typhoons, cyclones, floods, earthquakes and volcanic eruptions, or may be political events such as wars, riots, strikes and terror attacks. It may also take the form of epidemic or pandemic diseases such as Ebola, Coronavirus and an act of a state or governmental prohibition.

Does Nigerian law recognise force majeure?

The law of contract in Nigeria recognises force majeure. Parties generally rely on the common law principles to enforce a force majeure clause in Nigeria. However, the parties must have expressly agreed to include such a clause in the contract itself, as it is elementary knowledge that parties are bound by the terms of their contract. The force majeure clause may as well lead to the contract being discharged by frustration. 

Can you give us an example of a force majeure clause?

An example of a force majeure clause is:

“1. Neither party shall be considered in breach of its obligations under this Agreement or be responsible for any delay in carrying out its obligations, if performance is prevented or delayed wholly or in part as a consequence of force majeure which is beyond the control of the Parties.

(2) Force Majeure here includes:

  • acts of God, including but not limited to fire, flood, earthquakes, windstorms or other natural disasters;
  • war, threat of or preparation for war, armed conflict, imposition of sanctions, embargos, or similar actions;
  • terrorist attacks, civil war, civil commotion or riots;
  • failure of any Governmental body to comply with any law (including a failure to grant, renew or maintain any licence or consent needed) or any change in law or interpretation of law;
  • fire, explosion(s) or accidental damage(s);
  • epidemics and pandemics;
  • any labour dispute(s), including but not limited to strikes, industrial action or lockouts; and
  • without limitation, any other extreme or adverse conditions or situations, and the continuance of these would make it unlikely that the party would be able to perform its obligations under this Agreement.

(3)Provided that one (1) month written notice of the event(s) is given by that Party having become aware of the fact, the operation of the provisions of this Agreement shall be temporarily suspended until situations return to normalcy for the Party”

When can one declare a force majeure?

Force majeure is not automatically invoked. Once a force majeure event occurs which is provided in the contract between the parties, the party who will be unable to perform his obligations under the contract must give written notice of the force majeure event within a reasonable time (or within the time as provided in the contract) to the other party, informing that party of the force majeure event and of the expected outcome of the force majeure event. The party is under a duty to reasonably mitigate the force majeure event and its consequences and prove that there are no alternative means of performing the contract.

What is the effect of a force majeure event on a contract?

When there is a temporary impossibility,created by a force majeure event, in the performance of a contract, the contract will be suspended for the duration of that event. When there is a permanent impossibility to performance, the contract will generally be terminated retrospectively.

What are the advantages and disadvantages of declaring a force majeure?

The advantage of invoking a force majeure clause is that it protects the party who fails to perform the contract in due time because of unforeseeable and uncontrollable events. It is an important tool of minimising liability in circumstances beyond either party’s control.

The disadvantage of declaring a force majeure is that it may lead to unjust enrichment out of the contractual transaction especially where one party had already performed his or her part of the contract. It may as well be invoked as a waiver of liability in case of failure to perform a contract. It may sometimes lead to the termination of a contract when there are prolonged effects of the event.

When does force majeure not apply?

Force majeure clause would not be applicable in cases where the parties ought to have foreseen the event referred to as a force majeure or where the party could control the event. It would also not apply where a force majeure clause may be premature, such as the possibility of a circumstance which would change shortly, andwhich would not affect performance of the obligations of the party under the contract.

What is the doctrine of frustration?

The doctrine of frustration makes provision for the discharge of a contract after its execution if a change of circumstances makes the contract impossible to fulfil. It is an implied term in the contract which is expressly not agreed to by the parties in the contract. It is different from force majeure because a force majeure clause must be expressly agreed to by the parties in the contract while the doctrine of frustration is implied. The doctrine, like force majeure, relates to situations that occur totally out of the control of the parties. However, it is only the courts that can declare an event as a frustrating event and not by the parties as in a force majeure clause. Where a contract is frustrated, it brings the contract to an end.

The doctrine has been held by the courts to apply to personal contracts, time charterparties, contracts for sale of goods, carriage of goods, building contracts and leases, tenancies & sales of land. It can also apply to contracts of employment where the employer or the employee is not able to perform its obligations due to the change in circumstance.

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What are the contracts that are not affected by the doctrine of frustration?

The Law Reform (Contracts) Act and the Law Reform (Contracts) Law of Lagos State provide for the types of contracts that frustration does not apply to, that is:

  1. Any charterparty except a time charterparty or a charterparty by way of demise;
  2. Any contract for the carriage of goods by sea;
  3. Any contract for the sale of specific goods where the goods have perished before the risk passes to the buyer, or any other contract for the sale and delivery of specific goods where the contract is frustrated by reason of the fact that the goods have perished; and
  4. Insurance contracts.

In what instances will there be frustration?

It is impossible to list all the types of events that can lead to frustration of a contract. However, the courts have held and generally limited the application of the doctrine to:-

(a) situations where the supervening event destroys a fundamental assumption; and

(b) where force majeure clauses are drafted into the contract.

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. Some examples are:

(1) Where the subject matter of the contract has been destroyed, or is no longer available.

(2) If the government permanently requisitions the subject matter of the contract and which makes performance of an obligation under the contract impossible;

(3) Death or incapacity of a party to a contract.

(4) Where there has been a subsequent change in the law regulating the subject of the contract or the contract has become illegal to perform as a result of new legislation.

(5) A contract can be frustrated on the outbreak of war.

(6) Where there is a cancellation of an event that is vital to the contract of the parties;

(7) Where the commercial purpose of the contract has failed.

In what instances will there not be frustration?

The instances that will not constitute frustration, as held by the courts in Nigeria, are stated below:

  1. Where the parties contemplated the event or circumstance;
  2. Where one of the parties brought about the event by his choice, that is a self-induced frustration; and
  3. Where the event is one that the law regards as not fundamental to destroy the basis of the contract.

What is the legal consequence of frustration on contracts?

Once a court decides that a contract has been discharged by frustration, the court also determines the state of affairs of the parties and who should retain, return or refund any money or property. The court also decides who is to bear the loss or how the loss is to be apportioned between the parties.

Nigerian law also provides for the legal effect of frustration in the Law Reform (Contracts) Act and the Law Reform (Contracts) Law of Lagos State. The Act and Law permit the recovery of money prepaid towards the performance of the contract, and by abolishing any liability to pay, if in fact payment had not yet been made. The Act and Law also provide for the recovery of the expenses of a party which were incurred towards the performance of the contract before the occurrence of the frustrating event. The Act and Law also allow a party who had done something towards the execution of the contract which constitutes a valuable benefit to the other party (apart from payment of money), to recover a sum of money not exceeding the value of the benefit so conferred by him on the other party.

The Act and Law also provide for situations where only a part of the contract has been frustrated and the other parts are still in force. In such situations, the courts can sever the part of the contract that has been frustrated while the other parts will remain in force.

For further information, please contact:

Kusamotu & Kusamotu

(The Greenfish Chambers)

2A, Udi Street, Osborne Foreshore Estate,

Ikoyi, Lagos State.

Email: enquiries@kusamotu.com

Website: www.kusamotu.com                                                                                                   

Tel: +234 (0) 8147203068

Disclaimer: Nothing in this Question & Answer should be construed as legal advice from any of our lawyers or the firm. The answers are a general summary of developments and principles of interest on the subject of discussion and may not apply directly to any specific circumstances. Professional advice should therefore be sought before action based on any answer is taken.

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