Apr 13, 2020

Force Majeure and Frustration: The effect of the global pandemic on contracts | Solomon Oho


In 2020, who would have thought that the world would be faced with such a global threat that is not a nuclear war instigated by North Korea, or an Alien Invasion but an invincible biological threat where we now seem to cherish the comfort of staying indoors, government and employers advising their employees to work from home, Mums yelling at their kids to go outside and get a life are now being encouraged to stay indoors not to risk contracting the deadly Virus. 

It is no surprise that this Disease (COVID-19), has disrupted various commercial and operational activities, interrupted Supply chains, and made contractual obligations impossible to perform as many countries have been forced to impose restrictions on movements, international and domestic flights, shutdown of workplaces, sporting events, industries, ports, markets, and public places generally which tend to pull a large crowd of people.

As a result of these recent developments, it has become impossible for many business owners, companies and relevant stakeholders to perform their contractual obligations in a Contract which then introduces the application of Force Majeure clauses in a contract or the Common Law principle of Frustration of Contract to help mitigate or excuse delay or non-performance of the contract.
This article will discuss the applicability of Force Majeure and Frustration, their effects on Contracts amidst the outbreak of COVID-19, how to invoke or enforce them and suggestions on the application of Force Majeure and Frustration on Contracts in the future.

Force Majeure:

This is a Clause included during the drafting of a contract to state that a party shall not be liable for the failure of or any delay in performing his own obligations in the contract so far as the failure or delay is as a result of an event beyond the reasonable control of a party and could not reasonably have been foreseen or provided against.  However, such failure to perform will not be excused for failure or delay resulting from only general economic conditions or other general market effects such as an increase in the cost of delivery as a result of the event.[1]

The purpose of this clause is to protect parties from events that are outside the normal risks associated with the business, and to put the parties on notice of events that may excuse or suspend performance.  It is important to point out that the distinguishing factor between Force Majeure and Frustration is that the act which seeks to delay or cause either party not to perform their contractual obligations must be specified in the Force Majeure Clause in the contract while the parties only need to meet the necessary tests for frustration to apply.

This Clause is often interpreted narrowly, and the party invoking the force majeure clause to excuse performance must prove the event in question falls within the scope of the clause. For example, Act of God, War, Riot. However, in the instant circumstance, parties may have failed to include a term that will sufficiently cover the recent outbreak of COVID-19 but where parties include general terms such as Disease, Epidemic, pandemic, or Government action which the COVID-19 or events arising from COVID-19 may fall under, would enable parties to invoke the Force Majeure Clause to excuse the delay or non-performance of their contractual obligations in order to avoid a breach of the contract[2] 

There are certain factors the Courts take into consideration when interpreting or determining if the Force Majeure Clause is properly invoked by a party and these are;

·        Does the Force Majeure Clause capture the event the party seeks to invoke

·         Was the event unforeseeable at the time of entering the contract,

·        Whether the risk of non-performance could be mitigated?

·        Whether the event has rendered performance impossible, or merely expensive?

The Force Majeure Clause also provides for some remedies which could be specific to the listed events in the clause. Such as the party is excused from liability or damages, an extension of time within which to perform his contractual obligations, or termination of the contract where the purpose of the contract can no longer be achieved.[3]


Frustration:

The doctrine of frustration can be traced back to the English common Law as a principle which will generally come into effect and apply to a contract that has been made impossible for parties to perform their obligations in the contract. This means that a contract’s performance will be rendered impossible because of some intervening or supervening event after the contract has been made.

Under the English common law, frustration will result in the contract being terminated so that the parties are excused from further performance or any liability. A party faced with an external occurrence or event that may make its performance under a contract impractical, onerous or even impossible might seek to rely on the principle that the contract has been frustrated. This principle was laid out in the Locus Classicus case of Taylor V Cadwell where the Court held that “when an opera house, which was rented for holding concerts was destroyed by fire, the contract was frustrated. This was because the very thing on which the contract depended on ceased to exist or if a certain thing happened. Thus it was held that for the doctrine of frustration it must be so that the nature of contract is such that it would not operate if a thing ceased to exist.”  It is also important to note that frustration will not apply where the non-performance of a party’s obligations is as a result of his own decision or negligence.[4]

The Courts would have to consider the following factors in determining if the doctrine of frustration will apply;

·        That the event in question must be unforeseen,

·        It must have occurred without the fault of either party to the contract and

·        It must either make the contract’s performance impossible or

·        It must destroy the fundamental purpose of the contract.

The distinguishing factor between the Application of Frustration in a Contract and the Force Majeure Clause is that where a contract fails to integrate a Force Majeure Clause, the doctrine of frustration would apply to the non-performance of the contract upon meeting the necessary tests listed above. The reason being that frustration applies in case of events which happen after the contract is made and for which neither any party is responsible nor can they prevent it from happening.

The application of the doctrine of frustration has the effect of terminating the contract and relieving both parties from their contractual obligations.  In such circumstances, Section 8(2) of the Law Reform (Contracts) Law of Lagos State, provides that all sums paid to a party in accordance with the contract shall be recoverable by the person who made the payment. However, Section 8(3) of the same law states that if the party to whom the payment was made has incurred expenses for the performance of the contract before the frustrating event occurred, the court may, if it considers it just to do so, allow the retention of the portion of the sums paid to him or her that have been so expended.[5]

Further to the above, section 120 of the Federal Competition and Consumer Protection Act provides for the protection of consumers who may find themselves on the defaulting side of a consumer contract and gives them the right to "cancel any advance booking, reservation or order for any goods and services, subject to a reasonable charge for cancellation of the order or the reservation by the supplier or service provider."  For example, before the outbreak of COVID -19, it is normal for parties to have booked or made a reservation for travel tickets with domestic and international Airlines but due to the sudden outbreak, parties will be forced to change their plans to either travel at an earlier date or decide not to make use of such flight reservations again. The Competition and Consumer Protection Act would then give the consumer the right to cancel such advance booking, reservation or order for any goods and services. Airlines also have the right to charge a reasonable fee for the cancellation of the reservation or services, but recent reports and outcry by consumers on social media have stated that the domestic airlines have refused and/or failed to adhere to the provisions of the Federal Competition and Consumer Protection Act.

How to Invoke a Force Majeure Clause and/or Frustration in a contract

In light of the outbreak of the COVID-19, a party can take the following steps to invoke the Force majeure Clause:

1.      Check whether the Force Majeure clause in the contract provides for the Outbreak and other events which came about as a result of such. The FM clause might have not specifically mentioned the Corona Virus Disease but might fall under one of the general terms usually inserted in force Majeure clauses such as “Disease”, “Pandemic”, “epidemic” or “Government Action.” 

2.      The party would also consider whether the risk of his non-performance could have been mitigated. The party seeking to invoke the FM clause is under an obligation to have taken reasonable steps to mitigate the foreseeable risks of its non-performance.

3.      Lastly, the party would have to show that his contractual obligations or performance have been impossible to execute as a result of the Outbreak. For example, where an Industrial company has a contractual target to produce a certain amount of Chairs to be delivered on a particular date, but due to the Government restrictions and shutdown as a means of preventing the widespread of the disease, the workers are required to stay at their respective homes for a certain or indefinite period will make it impossible for the party to meet up with the delivery date.

In the event where a claim of Force Majeure will not apply, the next consideration is whether any of the following established grounds to founding a successful claim of frustration apply:

·        Temporary unavailability – where a person or object that is essential for performance of the contract is temporarily unavailable.

·        Method of performance impossible – this will usually occur where there has been a ban or restriction of movement e.g., a contract for Courier services by Air where a travel restrictions is in place as is the current case in the world where Airlines have been grounded pending the passing of the outbreak. However, a contract will not be frustrated where performance is possible by a different method, and the difference between the two methods of performance is not sufficiently fundamental.

·        Failure of a specific source – this occurs where a contract to import goods from a particular country is now subject to a travel ban and/or restriction. E.g. the restrictions on importation of Masks and other protective gears from China due to conspiracy theories of such masks being contaminated.[6]

The application of Force Majeure and Frustration on Contracts in the future.

In high and positive spirit of a pro Covid-19 era, there are certain actions parties to a contract are advised to take into consideration in order to best protect their interests in the event of a severe outbreak or event which is likely to render the performance of contractual obligations impossible.

The parties are to;

1.      Check the definition and scope of the force majeure Clause and whether the event in question falls within such scope;

2.      Check the contract’s notice requirements and whether they have been or may be triggered

3.      Write to your counterparty and require (i) evidence of the circumstances it relies on, (ii) a full explanation of why its performance is now physically/legally impossible, (iii) evidence of steps it is taking to mitigate and (iv) regular updates as to its efforts to resume performance.

4.      Check the governing law provisions and impact that such law will have on interpreting the contract

5.      Check whether mitigation steps or alternative means of performance can reasonably be taken in respect of the contract

6.      Consider the potential consequences of a breach and/or default of the contract

7.      Can consider entering into a written variation to the Contract or seek Alternative Dispute resolution mechanisms.

In essence, Force Majeure clauses are inserted in a Contract to protect parties and help parties lessen or avoid their contractual obligations in the event of a phenomenon which is out of the control of both parties. Where this Force Majeure Clause is not inserted in a Contract, then the general Common Law Principle of Frustration will apply upon meeting certain criteria and alleviate both parties from their contractual obligations. The outbreak of COVID-19 is an unexpected event that hit the whole world and has put a hinge on so many contracts, and business operations. Parties are advised to negotiate and look for amicable ways to fulfil or remedy their own contractual obligations as it will be counter-productive for parties to play the blame game which could possibly ruin business relationships.



 

[4] Vandana Jaiswal, Force Majeure Clauses & Doctrine of Frustration of Contract http://www.legalservicesindia.com/article/1211/Force-Majeure-Clauses-&-Doctrine-of-Frustration-Of-Contract.html Accessed 28th March, 2020

[5] BabaJimi Ayorinde, COVID-19 Force Majeure and Frustration  https://www.mondaq.com/Nigeria/CorporateCommercial-Law/908634/COVID-19-Force-Majeure-And-Frustration Accessed 29th March, 2020

[6] SIDLEY, COVID-19 and the impact on English Law Governed Contracts – Force Majeure and Frustration  https://www.sidley.com/en/insights/newsupdates/2020/03/covid-19-and-the-impact-on-english-law-governed-contracts--force-majeure-and-frustration Accessed 30th March, 2020

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