Effect of Convid-19 on Contractual Obligations :The Legal Perspective.

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. The emergence of the COVID-19 pandemic and the attendant lockdown which has disrupted commercial activities will, no doubt, create contractual problems. In some instances, the lockdown on activities will mean that time-bound obligations could not be met. In others, the lockdown will simply be raised as an excuse to avoid or delay obligations! Whatever their merits, there is likely to be a rash of breach of contractual claims once normal business activities fully resumes.

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.

The concept of Force Majeure is derived from the French legal system.
Force Majeure represents the legal proposition which posits that obligations in a contract may be vacated or stayed as a result of some supervening circumstance(s) that has made the performance of the obligations or some of the obligations in the contract impossible.See GLOBE SPINNING MILLS (NIG) PLC v. RELIANCE TEXTILE INDUSTRIES LTD [1]. The phrase is of French origin which literally connotes ‘superior strength’.

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. See DIAMOND BANK LTD v. UGOCHUKWU [2]

A Force Majeure clause, as of standard practice, is usually inserted by the parties to a contract in the contractual agreement that sets out the obligations and rights of the parties. In other 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.

A foremost principle of contract law is that promises must be kept. Parties are bound by the terms of a contract voluntarily made. This is reflected in the ancient Latin maxim “pacta sunt servanda.” Where a party fails to keep his contractual obligation, the remedies of the counterparty lie in either:

• an order of the court to compel the performance of that obligation (decree of specific performance), or
• payment of damages to assuage any financial loss directly occasioned by the breach of contract.
One of the few exceptions for a party’s failure to keep contractual promises is where an unforeseeable supervening event occurs, which makes it impossible to perform the contract.

The legal doctrine of frustration makes provision for the discharge of a contract where, subsequent to its formation, a change of circumstances occurs without default of either party as to make it legally, physically, or commercially impossible to fulfil the contract.

Also where a contract fails to 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”.

In the case of A. G. CROSS RIVER STATE V. A. G. FEDERATION,[3] the Supreme Court of Nigeria held that the frustration of a contract occurs

 “where it is established to the satisfaction of the court that due to a subsequent change in circumstances, the contract has become impossible to perform. Frustration of contract arises where a supervening event destroys a fundamental assumption of the contract. In other words, frustration of contract occurs whenever the law recognises that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from what was undertaken by the contract.”

The COVID-19 pandemic and the attendant lockdown consequences can be regarded as a supervening event that is out of the control of the parties and would, in appropriate cases, qualify as having had a disruptive impact on the performance of contractual obligations. The real problems that the courts (or arbitral tribunals) will have to grapple with lies in ascertaining the facts of each individual case in order to situate the allegations of breach of contract within the confinement of either frustration or force majeure, particularly where there is a dispute as to whether the terms of a force majeure clause are applicable or whether the general doctrine of frustration may be invoked to override the specific terms of that clause.

If the statistics about the commercial slowdown and possible global economic recession occasioned by the COVID-19 pandemic are anything to go by, the economic effects of the pandemic are likely to be catastrophic. Commercial entities need to start reviewing their contractual obligations with their financial and legal advisors, and come up with strategies to deal with existing and future obligations. For instance, they may begin to initiate dialogues with contractual counterparties to agree to the suspension, or even termination of pending or prospective contracts; depending on the nature of the obligations and the occurrence of variable events or contingencies that make it impossible to fulfil these obligations.

1 [2017] LPELR-41433 (CA)

2 [2008] 1NWLR (Pt. 1067) (P.29,Paras. A-B)

3 [2012] 16 NWLR (Pt. 1327) 425, 480; paras. E-F

About the AUTHOR 
Nnamseh Aniekan Aloysius is a writer, a poet, motivator, author, reseacher and the sole founder of “Wits Of The Law”.His area of interest are International Humanitarian Law (I.H.L), Criminal Litigation, Intellectual Property Law, Tax Law and Health Law.

                  COPYRIGHT RESERVED 
                                  © 2020 

For knowledge and Justice

Leave a Reply

Your email address will not be published. Required fields are marked *