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| A picture taken by asklegalpalace on 28 March 2020 |
Nations faces an economic and health emergency of historic proportions due to the coronavirus pandemic, the worst pandemic in over 100 years.
The novel Covid-19 pandemic has brought severe hardship on countries and business across the world. Nations are shutting down and commercial activities is currently lockdown. The pains or hardships caused by the eruption of Coronavirus known as COVID-19 is having some negative effects on contractual obligations among individuals, corporate and government bodies due to frustrations.
For example, the United States President Donald Trump signed into law the $2 trillion rescue plan to salvage a US economy crippled by the novel coronavirus.
According to US lawmaker "This will deliver urgently needed relief to our nation’s families, workers and businesses. That’s what this is all about.”
According to the International Monetary Fund (IMF) Coronavirus pandemic has driven the global economy into a downturn that will require massive funding to help developing nations, IMF chief Kristalina Georgieva said.
“It is clear that we have entered a recession” that will be worse than in 2009 following the global financial crisis, she said in an online press briefing.
Over 80 countries, mostly of low incomes, have already have requested emergency aid from the International Monetary Fund, she said.
The Director General of International Labour Organization (ILO), Guy Ryder, said that about 25 million people would become unemployed, while over $3.4 trillion income would be lost to the novel coronavirus globally.
“All aspects of our future will be affected – economic, social and developmental. Our response must be urgent, coordinated and on a global scale, and should immediately deliver help to those most in need.
“From workplaces, to enterprises, to national and global economies, getting this right is predicated on social dialogue between governments and those on the front line – the employers and workers. So that the 2020s don’t become a re-run of the 1930s
In order to contain the spread of the virus, countries have restricted non-essential service providers to stay at home for either a stated number of days or until further notice. Key players in the global economy have adopted other stringent measures to curtail the spread of the virus and this includes, cancellation or postponement of travels, businesses, conferences, sports and games, court hearings and so on. For instance, there is a partial closure of all courts in Nigeria. Similarly, the International Court of Arbitration has postponed all hearings and meetings scheduled to hold at the ICC Hearing Centre in the French capital, Paris, until 13 April 2020. In the field of sports, all the major football leagues in Europe have also stayed action until further notice; and the Tokyo Summer Olympics which the Japanese government has spent over 21 billion dollars has been postponed to 2021 summer. The impact of the deadly virus outbreak has been far-reaching. A number of industries and businesses have been hit hard by the COVID-19 pandemic. At the frontlines of the businesses and industries closed down or badly affected by the virus include hospitality, betting companies and casinos, retail, tourism, food and restaurant services, airline industries, sports industry, manufacturing and supply chain, stock markets, nonessential service industries and a good number of small businesses.
Although the damage caused by COVID-19 is still ongoing and its scale and extent yet to be assessed and ascertained, in a world connected by trade and commerce, it is clear that governments, corporations, investors, small businesses and individuals will suffer unquantifiable economic losses as a result of the pandemic.
In any event, how governments, businesses and individuals manage the crisis within the sphere of their competence remains a personal decision and burden for each actor. But the key question many experts and stakeholders are struggling to answer at the moment is: how to equitably resolve existing legal obligations which could not be met as a result of the outbreak and impact of the COVID19 pandemic.
For instance, should an organization be compelled to pay interest on a loan even though its commercial operations have been shut down by the government during this period? What measures should commercial flight operators adopt to mitigate its losses during this period? Should passengers be made to pay extra money for rescheduled flights? How could losses incurred as a result of the pandemic be mitigated or avoided entirely?
For big businesses which cannot perform their contracts (particularly where they are time-bound) due to market instability, travel restrictions, inflation and currency fluctuation or supply chain disruption, and in the absence of any insurance policy cover for the outbreak or its effects, how does one negotiate a fair settlement without incurring consequential damages?
LIMITATION AND EXCLUSION CLAUSES IN COMMERCIAL CONTRACTS
“Whether a party will be legally excused from its contractual obligations or able to terminate a contract will depend largely on the terms of each contract” and the facts or circumstances of each case. Most commercial contracts contain protection, limitation or exclusion from unforeseen liability clauses such as force majeure, frustration,
quantum meruit and material adverse change. This clause is designed to protect contracting parties from losses and damages which should ordinarily accrue where the performance of a contract becomes extremely difficult or impossible as a result of events or circumstances known as an Act of God.
An Act of God is a defence in both contracts and torts. It refers to “operation of natural forces, free from human intervention.” Thus an extraordinary violent storm, wind or tide like typhoon and hurricane are good examples of Acts of God. In the English case of Nichols v. Marshland (1876)2 Ex. D.1., the court held an extraordinary rainfall “greater and more violent than any within the memory of a witness,” which broke down embankments and the rush of the escaping water sweeping bridges away to be an Act of God. But the courts are reluctant to uphold a plea of an Act of God unless the party relying on same to avoid legal obligations proves that human foresight and prudence could not have reasonably recognized and averted such an event. Or as captured in The Mostyn (1928) A.C. 57 at p.93., that the event proved to be “an irresistible and unsearchable providence nullifying all human effort.”
More applicable to commercial contracts and often relied upon by defendants in a suit is the doctrine of frustration. The doctrine provides for “discharge of a contract where subsequent to its formation, a change of circumstances makes it legally, physically, or commercially impossible to fulfil the contract”. Lord Radcliffe captured it sufficiently in Davis Contractors Ltd. v. Fareham U.D.C. (1956)A.C. 696 when he held, “…frustration occurs whenever the law recognizes that without default of either party, a contractual obligation has become incapable of being performed…”
A contract is frustrated if and only if the supervening events occur under circumstances that are completely out of the control of the contracting parties and the intervening event must be so fundamental as to be found by a tribunal “both as striking at the root of the agreement and entirely beyond what was contemplated by the parties when they entered into the agreement.” This is a question of fact to be determined solely by the court. Courts decide it ex post facto – on the actual circumstances of the case – Lord Wright in Denny, Mott & Dickinson v. James B. Fraser & Co. Ltd. (1944) A.C. 256.
Although several theories have been advanced by authors and courts to justify the doctrine, these theories merely represent the stages of a court’s reasoning process before arriving at a just determination of a case. But what is the fate of parties who failed to insert a frustration clause in their agreement? The common law has graciously provided the implied term theory to their rescue. Thus, while it is advisable and tidy to insert a frustration clause in a commercial contract, its absence is not fatal in the event. It follows that the clause will be implied in the event of frustration.
Is COVID-19 an Act of God or an Event Capable of Frustrating a Contract?
Subsequent legal changes; an outbreak of war; destruction of the subject-matter of the contract; government requisition of the subject-matter of the contract; cancellation of an expected event; and miscellaneous events have all been held in deserving cases to constitute frustrating events. However, in recent memory, no disease outbreak has had such a crippling global effect like the COVID-19 pandemic. Thus in the months and years to come, arbitration tribunals and courts around the world will be invited to answer the foregoing question, to wit: Is COVID-19 an Act of God or an event capable of frustrating a contract? Put differently, should a party be excused from any legal or commercial obligation not performed due to the outbreak of the COVID-19 pandemic? In reference to the time for performance of a contract or any obligation, should the period of the COVID-19 outbreak be reckoned with or should it be treated as a period of a public holiday? If the answer is in the affirmative, what date and time should be reckoned with, is it from December 2019, January, or March 2020? What day of the month should become relevant?
Since these are questions to be answered by courts, and it will be interesting to see how courts will move to resolve these questions against competing interests while holding the balance during a legal fiasco. Until then, one is of the view that in deserving cases, courts should be more willing than reluctant to construe the pandemic as a frustrating event or an Act of God. In a digital world, however, contracts that can be performed virtually cannot be said to have been frustrated by the pandemic unless it can the shown that the party to perform such service was incapacitated by sickness or it was due to absence of key working facilities.
Conclusion
One is of the view that contracts that made provisions for adjustments and renegotiation should apportion risks arising from the outbreak, while lawyers and nonlawyers currently negotiating a new contract should try to include terms to cover the risk arising from the pandemic. Also, where possible, rather than go into full-blown legal suits or arbitration, parties affected by the pandemic should explore negotiated settlements. State actors faced with claims can always fall back on treaties or customary international law defences which stem out of public policy under such doctrines as public health and security, necessity and force majeure to avoid liability. Moving forward in a world of uncertainty, it may become imperative for business concerns to take out insurance cover cater for events like the pandemic in future. The coming months will be interesting in the legal world. What do you think?