By Mayowa Ogunsan
In the light of the current pandemic being faced by nations of the world, it has become clear and incontrovertible that the clarity of contractual terms is as important as the contractual obligation.
Nigeria, as a nation is not only faced with challenges relating to the treatment of patients suffering from the ailment (COVID-19) but is also faced with looming issues relating to the inability of parties to fulfill contractual obligations. Measures adopted by the government such as placing people on quarantine, ordering the Lock Down of some states, and closing the borders are some of the major contributing factors necessitating the inability of parties to fulfill their contractual obligations.
The inability to thus fulfill these obligations has become of concern in the business and commercial sphere of every industry as many parties to commercial contracts have already become unable, and more are likely soon to become unable, to perform their duties and meet their contractual obligations.
This article therefore seeks to address the following questions of law:
The importance of a force majeure clause in contract
Whether COVID-19 is a force majeure event
The importance of notice in a force majeure event
What happens where a contract does not have a force majeure clause and a party is unable to perform a contractual obligation?
FORCE MAJEURE CLAUSE IN CONTRACT
The importance of a force majeure clause in contract cannot be overemphasized[1]. Force Majeure which is a French word means “superior force”. It is generally used in a contractual agreement to describe events that are entirely outside the control of parties to a contract. The purpose of such a clause is to absolve the parties from liability in the event they cannot fulfill the terms of a contract for reasons which go beyond their control.[2]
This clause is of essence bearing in mind the universal concept of Pacta Sunt Servanda – an agreement must be kept. This clause therefore helps to answer the question as to what should happen in the event a party to a contract is unable to perform and fulfil his contractual obligations due to unforeseeable events.
In order to be considered a force majeure, an event has to be:
Unforeseeable – there was no way to predict that the disaster/conflict/etc. would occur when, where and how it occurred
External – the event was not the result of actions committed by the party itself or an associate of the party (employees, business partners…)
Irresistible – the event was of such a nature that there was no way for the party to take appropriate countermeasures before or during the event[3]
G.-A.Ilie in describing what events are stated that the word ”events” are broadly used to include: natural events (such as flooding, earthquake, fire, etc.), political events (for example war, strike, massive protests, closing of borders, etc.) and legal events (expropriation, legal limitation of the exercise of a certain right, prohibition of an activity, etc.)[4].
IS COVID-19 A FORCE MAJEURE EVENT?
Whether Covid-19 is a Force Majeure event is a matter of construction of the contractual term and will largely depend on the scope of event addressed by the clause in the agreement. The importance of legal skills in drafting this clause therefore comes into play so as to be able to adequately capture unforseeable and external events which though occur, are outside the control and intention of the parties.
Force majeure provisions vary widely. Some contain broad language defining force majeure as an unforeseen event outside of a party’s control or an act of God, while others reference specific events, such as disease, war, or hurricanes. One particular circumstance that is rarely included in the definition of a force majeure event is general economic decline. Depending on the language in the contract, delays or terminations due to the coronavirus or related government action (such as a travel or congregation ban) may be covered[5].
As more people and businesses are impacted by the coronavirus, the breadth of situations covered by force majeure clauses will be tested, including the impact of labor and supply shortages. Beyond determining whether a specific event falls within the definition of force majeure in question, further analysis will be required to determine whether the event’s impact rises to the level contemplated by the contract. Some contracts may require the force majeure event to render performance of the contract impossible, while others may only require the event to render performance commercially impracticable[6].
It must however be noted that not all force majeure clauses allows for absolute nonperformance of the contractual obligation as some still impose a duty on parties to perform after a specific period of time. It is therefore important for parties to carefully study the force majeure clause inserted in their contracts (especially in times as this) in other to avoid incurring liabilities.
Recousre must also be made to the fact that for force majeure to be applicable, there must be a causal connection between the force majeure event that made it physically or legally impossible to perform the contractual obligations.
It therefore suffice to state that before a party to a contract can escape liability for the nonperformance of a contractual obligation, the affected party must show that the COVID-19 and the consequent governmental actions is such as to prevent the affected party from performing his part of the contract.
NOTICE IN FORCE MAJEURE EVENTS
Many a times, a force Majeure clause provides that in the event of a force majeure, the affected party must notify the other of such event within a specified period of time. The purpose of this is to enable the other party to adjust adequately with situation that might affect the performance of the contractual obligation.
Where a force Majeure clause provides for notice, it is important that the affected party duely notify the other party of this events so as to escape the liability of nonperformance.
WHAT HAPPENS WHERE NO FORCE MAJEURE CLAUSE IS INSERTED IN A CONTRACT
In the event an agreement does not provide for a force majeure, a party may invoke the common law doctrine of nonperformance, such as impossibility, impracticability, and frustration of purpose. These common law doctrine typically require the affected party to prove that such party’s performance is not just more expensive or challenging than expected, but, depending on the doctrine relied upon, is either no longer possible or is so inherently different in nature than what was originally expected that it contravenes the basic assumption of the parties’ underlying agreement.
Where a party is claiming frustration, it must be proved that though a contractual obligation has been imposed on parties by an agreement, it has become imposible for a party to do or perfom such obligations by reason of some event which the affected party could not prevent.
Before this doctrince can be applicable, the courts typically will begin analysis by determining whether or not the event causing delay or termination of the contract was foreseeable. Where it is foresseable and could have reasonably been contemplated by the party, the party cannot rely on frustration as a ground for nonperformance.
RECOMMENDATIONS
With the closure of businesses and in effect the posible nonperformance of contractual obligations, parties are at risk of incuring liabilities in contract. The following shall therefore be recommended in other to prevent and mitigate liabilities:
Before an agreement is executed by parties, parties should carefully review the force majeure clauses in order to understand the circumstances under which they can declare a force majeure and whether a pandemic and the resulting emergency measures may fall under its scope.
Depending on the tenor of the force majeure clause, if a party is affected by COVID-19, such party should do an official notification to the other party informing it of the force majeure event and the impossibility and impracticability of performing the contractual obligation he is required to perform in the agreement.
Where an agreement do not have a force majeure clause, parties should review their agreement to include this clause by either making a general provision or specifically stating events that could constitute a force majeure event.
CONCLUSION
The aftermath effect of COVID-19 on our industry is undoubtedly going to be emersive. Whether parties will be liable for default in the nonperformance of their contractual obligation will largely depend on the tenor of the force majeure clause embedded in the agreement. Although legal questions may arise as to the effect of COVID-19 on a contract, businesses will likely have to balance their potential legal remedies with the impact to their business relationships due to the uncertainty of the situation and the broad impact of the pandemic.
Mayowa Ogunsan is a consultant and an Associate in the law firm of Wiseview Legal Consultancy. E-mail: m.ogunsan@wiseviewlegal.com
[1] The Force Majeure is an exception to the principle of law imbedded in the doctrine of Pacta Sunt Servanda – an agreement must be kept
[2] COVID-19 – A Force Majeure Event? Published on Mondaq by Chrysanthos Christoforou of Elias Neocleous & Co LLC
[3] Artilce written by Contract Book. (Last accessed on the 1st day of April, 2020) https://contractbook.com/contractguide/force-majeure
[4]G.-A.Ilie, Risks in Contracts. From the Old Civil Code to the New One (Bucharest: Universul Juridic, 2012), 52.
[5] Contracts Being Tested By COVID-19. Published on Mondaq by Richard A. Vance and Alison Zeitlin Stites & Harbison PLLC
[6] Ibid
Nigeria, as a nation is not only faced with challenges relating to the treatment of patients suffering from the ailment (COVID-19) but is also faced with looming issues relating to the inability of parties to fulfill contractual obligations. Measures adopted by the government such as placing people on quarantine, ordering the Lock Down of some states, and closing the borders are some of the major contributing factors necessitating the inability of parties to fulfill their contractual obligations.
The inability to thus fulfill these obligations has become of concern in the business and commercial sphere of every industry as many parties to commercial contracts have already become unable, and more are likely soon to become unable, to perform their duties and meet their contractual obligations.
This article therefore seeks to address the following questions of law:
The importance of a force majeure clause in contract
Whether COVID-19 is a force majeure event
The importance of notice in a force majeure event
What happens where a contract does not have a force majeure clause and a party is unable to perform a contractual obligation?
FORCE MAJEURE CLAUSE IN CONTRACT
The importance of a force majeure clause in contract cannot be overemphasized[1]. Force Majeure which is a French word means “superior force”. It is generally used in a contractual agreement to describe events that are entirely outside the control of parties to a contract. The purpose of such a clause is to absolve the parties from liability in the event they cannot fulfill the terms of a contract for reasons which go beyond their control.[2]
This clause is of essence bearing in mind the universal concept of Pacta Sunt Servanda – an agreement must be kept. This clause therefore helps to answer the question as to what should happen in the event a party to a contract is unable to perform and fulfil his contractual obligations due to unforeseeable events.
In order to be considered a force majeure, an event has to be:
Unforeseeable – there was no way to predict that the disaster/conflict/etc. would occur when, where and how it occurred
External – the event was not the result of actions committed by the party itself or an associate of the party (employees, business partners…)
Irresistible – the event was of such a nature that there was no way for the party to take appropriate countermeasures before or during the event[3]
G.-A.Ilie in describing what events are stated that the word ”events” are broadly used to include: natural events (such as flooding, earthquake, fire, etc.), political events (for example war, strike, massive protests, closing of borders, etc.) and legal events (expropriation, legal limitation of the exercise of a certain right, prohibition of an activity, etc.)[4].
IS COVID-19 A FORCE MAJEURE EVENT?
Whether Covid-19 is a Force Majeure event is a matter of construction of the contractual term and will largely depend on the scope of event addressed by the clause in the agreement. The importance of legal skills in drafting this clause therefore comes into play so as to be able to adequately capture unforseeable and external events which though occur, are outside the control and intention of the parties.
Force majeure provisions vary widely. Some contain broad language defining force majeure as an unforeseen event outside of a party’s control or an act of God, while others reference specific events, such as disease, war, or hurricanes. One particular circumstance that is rarely included in the definition of a force majeure event is general economic decline. Depending on the language in the contract, delays or terminations due to the coronavirus or related government action (such as a travel or congregation ban) may be covered[5].
As more people and businesses are impacted by the coronavirus, the breadth of situations covered by force majeure clauses will be tested, including the impact of labor and supply shortages. Beyond determining whether a specific event falls within the definition of force majeure in question, further analysis will be required to determine whether the event’s impact rises to the level contemplated by the contract. Some contracts may require the force majeure event to render performance of the contract impossible, while others may only require the event to render performance commercially impracticable[6].
It must however be noted that not all force majeure clauses allows for absolute nonperformance of the contractual obligation as some still impose a duty on parties to perform after a specific period of time. It is therefore important for parties to carefully study the force majeure clause inserted in their contracts (especially in times as this) in other to avoid incurring liabilities.
Recousre must also be made to the fact that for force majeure to be applicable, there must be a causal connection between the force majeure event that made it physically or legally impossible to perform the contractual obligations.
It therefore suffice to state that before a party to a contract can escape liability for the nonperformance of a contractual obligation, the affected party must show that the COVID-19 and the consequent governmental actions is such as to prevent the affected party from performing his part of the contract.
NOTICE IN FORCE MAJEURE EVENTS
Many a times, a force Majeure clause provides that in the event of a force majeure, the affected party must notify the other of such event within a specified period of time. The purpose of this is to enable the other party to adjust adequately with situation that might affect the performance of the contractual obligation.
Where a force Majeure clause provides for notice, it is important that the affected party duely notify the other party of this events so as to escape the liability of nonperformance.
WHAT HAPPENS WHERE NO FORCE MAJEURE CLAUSE IS INSERTED IN A CONTRACT
In the event an agreement does not provide for a force majeure, a party may invoke the common law doctrine of nonperformance, such as impossibility, impracticability, and frustration of purpose. These common law doctrine typically require the affected party to prove that such party’s performance is not just more expensive or challenging than expected, but, depending on the doctrine relied upon, is either no longer possible or is so inherently different in nature than what was originally expected that it contravenes the basic assumption of the parties’ underlying agreement.
Where a party is claiming frustration, it must be proved that though a contractual obligation has been imposed on parties by an agreement, it has become imposible for a party to do or perfom such obligations by reason of some event which the affected party could not prevent.
Before this doctrince can be applicable, the courts typically will begin analysis by determining whether or not the event causing delay or termination of the contract was foreseeable. Where it is foresseable and could have reasonably been contemplated by the party, the party cannot rely on frustration as a ground for nonperformance.
RECOMMENDATIONS
With the closure of businesses and in effect the posible nonperformance of contractual obligations, parties are at risk of incuring liabilities in contract. The following shall therefore be recommended in other to prevent and mitigate liabilities:
Before an agreement is executed by parties, parties should carefully review the force majeure clauses in order to understand the circumstances under which they can declare a force majeure and whether a pandemic and the resulting emergency measures may fall under its scope.
Depending on the tenor of the force majeure clause, if a party is affected by COVID-19, such party should do an official notification to the other party informing it of the force majeure event and the impossibility and impracticability of performing the contractual obligation he is required to perform in the agreement.
Where an agreement do not have a force majeure clause, parties should review their agreement to include this clause by either making a general provision or specifically stating events that could constitute a force majeure event.
CONCLUSION
The aftermath effect of COVID-19 on our industry is undoubtedly going to be emersive. Whether parties will be liable for default in the nonperformance of their contractual obligation will largely depend on the tenor of the force majeure clause embedded in the agreement. Although legal questions may arise as to the effect of COVID-19 on a contract, businesses will likely have to balance their potential legal remedies with the impact to their business relationships due to the uncertainty of the situation and the broad impact of the pandemic.
Mayowa Ogunsan is a consultant and an Associate in the law firm of Wiseview Legal Consultancy. E-mail: m.ogunsan@wiseviewlegal.com
[1] The Force Majeure is an exception to the principle of law imbedded in the doctrine of Pacta Sunt Servanda – an agreement must be kept
[2] COVID-19 – A Force Majeure Event? Published on Mondaq by Chrysanthos Christoforou of Elias Neocleous & Co LLC
[3] Artilce written by Contract Book. (Last accessed on the 1st day of April, 2020) https://contractbook.com/contractguide/force-majeure
[4]G.-A.Ilie, Risks in Contracts. From the Old Civil Code to the New One (Bucharest: Universul Juridic, 2012), 52.
[5] Contracts Being Tested By COVID-19. Published on Mondaq by Richard A. Vance and Alison Zeitlin Stites & Harbison PLLC
[6] Ibid