Monday, 6 April 2020

The Legal Implications of Covid-19 Pandemic on Existing Contractual Obligations: Force Majeure and Frustration of Contract


By Larry C. Nkwor Esq.

Introduction
The world is currently experiencing a pandemic of an infectious disease called coronavirus, (“Covid-19”).  Covid 19 is said to have originated from a seafood market in the city of Wuhan in China in late December of 2019. Covid 19 is at the center of every discussion today. Its rapid spread has had devastating effects on world economies, tax obligations and contractual obligations. The proliferation of the virus has led to the frustration of domestic and international contractual obligations. The virus has forced many cities around the globe to a total lockdown. As at Monday, 6th of April, 2020 there were about 1,329,825 confirmed cases (Covid 19) with over 73,839 deaths worldwide.[1]
This article analyses the legal implications of the Covid-19 Pandemic on existing contractual obligations and the applicability of the force Majeure clause and the doctrine of frustration of contract.

Force Majeure and the Doctrine of Frustration of Contract
"Generally, a force majeure event is an event that is beyond the affected party’s reasonable control, and could not have been foreseen, or, if the event could have been foreseen, is an event that was unavoidable."  say Alexandro Padrés and Alyssa Cowley.[2]
 Force majeure is an event that could not have been contemplated at the time parties entered into a contract. A force majeure clause is a contractual term that relieves parties from their contractual obligations when an event outside their control occurs and which makes performance of their contractual obligations impossible. In contrast with the definition of Alexandro Padrés and Alyssa Cowley, the event must both be unforeseeable and unavoidable.
"Force majeure provisions will be construed strictly and in the event of any ambiguity the contra proferentem rule will apply. Contra proferentem literally means "against the party putting forward". In this context, it means that the clause will be interpreted against the interests of the party that drafted it. The parties may contract out of this rule."[3]
It is the doctrine that, in interpreting documents, ambiguities are to be construed unfavourably against the maker. Flowing from the above, where there is any equivocation of the force majeure clause inserted in a contract, the clause will be construed strictly against the party relying on it.

Frustration of a contract is the legal termination of a contract due to unforeseen circumstances that prevent achievement of its objectives, render its performance illegal, or make it practically impossible to execute. It could be caused by reasons such as an accident, change in law, fire, sickness of one of the parties, third-party interference, epidemic etc.[4] Frustration of a contract excuses non-performance and automatically discharges the contract. However, frustration is not acceptable as an excuse where the circumstance was foreseeable, and is not applicable to certain types of contracts such as insurance policies.[5]
In Common law jurisdictions, such as Nigeria, force majeure is a creature of contract and it is not a general legal concept. For a party to rely on force majeure, the contract executed must contain a force majeure clause. In the absence of a force majeure clause, parties to a contract are left to the mercy of the common law contract doctrine of frustration.[6] It is therefore advisable for parties to incorporate into their contract a carefully negotiated force majeure clause to specifically address any crisis that might occur such as the Covid-19 pandemic.
Applicability of Force Majeure and Frustration of Contract
Every force majeure clause ought to be considered and construed separately in light of the contract executed and existing circumstances.  For force majeure to discharge contractual liabilities in the aftermath of the Covid-19 crisis, the first thing to consider is whether the clause contains a provision that covers a crisis like Covid-19.  It might be tricky and a bit technical if the clause is a general or broad one, which fails to list any specific events with particularity. Nevertheless, where specific events are mentioned, and a pandemic or epidemic is not listed amongst the specific events, a party may not be able to rely on force majeure to discharge contractual liabilities on account of Covid-19. In this instance, the Expressio Unius Est Exclusio Alterius rule will apply. This simply means, to express one thing is to exclude another. Rodara, Justice defined Latin maxim Expressio Unius Est Exclusio Alterius as follows:

“…... a maxim of interpretation meaning that the expression of one thing is the exclusion of the other. When certain persons or things are specified in a Law, Contract or Will, an intention to exclude all others from its operation may be inferred. In this case, the reference to the assignment to a financial institution excludes assignment to any other entity.”

The term epidemic or pandemic covers Covid-19. Thus, where a pandemic or epidemic is not captured in the force majeure clause, a party cannot successfully rely on force majeure on account of Covid-19 pandemic.

In order to make a successful case for force majeure, the party relying on it has to establish some elements. The elements are as follows:
1) External to the Parties; the event or situation was not caused by the actions or inactions of the party seeking to rely on force majeure.
2) Irresistibility; the impediment nor its consequences could not have been avoided or prevented by the non-performing party.
3) Unforeseeability; the event could not have reasonably been foreseen by the parties at the time of conclusion of the contract and was beyond the party’s control.
4) Impossibility; the event must have made performance an impossibility and not merely more difficult or impracticable.

The elements are conjunctive and the absence of any, destroys a case built on force majeure. The elements are dicey and are not as straight forward as they appear.
On the question of External to the Parties, Covid-19 and its consequences seem to be external. It couldn’t have been caused by a party’s actions or inactions. Covid-19 appears to be an Act of God. However, some persons in certain quarters have argued that COVID-19 is man-made. Even If this theory is true, it doesn’t change the fact that it is external to the parties unless it is proven otherwise that the party relying on it caused the virus and its scourge, which is very unlikely.
On Irresistibility, it appears that the occurrence of Covid-19 and its scourge could not have been prevented by a party that may seek to rely on force majeure. As earlier mentioned, Covid-19 appears to be an Act of God.
Considering Unforeseeability, while it may appear that Covid-19 and its scourge couldn’t have reasonably been foreseen or contemplated by parties, conversely, one might be led to argue that it was foreseeable, having regards to the timing of the contract. In the Australian unreported case of Asia Pacific Resources Pty Ltd. v Forestry Tasmania (No. 2) (1998) Aust Contract R 90 – 095, it was noted that
as a general rule, a party cannot invoke a force majeure clause due to ”circumstances beyond the control of the parties” which, to the knowledge of the party seeking to rely upon the clause, were in existence at the time of the contract.”
 Caution must be taken as to the time of the conclusion of the contract. Furthermore, Kerr J in Trade and Transport Inc v Iion Kaiun Kaisha Ltd, The Angelia [1973] 2 All ER 144 stated that:
 Ordinarily a party would be debarred from relying upon a pre-existing causes as an excepted peril if:
(i) The pre-existing cause was inevitably doomed to operate on the contract
(ii) The existence of facts that show that the excepted cause is bound to operate is known to the parties at the time of contract, or at least to the party who seeks to rely on the exception.
His Honour then added as an alternative to (ii);
(iii) If the existence of such facts should reasonably have been known to the party seeking to rely upon them and would have been expected by the other party to the contract to be so known.”
The foregoing infers that, causes beyond the control of the parties that were known or should reasonably have been known at the date of contracting cannot excuse performance. It is noteworthy that adequate care must be taken by the Courts in the interpretation of this ingredient.
Lastly, on the question of Impossibility, the party seeking to rely on force majeure must satisfactorily prove that the Covid-19 pandemic rendered performance of the contract impossible and not merely impracticable. It is not enough that the contract became more difficult. This element is a tricky one, as it is questionable whether Covid-19 is capable of rendering a contract an impossibility and whether are there contracts that COVID-19 might not be able to affect performance of. Nonetheless, given the lockdown of cities and shutdown of various operations and entities around the globe, it is likely that a Court will find that Covid-19 is a force majeure event. This is however subject to the facts and intricacies of each case.
Where the contract doesn’t contain a force majeure clause or where the clause doesn’t capture a pandemic/epidemic amongst the listed events, the only viable option would be to rely on the doctrine of frustration of contract. Just like, force majeure, the party relying on frustration has to establish that Covid-19 and its scourge could not have reasonably been foreseen at the time of the contract and the performance of the contract must have become impossible, and not merely impracticable. The party must show that the contract was frustrated and it would be unjust for the party to be held liable in light of the existing circumstances.[7]
Conclusion
The complexities and circumstances of each contract and case will determine whether or not a successful case can be made on force majeure or frustration of contract.





[1]  Worldometer, "Covid-19 Coronavirus Pandemic", https://www.worldometers.info/coronavirus/ (Accessed 6th April 2020)


[2] Partner and Associate respectively, in the Project  Development & Finance Practice from Shearman and Sterling an email, https://www.fastcompany.com/90482640/what-is-force-majeure-the-legal-term-youll-be-hearing-a-lot-during-the-coronavirus-crisis (Accessed 3rd April 2020).


[3] Damian McNair, "Force Majeure Clauses", Asia Pacific Projects Update, DLA Piper.


[4] Bussiness Dictionary, http://www.businessdictionary.com/definition/automatically.html (Accessed 3rd April 2020)


[5] Ibid.


[6] Janice M. Ryan, “Understanding Force Majure Cluases”, https:www.venable.com/insights/publications/2011/02/understanding-force-majure-clauses  (Accessed 3rd April 2020).


[7] Eris S. Block, "The Impact of COVID-19 on Contractual Obligations: Force Majeure and Frustration", https://www.mccarthy.ca/en/insights/articles/impact-covid-19-contractual-obligations-force-majeure-and-frustration Accessed 4th April 2020)



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