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HomeArticleCOVID-19: POSSIBLE DEFENCES TO A NON-PERFORMING PARTY IN A COMMERCIAL CONTRACT

COVID-19: POSSIBLE DEFENCES TO A NON-PERFORMING PARTY IN A COMMERCIAL CONTRACT

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By Taiye Adegoke

ABSTARCT

It is no longer news that the world is confronted with a common enemy today – the novel Coronavirus 2019 popularly known as COVID-19. The virus was first discovered in China and has today spread to over 190 countries around the globe. COVID-19 has disrupted the world economy and businesses across the globe are heavily hit by the operation of the pandemic. There is no gainsaying the fact that this novel coronavirus has surfaced in Nigeria with over 40 cases discovered so far as at the time of this article and still counting. The Nigerian Government, like other countries of the world have taken some measures to contain the spread of this virus in the most populous nation in Africa, which measures obviously is taking a hard toll on businesses, transactions and the economy at large. While the world continuously strives hard to put an end to this misery ravaging the whole world, it is almost certain that the post COVID-19 world would likely herald a bundle of commercial disputes possibly arising from breach of obligations as a result of the sudden outbreak of this disease. Thus, commercial lawyers would be called upon to review various commercial agreements and defaulting litigants would rely on commercial lawyers to present a solid defence for them to the breach of their obligations resulting from the COVID-19 disorder.

INTRODUCTION

According to Wikipedia, Coronavirus disease 2019 (COVID-19) is an infectious disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The disease was first identified in 2019 in Wuhan, the Capital of Hubei China, and has since spread globally, resulting in the 2019-2020 Coronavirus pandemic. Research published in the Journal Nature attributes the origin of COVID-19 to jump or transmission of the virus from bats to people. It was first reported to the World Health Organization (WHO) country office in China on 31 December, 2019. The outbreak was declared a Public Health Emergency of International Concern on 30 January, 2020. On 11 February, 2020 WHO announced a name for the new Coronavirus disease: COVID-19.[1]

As of March 23, 2020, there had been 334,981 cases of Coronavirus disease globally, and 44,652 death toll in 190 countries around the globe. In the US alone, 31,573 cases and 201 death toll have been recorded so far. In Nigeria, on 23 March, 2020 the Nigeria Centre for Disease Control (NCDC) via its official twitter account[2] announced that four new cases of COVID-19 have been confirmed in Nigeria. Three are in Lagos State and one in FCT. As at 11:00pm on 23 March, there are forty confirmed cases of COVID-19 in Nigeria. Two have been discharged with one death recorded.[3] The number keeps increasing daily.

IMPACTS OF COVID-19 ON NIGERIA’S ECONOMY

The impact of Coronavirus is having a profound and serious effect on the global economy and Nigeria is not left out. The first case of Coronavirus disease was confirmed in Nigeria on the 27th of February, 2020.[4] Ever since, there has been an upsurge in the number of cases recorded, with new cases surfacing. As at 23 March, 2020 there have been 40 confirmed cases of Coronavirus disease in Nigeria according to ThisDay Newspaper.

The country is locked in a race against time to control the spread of the novel Coronavirus in Africa’s most populous nation. In order to contain the virus, the policymakers in Nigeria are making some hard policies with far reaching effect on the economy – but of course some of these policies come with difficult economic tradeoffs and by extension some legal consequences. In the efforts to control the disease some hard policies have had to be taken for instance, social distancing, reduced mobility, travel ban, whether voluntary or enforced. Lagos and Ogun States Government have placed a ban on social and religious gathering of more than 20 people. The Federal Government of Nigeria have also placed a travel ban on citizens from countries with more than 1000 cases. Airports have been closed down. The Nigerian Civil Aviation Authority announced a ban on all International flights except essential or emergency flights.[5] All Airlines are required to submit passenger manifests to the Port Health Authorities prior to the arrival of any essential and emergency flights into the country. The Federal Government of Nigeria have also temporarily suspended the issuance of visas-on-arrival. All civil servants from Grade 1 to 12 in non-essential roles have been directed to work from home for at least two weeks, especially in Lagos State. The Universities have been shut nationwide and is some states, all public and private schools have been closed to curtail further spread or local transmission of the virus.

The outbreak of Coronavirus disease has brought terrible human suffering in China where it originated, and it is almost doing same in Nigeria, along with significant economic costs. What started as a series of sudden stops in economic activities is gradually cascading through Nigeria’s economy and has almost metamorphosed into a full-blown shock simultaneously impeding demand and supply and hampering the performance of contractual obligations. If this eventually be the case, a lot of legal tussle/battle would likely follow and our courts would become the hub of more commercial cases than ever.

LEGAL IMPACTS OF COVID-19 ON COMMERCIAL CONTRACTS IN NIGERIA

Expectedly, like it happened in China, the hard measures taken to fight the spread of the disease in Nigeria come with a difficult economic backlash. The effect is definitely hard on every sector of the economy, be it the Manufacturing sector, Construction, Finance and so on and this by extension results in serious legal implications. We need not stress that Commercial contracts are definitely a target hit of COVID-19 as most suppliers, contractors or even what is generally known to be contracts for personal service may likely find it hard to fulfil various obligations under their terms of contract. For example, the Honourable Minster of Transportation, Mr. Rotimi Amaechi said in a statement recently that the construction of the Lagos-Ibadan Railway was put on hold because of the COVID-19 pandemic. Similarly, there are news making the waves that the popular AY Live Show organized by the popular comedian Ayo Makun (popularly called AY) slated to hold during Easter is no longer holding as scheduled due to this ravaging pandemic. Suffice to say that this show has sponsors and collaborators and there are contracts imposing rights and obligations between the organizers and collaborators. Needless to state that the sudden cancellation of the show would likely give rise to some legal issues.

Contract as we are aware is a personal agreement of the parties to it. It is what the parties have agreed voluntarily to be subjected to in their relationship. The Court of Appeal in the case of N.I.B Investment West Africa v. Omisore (2006) 4 NWLR (Pt. 969) 172 at 200-202 held that:

“When parties make a contract, it is within their prerogative to make their own law to which they are subject. The contract also creates the rights and obligations which bind them.”

Thus, a party is bound by the terms of his contract. Looking at the sweeping effects of COVID-19, it is no gainsaying that so many contractual obligations would be involuntarily breached. What then is the fate of the non-performing party? Will he be absolutely liable for non-performance? What defences are there for a party who failed to perform his obligation as a result of COVID-19 impacts? The writer has identified the following defences which if properly canvassed would excuse the non-performing party from his obligation and ultimately absolve him from liabilities. The two major defences are: Force Majeure Clause and the Common law doctrine of Frustration. We shall now examine each of the defences below.

i. Force Majeure Clause: In the Common law jurisdictions like Nigeria, there is no statutory rules which provide a party to a contract with relief in the nature of what may be categorized as force majeure event. Force majeure is principally a matter of contract law. Force Majeure is something that is unexpected and unforeseen happening, making nonsense of the real situation envisaged by parties.[6] According to Black’s Law Dictionary, Force majeure is defined as “an event or effect that can neither be anticipated nor controlled.” It includes both natural and human acts.

Many commercial contracts contain a Force majeure clause which sets out a list of events that must occur and how parties are to react to such events should they eventually occur. This clause may – (i) excuse one or more parties from performing their obligations and the resulting liability of non-performance; (ii) state that one or more parties will still be required to perform their obligations or pay for non-performance despite the occurrence of a listed event; (iii) delay obligation to perform for a specific period of time following the occurrence of a listed event.

Force Majeure is contractual. Therefore, whether the clause will apply in a given situation and the consequences will depend largely on how the parties have worded their agreement. Again, just like in any other civil case there is a burden of proof to be discharged by the party seeking to rely on the clause to the effect that the relevant events captured by the contract as force majeure occurred. It must also prove that it had the stipulated effect on its contractual performance.

In order to successfully invoke the force majeure clause, the party invoking it should assess whether the facts of its situation are within the scope of the wordings of the force majeure clause. This has two wings:

The first wing is whether the events are within those defined in the contract as triggering the operation of the clause. For example, COVID-19 might have been classified under the term “pandemic” as used in the contract. Many other related terms that can be used include “epidemic”, “plague”, “human communicable disease outbreak, and so on. However, it is possible the disruption has been caused by some more specific events e.g. mandatory quarantine, movement restriction, economic shut down etc. A more comprehensive force majeure clause would anticipate such specific events and specifically list them out. The advantage of this is that it affords the affected party more latitude of argument. Whereas, some force majeure clauses are drafted to be more generic, usually containing the omnibus phrase “any other cause beyond the party’s control” or “events similar to those listed in the provision”. While the open-ended style is equally effective, it gives rise to more uncertainty as the court is free to interpret it the way it deems fit.

The second is whether the extent of disruption is specified and met. Some force majeure clause would specify that the supervening events must “prevent” performance of obligation. In this case, the non-performing party must be able to show that he is both legally and physically prevented from performance and not merely because performance is difficult or unprofitable. Thus, in COVD-19 situation, the non-performing party relying on the force majeure clause must show that closure of shops, compulsory quarantine, movement restriction, work from home etc, “prevented” him from performing his obligation under the terms of the contract and not merely posing difficulty which may be surmounted with some level of determination and perseverance.

The purpose of the force majeure clause is only to provide relief for a non-performing party under a contract, it is not by any stretch of imagination aimed at terminating or suspending the contract simply because performance of an obligation under it becomes costly or difficult. Therefore, the party seeking reliance on the force majeure clause must be able to show, on a balance of probabilities, that it has used its best possibilities and reasonable endeavor to avoid invoking the force majeure event. In other words, a party is advised to place itself in such a position where it can easily demonstrate that it has taken appropriate measures to keep losses to a minimum and that it is not taking undue advantage of the force majeure clause.

A force majeure clause may also contain the mechanism needed to invoke it. Since it is contractual, this contractual mechanism is important, without which it may be impossible to rely on it. For example, the parties may agree on when and how to notify the other party; and how long the parties can wait before taking any further action. If these conditions are not met, the force majeure defence will fail. In the case of Globe Spinning Mills (Nig) Plc v. Reliance Textile Industries Ltd (2017) LPELR-41433 (CA) the Court of Appeal held thus: “Paragraph 12 of the Memorandum of Understanding clearly stated the circumstances in which the Clause with respect to Force Majeure (Clause 28) could be invoked and nothing in the letter of 14th April, 2008 of the Respondent constituted a proper invocation of the said Clause.”

Finally, the effect of the force majeure clause will depend on how the contract is worded which could be either to terminate the contract or to excuse partial performance. Normally, unlike frustration, a force majeure clause is not aimed principally at terminating the contract. It is only to suspend the performance of obligation until an agreed future time. However, some force majeure clause allows parties to terminate if the event lingers too long. Some specifies three (3) months or more. In the case of COVID-19, it is hopeful that the pandemic will be over in few months, then, the force majeure clause allows outstanding obligations under a contract to be performed after the pandemic.

It is advisable that a party reviews its agreement to see if a force majeure clause exists and invoke it as a defence. It is, in the writer’s opinion the best form of defence in a commercial dispute of this nature.

ii. Frustration: Unlike force majeure, frustration is a right at law. It is a common law doctrine which simply means that if the performance of a contract depends on the continued existence of a state of affairs, then the destruction or disappearance of the state of affairs without the default of either of the parties will discharge them from the contract.[7] Frustration only occurs under conditions that are completely outside the control of the parties. In other words, for doctrine of frustration to avail a party, he must show that he is willing and capable of performing his own obligation under the contract but was prevented from doing so by circumstances beyond his contemplation and control.[8]

For frustration to avail a party, the following four conditions must be present:

(a) The event must have occurred after the contract has been formed;

(b) The event must be beyond the contemplation of the parties when the contract was made, and must be so fundamental as to be going to the very root of the contract;

(c) The event is not due to the fault of either party and not self-inflicted; and

(d) The performance of the contract has, as a result of the event, become impossible, illegal, or radically different from what was contemplated at the time the contract was made.

Applying this to the COVID-19 situation, the party seeking to rely on the doctrine of frustration must be able to show that COVID-19 pandemic only occurred after he entered into the contract; and that he never anticipated the occurrence of COVID-19 when he entered into the contract; and that the ripple effects of measures taken to curtail the spread of the Coronavirus has fundamentally affected the essence of the contract; and that it is impossible to perform the contract in view of the lingering COVID-19 pandemic.

Unlike force majeure, the burden of proving frustration is more stringent. For example, the mere fact that COVID-19 deprives a party of enjoying the benefits expected from the performance of the contract or even that the performance of the contract is difficult in the face of COVID-19 might not necessitate that the doctrine of frustration can be invoked to excuse performance. The courts want a more and near perfect reason before relieving a party from his obligation under a contract due to frustration.

Unlike force majeure, where the court holds that the doctrine of frustration applies, contractual parties are not at liberty to elect whether to terminate the contract or not. The consequence of frustration is naturally termination without less. This is most likely why the burden of proof is stringent.

Where a contract is frustrated, further performance of the contract is excused only if:

(a) The frustration occurs before the breach of the contract;

(b) The frustration is without the fault of either party; and

(c) The frustration is due to a fundamental change of the circumstance beyond the control and original contemplation of the parties.[9]

iii. Other Possible Defences: Although, the two major defences are Force Majeure and Frustration already discussed above and should readily be the first port of call for any commercial lawyer who wishes to present a solid defence on behalf of his client against liability for non-performance under a contract caused by COVID-19. This does not mean that where these two defences fail, there are no other defences that can be explored in case a claim is made.

Some of these other defences include:

(a) Estoppel – generally, where the defaulting party has discussed the issue of COVID-19 and its attendant problems with the innocent party, and the innocent party has made representations to excuse the other party from performance which the innocent party has relied upon, an estoppel may arise in such situation.

(b) The possibility of the innocent party to mitigate his loss may also serve as a possible defence which a defendant may use. Generally, the Claimant cannot recover loss, where it could have taken reasonable precautions to avoid the loss. For example, where the contract is for the supply of goods and products, and there are other alternatives for the Claimant to buy those goods, the Claimant should reasonably take steps to buy the goods there. Failure to do so may present the Defendant with an arguable defence.

(c) In some contracts the parties might have included a limitation of liability clause which will avail the Defendant where a claim arises.

(d) Open dialogue may also be necessary at this point. It should be noted that written contract is just one way of managing businesses. It should not be exclusive at this period. Ink on the paper may not adequately and satisfactorily address any strain in the relationship of parties in the face of COVID-19. It is therefore, advisable that parties engage in dialogue in order to iron out issues and reconcile the impossibilities in their contract posed by COVID-19. To be frank, the best way to handle the impact COVID-19 may have on the performance of a contract is to walk up to the other party and discuss on how to collaboratively find the best solution which will allay every party’s concern and maintain the relationship between them. Parties are therefore advised to review their contract and know their right and obligations in order to be well equipped for an open dialogue.

CONCLUSION

COVID-19 has come with a lot of uncertainties. It is a common enemy of the world which requires concerted efforts to combat. As efforts are being made to find a lasting solution to the menace of the pandemic, drastic economic decisions are being taken which have had (and continues to have) serious legal impacts on businesses and contracts. It remains to be seen what the post COVID-19 era would offer in the business and legal world. But while we await that, the writer has been able to discuss the possible impacts of COVID-19 on commercial agreement and possible defences available to a non-performing party have equally been suggested. It remains to be seen how these would play out practically in our court rooms.

AUTHOR

Taiye Adegoke, B.A (Ife); LL.B (Ibadan); B.L

University of Ibadan (First Class Honors)

Nigerian Law School (First Class Honors)

(+234) 803 236 727

Linkedin: Taiye Vincent Adegoke

[1]https://www.who.int/emergencies/disease/novel-coronavius-2019/events-as-they-happen/

[2] @NCDCgov on Twitter.

[3] @NCDCgov on Twitter.

[4] www.ncdc.gov.ng>new>first-case-of-corona-virus-confirmed-in-nigeria/

[5]Premiumtimesng.com/news/headlines/383095-updated-nigeria-bans-all-international-flights-as-coronavirus-cases-rise/coronavirus/coronavirusinnigeria/coronavirusupdate/coronaviruspandemic.html

[6] Globe Spinning Mills (Nig) Plc v. Reliance Textile Industries Ltd (2017) LPELR – 41433 (CA) Per NDUKWE-ANYANWU J.C.A. (P.27, Para. E).

[7] Standard (Nigeria) Engineering Company Ltd & Anor. v. NBCI (2006) LPELR – 3111 (SC).

[8] Gold Link Insurance Company Ltd v. Petroleum (Special) Trust Fund (2008) LPELR – 4211 (CA); Egbe v. Alhaji (1990) 1 NWLR part 128 page 564; Ademola v. Sodipo (1989) 5 NWLR, Part 121, page 329.

[9] AIICO Insurance Plc v. Addax Petroleum Development Company Ltd (2014) LPELR – 23743 (CA).

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