CORONA VIRUS: FORCE MAJEURE AND THE COMMON LAW DOCTRINE OF FRUSTRATION
AUTHOR: AKINYEMI AKINWUNMI H.
INTRODUCTION
With the number of confirmed cases exceeding 5 million, governments across the globe have been forced to take several safety measures to contain the spread of the pandemic – Corona Virus. For example, the United Kingdom has passed an Emergency Coronavirus Act, giving government officials new powers to prohibit gatherings and public events, as well as detain “potentially infectious persons” and put them in isolation facilities. Other countries like the U.S, China, Italy, France and Spain have also imposed travel bans and movement restrictions in their countries with heavy fines introduced for people who ignore the rules. The African continent likewise is not spared as reports have it that a State of emergency is effective in Senegal and Ivory Coast, while in Nigeria, the federal government has ordered cessation of movement in coronavirus hotspots, and advised citizens to work from home. These containment policies put in place by the government is sure to be inimical to businesses which are heavily reliant on supply chains and free movement of goods and services for the performance of their contractual obligations. Against this backdrop, this essay seeks to provide an expository analysis on certain defenses which may be available to contracting parties in the event of contractual non performance caused by the pandemic.
FORCE MAJEURE CLAUSES
The Black’s Law Dictionary defines a force majeure clause as one which is “…included to protect contracting parties in the event that a part of the contract cannot be performed due to cases which are outside the control of the parties and could not be avoided by exercise of due care”. For instance, if a contract to perform at a music concert exists between Nexus (an international music star) and organizers of a Nigerian music concert. In line with the contract signed by both parties, the music star had been paid in advance, huge sums of money as his performance fee, he had also begun preparations for the event, incurring huge expenses in the process. However, as a result of several complications occasioned by the pandemic, he found it impossible to perform at the concert as required of him by the contract. This new development was frowned at by the concert organizers who claimed that they were at a loss as they had to return the revenue they gained from sales of tickets. They thus demanded that Nexus refunds the advance payment he was earlier given and also threatened to sue him for breach of contract if he refuses to pay up between three weeks, what defenses would be available to Nexus?
The answer to this question depends on whether or not force majeure clauses were included in their contractual provisions. Over the years, the force majeure clause has served as a defense invoked by individuals and corporate organizations, when faced with similar challenges. For example, Shell recently declared force majeure on exports of Nigerian Forcados crude oil after a shutdown by the pipeline’s operator, the China National Offshore Oil Corp had also declared force majeure, notifying its suppliers that it would be unable to continue buying the agreed quantities of gas. Before defining the term force majeure, it is pertinent to determine the origin of force majeure clauses.
ORIGIN OF FORCE MAJEURE CLAUSE
The force majeure clause originated from the French and Roman law where there are express provisions in the French civil code which could serve as a defense in the instance of contractual non performance. Article 1218 of the French civil code provides that a force majeure event justifies suspension or termination of a contract even if the contract does not contain any provision in that respect. However, for any event to qualify as a force majeure event, such events must; not be attributable to the obligor (the party relying on force majeure), not have been foreseeable as at the time of entering into the contract and must not have been reasonably avoidable by taking appropriate measures. It is important to note that the burden of proof that a certain event qualifies as force majeure lies on the party invoking it.
The force majeure clause is also not alien to common law jurisdictions, for example, in the keenly contested case of Peter Dixon & Sons Ltd. v Henderson Craig and Co. Ltd. the court held that the scope of force majeure clauses would be construed expressly, and when necessary, the ejusdem generis rule would be applied to determine what the parties intended. The English court also held in Classic Maritime Inc v Limbungan Makmur, that a force majeure clause must be interpreted like any other contractual clause: construed as a whole and in accordance with the modern iterative approach. It should however be noted that unlike in civil law jurisdictions where a statute exists to that effect, common law jurisdictions courts do not usually presume the existence of any force majeure events, and even when parties make express provision for them in their contracts, they are usually construed very narrowly.
FORCE MAJEURE IN THE NIGERIAN SPHERE
The entire jurisprudence on this subject has been stated by Justice Ndukwe of the court of appeal in the case of Globe Spinning Mills Nigeria Plc. v. Reliance Textile Industries Ltd. where he defined force majeure as something that is unexpected and unforeseen happening, making nonsense of the real situation envisaged by parties. The court also further stressed in the case of Diamond bank v. Ugochukwu that for force majeure to occur, there must be an event which significantly changes the nature of the contractual rights of the parties that it would be unjust to expect the parties to perform those rights. In such unfortunate instances where the reasonable expectations of the parties have been frustrated by circumstances beyond their control, it is only equitable that a force majeure clause operates to limit damages either by partly excusing, or completely discharging the contracting party of its obligation to perform its contractual duties. It is however instructive to note at this point that there are no stereotypes or uniform set of force majeure events, but rather, when the parties have themselves defined the boundaries of force majeure in their agreement, those boundaries dictate the application, effect and scope of force majeure, leading the court to treat each case based on the circumstances surrounding it and its own peculiarity. Thus it is advisable for parties seeking to include force majeure provisions in their contracts to ensure that its wordings are as open ended as possible: accommodating as many events though unforeseeable at the moment of entering into the contract may frustrate its performance.
Below is a typical example of a force majeure clause:
“Neither party shall be held liable or responsible for failure or delay in fulfilling or proffering any of its obligations under this agreement (other than the payment of money owed hereunder) to the extent that such failure or delay results from any cause beyond its reasonable control, including, without limitation, fire, flood, natural disaster, outbreak of diseases, explosion, war, strike, labour unrest, riot, embargo, acts or omissions of carriers, or act of God (each a “Force Majeure Event”). Such excuse shall continue as long as the Force Majeure event continues, following which such party shall promptly resume performance hereunder.”
THE COMMON LAW DOCTRINE OF FRUSTRATION
In the early part of this essay, we mentioned that a force majeure clause exists to mitigate damages in the event that something unexpected and unforeseen happens which changes the nature of the contract thus making its performance unjust to the obligor. We also established that force majeure events are not presumed by courts except explicitly provided for by contracting parties in their contacts. However, if a party fails to include force majeure clauses in their contracts, other defenses may still be potentially available to excuse performance, such as the defense of frustration.
Prior to the decision of the court in Taylor v Caldwell, the rule of absolute contract prevailed, meaning that notwithstanding the circumstances, parties were usually bound to the express provisions of their contract. The rationale for this harsh rule is not farfetched as it was usually believed that a contracting party can make provisions for unforeseen contingencies in its contacts, and if it fails to do so, it must be taken to be well acquainted with the risks that such a situation entails . However in Taylor v Caldwell, an event organizer had contracted with a venue owner to rent a music hall and garden for four days, agreeing to pay the venue operator for each day he uses the venue. Unfortunately, before the first day, an accidental fire engulfed and destroyed the music hall. Ordinarily, the absolute contract rule would have applied as no force majeure clause was included to govern such a situation, but instead, the court held that “without the concert hall, the purpose of the contract was frustrated and thus, the impossibility of performance arising from the perishing of the subject matter of the contract shall excuse its performance.” Thus laying the foundation for the nascent common law doctrine of frustration.
After the epoch-making decision in Taylor v Caldwell, the doctrine of frustration has often been relied upon by the court in a plethora of cases to free contracting parties from the shackles of performing contracts which are rather impossible in nature. Thus, a very comprehensive definition of the doctrine of frustration was given by Owoade J.C.A in the case of Augustine Asibe & ors v. Owerri Municipal Local Government as “the premature determination of an agreement between parties lawfully entered into… owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by law both as striking at the root of the agreement and as entirely beyond what was contemplated by the parties when they entered into the agreement”. As to when a contract can be said to have been frustrated, Ndukwe J.C.A did shed more light when he held in the case of Alico insurance PLC v. Addax Petroleum Company Ltd that frustration occurs “whenever the law recognizes 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 radically different from what was undertaken by the contract.”
A contract is not frustrated merely because its execution becomes more difficult or more expensive than either party originally anticipated, thus, a duty lies on the party relying on the doctrine of frustration to adduce evidence showing that its performance has indeed been frustrated by the existence of certain events beyond the control or anticipation of either party and reaching down to the fundamentals of the contract itself. However, for the defense of frustration to avail a party, its frustration has to have occurred before its obligation under the contract became due. In the event that the performance of contract has been due before the occurrence of the frustrating event, each party is bound to fulfill its obligation as spelt out in the contract. Thus, all legal rights already accrued, money already paid or which has become payable before the frustrating event, remains intact, while obligations falling due for performance after the event (which led to frustration of the contract) would be discharged.
As opposed to a force majeure clause where parties are at liberty to determine the scope of what may constitute a force majeure event, it is the sole duty of the court to determine whether and when a contract has been frustrated, making it more difficult to succeed in proving a force majeure event than in proving that a contract has been frustrated. The following events might generally be considered by the court as having the capacity to frustrate a contract; subsequent legal changes or statutory impossibility, outbreak of war, destruction of the subject matter of the contract or literal impossibility, government acquisition of the subject matter of the contract, cancellation by an unexpected event for example, when in a contract for personal service, the other party becomes permanently incapacitated by ill health, imprisonment, or death etc. As decided by the court in Pulseline Services Ltd v Equitorial Trust Bank, when any such event occurs as to frustrate a contract, such a contract is brought to an end, with all obligations under it discharged thereof.
CONCLUSION
It is axiomatic that the COVID-19 situation is unexpected and its numerous devastating effects on the performance of contractual obligations beyond the control of contracting parties. Various claims of force majeure and frustration of contract – some genuine, some opportunistic – are most likely to be brought after the pandemic, each of these claims to be decided according to the peculiarity of each case. Contracting parties such as Nexus are thus strongly advised to ensure that force majeure clauses are entrenched in their contractual provisions and as an addendum that such clauses are as open ended as possible, accommodating even unplanned events. Alternative Dispute Resolution (ADR) is also expedient as the option of litigation has proven to be inimical to contractual relationships.
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