Force Majeure and Frustration: The effect of the global pandemic on contracts | Solomon Oho

In
2020, who would have thought that the world would be faced with such a global
threat that is not a nuclear war instigated by North Korea, or an Alien
Invasion but an invincible biological threat where we now seem to cherish the
comfort of staying indoors, government and employers advising their employees
to work from home, Mums yelling at their kids to go outside and get a life are
now being encouraged to stay indoors not to risk contracting the deadly Virus. 

It is no surprise that this Disease (COVID-19), has disrupted various
commercial and operational activities, interrupted Supply chains, and made
contractual obligations impossible to perform as many countries have been
forced to impose restrictions on movements, international and domestic flights,
shutdown of workplaces, sporting events, industries, ports, markets, and public
places generally which tend to pull a large crowd of people.

As
a result of these recent developments, it has become impossible for many
business owners, companies and relevant stakeholders to perform their
contractual obligations in a Contract which then introduces the application of
Force Majeure clauses in a contract or the Common Law principle of Frustration
of Contract to help mitigate or excuse delay or non-performance of the
contract.
This article will discuss the applicability of Force Majeure and Frustration, their
effects on Contracts amidst the outbreak of COVID-19, how to invoke or enforce
them and suggestions on the application of Force Majeure and Frustration on
Contracts in the future.

Force Majeure:

This is a Clause included during the
drafting of a contract to state that a party shall not be liable for the failure
of or any delay in performing his own obligations in the contract so far as the
failure or delay is as a result of an event beyond the reasonable control of a party
and could not reasonably have been foreseen or provided against.  However, such failure to perform will not be
excused for failure or delay resulting from only general economic conditions or
other general market effects such as an increase in the cost of delivery as a
result of the event.[1]

The
purpose of this clause is to protect parties from events that are outside the
normal risks associated with the business, and to put the parties on notice of
events that may excuse or suspend performance. 
It is important to point out that the
distinguishing factor between Force Majeure and Frustration is that the act
which seeks to delay or cause either party not to perform their contractual
obligations must be specified in the Force Majeure Clause in the contract while
the parties only need to meet the necessary tests for frustration to apply.

This Clause is often
interpreted narrowly, and the party invoking the force majeure clause to excuse
performance must prove the event in question falls within the scope of the
clause. For example, Act of God, War, Riot. However, in the instant circumstance,
parties may have failed to include a term that will sufficiently cover the
recent outbreak of COVID-19 but where parties include general terms such as
Disease, Epidemic, pandemic, or Government action which the COVID-19 or events
arising from COVID-19 may fall under, would enable parties to invoke the Force
Majeure Clause to excuse the delay or non-performance of their contractual
obligations in order to avoid a breach of the contract[2] 

There are certain factors the Courts take into consideration
when interpreting or determining if the Force Majeure Clause is properly
invoked by a party and these are;

·       
Does the Force Majeure
Clause capture the event the party seeks to invoke

·       
 Was the event unforeseeable at the time of
entering the contract,

·       
Whether the risk of
non-performance could be mitigated?

·       
Whether the event has
rendered performance impossible, or merely expensive?

The Force Majeure Clause also provides for some remedies
which could be specific to the listed events in the clause. Such as the party
is excused from liability or damages, an extension of time within which to
perform his contractual obligations, or termination of the contract where the
purpose of the contract can no longer be achieved.[3]

Frustration:

The doctrine of frustration can be traced back to the English
common Law as a principle which will generally come into effect and apply to a
contract that has been made impossible for parties to perform their obligations
in the contract. This means that a contract’s performance will be rendered
impossible because of some intervening or supervening event after the contract
has been made.

Under the English
common law, frustration will result in the contract being terminated so that
the parties are excused from further performance or any liability. A party
faced with an external occurrence or event that may make its performance under
a contract impractical, onerous or even impossible might seek to rely on the
principle that the contract has been frustrated. This principle was laid out in
the Locus Classicus case of Taylor V Cadwell where the Court held
that “when an opera house, which was rented for holding concerts was
destroyed by fire, the contract was frustrated. This was because the very thing
on which the contract depended on ceased to exist or if a certain thing
happened. Thus it was held that for the doctrine of frustration it must be so
that the nature of contract is such that it would not operate if a thing ceased
to exist.”  It is also important to
note that frustration will not apply where the non-performance of a party’s
obligations is as a result of his own decision or negligence.[4]

The Courts would have to consider the following factors in
determining if the doctrine of frustration will apply;

·       
That the event in
question must be unforeseen,

·       
It must have occurred
without the fault of either party to the contract and

·       
It must either make
the contract’s performance impossible or

·       
It must destroy the
fundamental purpose of the contract.

The distinguishing factor between the Application of
Frustration in a Contract and the Force Majeure Clause is that where a contract
fails to integrate a Force Majeure Clause, the doctrine of frustration would
apply to the non-performance of the contract upon meeting the necessary tests
listed above. The reason being that frustration applies in case of events which
happen after the contract is made and for which neither any party is
responsible nor can they prevent it from happening.

The application of the
doctrine of frustration has the effect of terminating the contract and
relieving both parties from their contractual obligations.  In such circumstances, Section 8(2) of the
Law Reform (Contracts) Law of Lagos State, provides that all sums paid to a
party in accordance with the contract shall be recoverable by the person who
made the payment. However, Section 8(3) of the same law states that if
the party to whom the payment was made has incurred expenses for the
performance of the contract before the frustrating event occurred, the court
may, if it considers it just to do so, allow the retention of the portion of
the sums paid to him or her that have been so expended.[5]

Further to the above, section
120 of the Federal Competition and Consumer Protection Act provides for the
protection of consumers who may find themselves on the defaulting side of a consumer
contract and gives them the right to “cancel
any advance booking, reservation or order for any goods and services, subject
to a reasonable charge for cancellation of the order or the reservation by the
supplier or service provider.” 
For example, before the outbreak of COVID -19, it is normal for parties
to have booked or made a reservation for travel tickets with domestic and
international Airlines but due to the sudden outbreak, parties will be forced
to change their plans to either travel at an earlier date or decide not to make
use of such flight reservations again. The Competition and Consumer Protection
Act would then give the consumer the right to cancel such advance booking,
reservation or order for any goods and services. Airlines also have the right
to charge a reasonable fee for the cancellation of the reservation or services,
but recent reports and outcry by consumers on social media have stated that the
domestic airlines have refused and/or failed to adhere to the provisions of the
Federal Competition and Consumer Protection Act.

How
to Invoke a Force
Majeure Clause
and/or Frustration in a contract

In light of the
outbreak of the COVID-19, a party can take the following steps to invoke the
Force majeure Clause:

1.      Check whether the Force Majeure clause in the contract
provides for the Outbreak and other events which came about as a result of
such. The FM clause might have not specifically mentioned the Corona Virus
Disease but might fall under one of the general terms usually inserted in force
Majeure clauses such as “Disease”, “Pandemic”, “epidemic” or “Government
Action.” 

2.     
The party would also
consider whether the risk of his non-performance could have been mitigated. The
party seeking to invoke the FM clause is under an obligation to have taken
reasonable steps to mitigate the foreseeable risks of its non-performance.

3.     
Lastly, the party
would have to show that his contractual obligations or performance have been
impossible to execute as a result of the Outbreak. For example, where an
Industrial company has a contractual target to produce a certain amount of
Chairs to be delivered on a particular date, but due to the Government
restrictions and shutdown as a means of preventing the widespread of the
disease, the workers are required to stay at their respective homes for a
certain or indefinite period will make it impossible for the party to meet up
with the delivery date.

In
the event where a claim of Force Majeure will not apply, the next consideration
is whether any of the following established
grounds to founding a successful claim of frustration apply:

·       
Temporary
unavailability – where a person or object that
is essential for performance of the contract is temporarily unavailable.

·       
Method
of performance impossible – this will usually occur where
there has been a ban or restriction of movement e.g., a contract for Courier
services by Air where a travel restrictions is in place as is the current case
in the world where Airlines have been grounded pending the passing of the
outbreak. However, a contract will not be frustrated where performance is
possible by a different method, and the difference between the two methods of
performance is not sufficiently fundamental.

·       
Failure
of a specific source – this occurs where a contract to
import goods from a particular country is now subject to a travel ban and/or
restriction. E.g. the restrictions on importation of Masks and other protective
gears from China due to conspiracy theories of such masks being contaminated.[6]

The application of Force Majeure and Frustration on
Contracts in the future.

In high and positive
spirit of a pro Covid-19 era, there are certain actions parties to a contract are
advised to take into consideration in order to best protect their interests in
the event of a severe outbreak or event which is likely to render the
performance of contractual obligations impossible.

The parties are to;

1.     
Check the definition
and scope of the force majeure Clause and whether the event in question falls
within such scope;

2.     
Check the contract’s
notice requirements and whether they have been or may be triggered

3.     
Write to your counterparty and require
(i) evidence of the circumstances it relies on, (ii) a full explanation of why
its performance is now physically/legally impossible, (iii) evidence of steps
it is taking to mitigate and (iv) regular updates as to its efforts to resume performance.

4.     
Check the governing
law provisions and impact that such law will have on interpreting the contract

5.     
Check whether
mitigation steps or alternative means of performance can reasonably be taken in
respect of the contract

6.     
Consider the potential
consequences of a breach and/or default of the contract

7.     
Can consider entering
into a written variation to the Contract or seek Alternative Dispute resolution
mechanisms.

In essence, Force
Majeure clauses are inserted in a Contract to protect parties and help parties lessen
or avoid their contractual obligations in the event of a phenomenon which is
out of the control of both parties. Where this Force Majeure Clause is not
inserted in a Contract, then the general Common Law Principle of Frustration
will apply upon meeting certain criteria and alleviate both parties from their
contractual obligations. The outbreak of COVID-19 is an unexpected event that
hit the whole world and has put a hinge on so many contracts, and business
operations. Parties are advised to negotiate and look for amicable ways to fulfil
or remedy their own contractual obligations as it will be counter-productive
for parties to play the blame game which could possibly ruin business
relationships.