Covid-19 and Contracts

Whether the Pandemic: Covid-19, Could Trigger a Force Majeure Clause 

On March 11, 2020 the World Health Organization (WHO) officially declared COVID-19 a global Pandemic in a bid to curtail the sporadic spread of the Virus. Several Countries of the world, are contained to enforce a general lockdown to the effect that it's citizens must now remain at home or in isolation.
This has no doubt had a ripple effect on commercial activities as a number of businesses were forced to shut down operations. In the light of this, the performance of contractual obligations has no doubt been truncated. Supply contracts, construction contracts, simple contracts, even the servicing of bond programme where performance may may be hindered or has been rendered almost impossible to execute as a result of this outbreak.
It is important to include a "Force Majeure" clause in commercial contracts which basically operates to suspend excuse or even terminate performance of it's obligations when certain circumstances beyond the reasonable control of the parties arises, making performance inadvisable, commercially impracticable or completely impossible.

What is a force majeure clause?

Force majeure clauses are contractual clauses which alter parties' obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations.

Depending on their drafting, such clauses may have a variety of consequences, including: excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate. We talk principally below about parties being excused from performance entirely, but many of the principles are common to these different varieties of clause.

In English and Scots law, force majeure is a creature of contract and not of the general common law. It therefore differs from some other legal systems where force majeure is a general legal concept and where courts may declare that a particular event, such as a pandemic like Covid-19, is a force majeure event.

As a result, whether a particular clause relieves a party of contractual liability will, under English and Scots law, depend on the precise wording used in the clause, the allocation of risk between the parties provided for by the contract as a whole, the circumstances in which the parties entered into the contract, and the situation that has arisen. It is for the party seeking to rely on a force majeure clause in order to excuse its non-performance or late performance to satisfy a court or other tribunal that this is the effect of the clause.in Nigeria however,

In the case of C.G.G (Nig) Limited v. Augustine & Ors, the court relying on the Black’s Law 
Dictionary, 8th Ed, defined Force Majeure as; “an event or effect that can neither be anticipated or controlled. It 
involves both natural and human acts. The human acts may be political in nature, including riots, strikes or war”. 
Similarly, in Global Spinning Mills Nigeria Plc v. Reliance 
Textile Industries Limited4
The court held that: “Force majeure is a common clause in contracts 
which provides that one or both parties can cancel a contract or be excused 
from either part or complete performance of the contract on the occurrence of 
a certain specified event or events beyond the parties' control. Such 
event(s) may include; war, strike, riot, crime, or an event described by the 
legal term act of God (hurricane, flood, earthquake, volcanic eruption, etc.), 
prevents one or both parties from fulfilling their obligations under the 
contract. Force majeure is generally intended to include occurrences beyond the reasonable control of a party, and therefore would not cover:”

Is Covid-19 a force majeure event?

Force majeure clauses will generally adopt one of the following approaches to defining the type of event which may, depending on its impact, relieve a party from contractual liability:

Listing specific events

These may include events such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics. Where the term epidemic, or pandemic, has been used, that will clearly cover Covid-19.

An act of government will have occurred where a government body has imposed travel restrictions, quarantines, or trade embargoes, or has closed buildings or borders, however the position is less clear where the government makes recommendations rather than makes orders using legal powers.

Where no relevant event is specifically mentioned, it is a question of interpretation of the clause whether the parties intended such an event to be covered. This involves considering whether the list of events included was intended to be exhaustive or non-exhaustive. Unless specific words are used to suggest that a list is non-exhaustive, it can be difficult to argue that parties who set out a list of specific events but did not include a particular event, such as an epidemic, nonetheless intended that event to be covered.

Setting out broad criteria

Contracts might, for example, refer to events or circumstances "beyond the parties' reasonable control". Determining whether this covers issues arising from Covid-19 is a question of interpretation and is fact-specific.

In unprecedented circumstances like the present, the courts are likely to be generous in their interpretation of this sort of wording when faced with parties who have encountered genuine difficulties in performing. However, as discussed further below, such parties will still need to show that their non-performance, or late performance, was truly outside their control and could not have been prevented or mitigated.

A combination of the above

Clauses may give a list of specific criteria, such as fire, flood, war and so on, alongside wider, general wording, such as "or any other causes beyond our control". Although all will depend on interpretation of the particular words used, the general wording in this type of clause will usually be interpreted broadly, rather than being limited to events that are similar to those specifically mentioned. As a result, such a clause may still be triggered even if a health event or other relevant event is not specifically listed.

Impact of the Covid-19 on contracting parties and their ability to perform contractual obligations

It is common for force majeure clauses to specify the impact that the event or circumstances in question must have in order for the clause to be triggered. Reference may be made, for example, to the event or circumstances having "prevented", "hindered" or "delayed" performance. These terms require different levels of impact on performance before a party will be relieved from liability.

Prevented

"Prevented" means that it must be physically or legally impossible to perform. This is a high bar. It is not enough that performance is more difficult, more expensive, or less profitable. Even where the word "prevented" has not specifically been used, the courts have interpreted force majeure clauses as only applying where performance is impossible in circumstances where such clauses state that a party is to be excused on the occurrence of causes beyond their control, and where a contract provided for delivery "unforeseen contingencies excepted". Similarly, it is common to see wording such as "unable to perform" and this is likely to be treated in a similar fashion by the courts.

Hindered

"Hindered" – or "impeded", "impaired" or "interfered with") is a lesser standard and may in appropriate circumstances be triggered by performance being made substantially more difficult.

For example, a shortage of raw materials caused by a force majeure event may hinder the performance of a manufacturing contract if those materials can be obtained at a higher cost but performance would mean breaking other contracts. However, the fact that performing would simply be less profitable due to higher costs, for example in sourcing alternative supplies of materials or labour, is generally unlikely to be sufficient to absolve the party in question of liability to perform.

Delayed

Proving that performance has been "delayed" should be less onerous than proving it is legally or physically impossible: it is not necessary to show that obligations have been "impossible" to perform or "prevented" for a period of time, just that complying as quickly as required under the contract is substantially more difficult.

What if there is no force majeure clause?

Since force majeure is a creature of contract rather than a rule imposed by the general law, if there is no force majeure clause, an affected party will have to look to other provisions of the contract for potential routes out of its difficulties. If the contract does not provide any such routes, it may in certain circumstances be possible to rely on the doctrine of frustration of contract.In the case of Davis Contractors Ltd v. Farehum U.D.C9 , Lord Radcliffe stated 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 a thing radically different from what was undertaken by the contract”. 

However, it is very difficult to show that a contract has been frustrated. Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform, or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations. One extreme situation where the courts have held that a contract was frustrated was when war broke out and the government banned the works and seized and sold the necessary equipment.

As with the test for "prevention" of performance under force majeure clauses, the fact that performance has been made more difficult or costly is not enough. In addition, it is questionable whether an epidemic, or even a pandemic, would be considered to be unforeseeable, given previous recent epidemics and warnings that further epidemics or pandemics are likely to occur. However, it might be possible to argue that the extent of the global government enforced lockdowns was unforeseeable.

Frustration may also be commercially undesirable in some circumstances, since its effect, regardless of the wishes of the parties, is to bring all parties' obligations under the contract to an end immediately.