IMPACT OF CORONAVIRUS ON CONTRACTS

IMPACT OF CORONAVIRUS ON CONTRACTS

– By Mosebolatan Oyedeji

It is indeed common knowledge that there is a contagious virus spreading fast across the world today. The Coronavirus also known as COVID-19 began in China towards the end of 2019 and quickly spread across the world affecting various countries and people irrespective of race, age, gender, ethnicity, or social status. On the 11th of March, 2020, the World Health Organization (W.H.O) officially declared COVID-19 a global pandemic.

In a bid to curtail the sporadic spread of the COVID-19 pandemic, several countries of the world are constrained to enforce a general lockdown to the effect that its 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 light of this, the performance of contractual obligations has no doubt been truncated. Supply contracts, construction contracts, simple contracts, and even the servicing of a bond programme where performance may be hindered or has been rendered almost impossible to execute as a result of this outbreak comes to play.

A “force majeure” clause (French for “superior force”) is a contract provision that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. In the absence of a force majeure clause, parties to a contract are left to the mercy of the narrow common law contract doctrines of “impracticability” and “frustration of purpose,” which rarely result in excuse of performance. Instead of relying on the common law, meeting planners can better achieve flexibility during times of crisis through a carefully negotiated force majeure clause. Whether negotiating with or without the assistance of legal counsel, major elements of a force majeure clause should be addressed.

Determining which types of circumstances will be covered by the force majeure clause is essential. Provisions often cover natural disasters like hurricanes, floods, earthquakes, and weather disturbances sometimes referred to as “acts of God.” Other covered events may include war, terrorism or threats of terrorism, civil disorder, labor strikes or disruptions, fire, disease or medical epidemics or outbreaks, and curtailment of transportation facilities preventing or delaying attendance by at least twenty-five percent of meeting participants.

Courts tend to interpret force majeure clauses narrowly; that is, only the events listed and events similar to those listed will be covered. For example, while acts of terrorism might be a specified force majeure event, it does not necessarily follow that a court would also excuse a party’s performance based on “threats” of terrorism. Thus, it is especially important to specify any type of circumstances that you anticipate could prevent or impede your meeting from being held.

Every Force majeure clause should be considered and interpreted in the context of the particular situation that triggered it in the first instance. A party may be inclined to argue that the Covid-19 pandemic can trigger a force majeure clause if the clause includes pandemic or communicable disease as the Covid-19. In the absence of a pandemic being listed as a reason to trigger force majeure clause, a party claiming the benefits of the clause would first have to demonstrate that the pandemic is a circumstance that falls within the language of the said provision in the contract.

It is uncertain how the courts will tackle these issues when it is raised if this pandemic continues to spread forcing more businesses to shut down operations. Nevertheless, given the current state of affairs, it is likely that a court will find that COVID-19 is an unforeseeable event outside the control of either party. It should however be noted that whether COVID-19 makes it impossible for a party to fulfill the terms of their contractual obligations is a different matter; the obligations cannot simply be more difficult to fulfill, they must be impossible to fulfill. The treatment and global responses to the pandemic may be relevant for transnational or international agreements.

What happens where a contract/transaction made no provision for a Force Majeure?

In the event that a contractual agreement does not include a force majeure clause, parties may be forced to rely on the common law doctrine of frustration. Under the doctrine of frustration, a party is relieved of any liability under a contractual agreement in the event of a breach of contract where a party to the agreement is prevented from, or unable to perform his obligations under the contract due to an event which is beyond his control.

There is a slight difference between the force majeure clause and the doctrine of frustration. With the doctrine of frustration, a party must show that the original purpose of the contract has been frustrated and it would be unjust for them to be bound to the terms of the contract under the existing circumstances. Like in a force majeure, the situation or event that has allegedly frustrated the contract must be unforeseeable at the time the contract was entered into and must not be the fault of either party. 

In conclusion, it is important for parties in an existing contractual agreement to examine their contracts to see if it includes a force majeure clause and the extent to which the clause can be triggered in the context of the current pandemic that has taken over the world. In the event that any contract does not include the Force Majeure Clause, or the clause does not appropriately cover the current pandemic, the doctrine of frustration can be relied on as an alternative legal remedy to mitigate the risk of legal action as a result of non-performance of the contract terms. It has also become imperative for lawyers to consider including a possible outbreak, pandemic, or communicable disease in a force majeure clause to avoid any issues in the foreseeable future.  

Note: This article is only for enlightenment and awareness.

Mosebolatan Oyedeji is a Legal Associate at Citizens’ Gavel Foundation for Social Justice, Ibadan, Oyo State, Nigeria. She can be reached at mosebolatan@gavel.ng.

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