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Good evening everyone! Welcome to another episode of our social media discussion. Two weeks ago we began our law and contagion series. We were able to run through governmental powers during a disease pandemic.
Since then we have seen governments take drastic steps to contain the dreaded COVID-19 to varying levels of success.
Today, we are delving into the economic effects of the disease with specific reference to contracts that may be potentially affected by the disease.
It is not news that since the Disease spiralled in February that the global stock market has lost more than 20 per cent value.
In the entertainment sector the NBA, English Premier League, Formula 1, UEFA Champions League, and Coachella have all been cancelled. That is distribution rights of over 30 Billion USD on hold indefinitely in most cases.
So yeah! The business community is freaking out. So today we are going to cut through the noise and give brief insights into the contractual issues to consider. We will limit our discussion to force majeure clauses.
The question whether the severity of this outbreak is such that it enables companies to temporarily (or permanently) be excused from the performance of their contractual obligations is being asked by many companies around the world.
The answer, as is frequently the case with legal questions, is, it depends.
So what is a force majeure?
Force majeure, which literally translates from French as “superior force” is a legal doctrine under which a party may be relieved from liability or non-performance when acts of God such as floods, earthquakes, wars, terrorism, government restrictions
Force majeure, which literally translates from French as “superior force” is a legal doctrine under which a party may be relieved from liability or non-performance when acts of God such as floods, earthquakes, wars, terrorism, government restrictions
and other unforeseeable circumstances prevent the fulfilling of a contract. A problem, however, surfaces at this juncture because most force majeure provisions are unlikely to list disease, epidemics, or quarantine as specific force majeure events.
Force Majeure, to a large extent, is a creature of contract although may be supplemented by statute. Whether a force majeure has occurred and the parties’ obligations in the event of such occurrence largely depend on the contract rather than the law.
The Courts would not take it upon themselves to make contracts for parties and are always reluctant to read meanings into contract terms on which there is no agreement. This much has been stated by the Supreme Court in BFI Group Corporation v Bureau of Public Enterprises
What are the elements of a force majeure event?
-It must be beyond the affected party’s control
-It must not be reasonably foreseeable by the affected party
-The effects of such an event cannot be avoided by the affected contracting party taking appropriate measures.
-It must be beyond the affected party’s control
-It must not be reasonably foreseeable by the affected party
-The effects of such an event cannot be avoided by the affected contracting party taking appropriate measures.
Is COVID-19 a force majeure event?
The coronavirus outbreak presents an inimitable situation because it is a blend of both a naturally occurring component (the virus) and a government action component (mandatory quarantine measures).
The coronavirus outbreak presents an inimitable situation because it is a blend of both a naturally occurring component (the virus) and a government action component (mandatory quarantine measures).
There is, therefore, no simple answer to whether the coronavirus qualifies as a force majeure event. Each particular transaction, contracts and governing laws would have to be examined individually.
Where a contract contains a force majeure, one would obviously have to first look at the specific language in the applicable contract to see whether or not epidemics, governmental restrictions or other relevant event or actions are explicitly covered.
Where they are not, the governing laws and statutes would be the guiding light.
So what happens when contracts make specific provision for pandemics?
Where a contract has specific provisions which include pandemics, disease or outbreaks as force majeure events, there is usually no issue as such clause would ordinarily provide for the steps to be taken
Where a contract has specific provisions which include pandemics, disease or outbreaks as force majeure events, there is usually no issue as such clause would ordinarily provide for the steps to be taken
upon the occurrence of such event. COVID-19 is clearly covered in such an instance having been declared by the World Health Organisation as a pandemic on March 11, 2020.
It may also be possible that the outbreak will be caught by the force majeure clause if it includes events such as acts of any government or regulatory body where such bodies impose restrictions in response to an outbreak, such as travel bans or enforced quarantine zones.
For instance, Ghana has joined the United States, Europe and an increasing number of Nations in imposing mandatory quarantines in a bid to substantially reduce the spread of the virus.
Thus, if a contract that is to be performed in Ghana has a force majeure clause that specifically includes pandemics or disease outbreaks as one of the occurrences that would constitute a force majeure, the affected party in such an instance would be excused from liability.
Conversely, where there is no or insufficient provision in the force majeure clause, this is where the problem lies.
In the United States, in the event that a contract lacks a force majeure provision, then the parties may seek protection under the common law doctrines of the impossibility of performance, commercial impracticability or frustration of purpose.
The Chinese law which we are considering because China is one of the largest production hubs of the world and also where the virus was first discovered, is wider in perspective.
Chinese statutes expressly define force majeure as “any objective circumstances which are unforeseeable, unavoidable and insurmountable.” Article 180 of Civil Code and Article 117 of the Contract Law exempt the affected party from liability in such instance.
The United Nations Convention on Contracts for the International Sale of Goods (CISG) also provides that a party is exempt from liability for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond its control and he could not
reasonably be expected to have taken the impediment into account at the time of the contract or to have avoided or overcome it.
In Nigeria, what constitutes a force majeure, like is the case in the US is largely dependent on the parties’ contract.
In Nigeria, what constitutes a force majeure, like is the case in the US is largely dependent on the parties’ contract.
The Courts would, therefore, have to look at the elements of a force majeure event in deciding if such occurrence qualifies as one. The COVID-19 is an event outside of the affected party’s control, which would ordinarily fall within the ambit of force majeure if parties have
simply provided that force majeure is any event outside a party’s control.
On foreseeability, outbreaks such as this would probably not normally be considered as unforeseeable given the many recent outbreaks of bird flu, lassa fever and viruses including the SARS epidemic of 2003.
However, the more severe domestic and global scale of lockdown, the WHO declaring the outbreak as a pandemic on March 11, 2020, and the China Council for the Promotion of International Trade (CCPIT) awarding the first Force Majeure certificate for the new coronavirus (2019-nCoV)
to a supplier on February 2, 2020, have shown that this outbreak is quite novel and far-reaching. The affected party could also not have avoided the outbreak as this is an external factor far beyond its power.
It is, therefore, our opinion that COVID-19 having fulfilled the elements of a force majeure, a claim may be validly made if well put together with a convincing combination of facts and figures. We sure would love to see the jurisprudence of this tested in Courts.
Again, the specific wording of each clause of the contract must be considered on its own merits. In Seadrill Ghana Offshore v Tullow, Teare J stated that, in order for a party to rely on an event of force majeure, it must be the sole operative cause of the inability to perform.
That means where a party is affected by COVID-19, but there is also some other reason why it cannot perform its obligations, then it cannot rely on the force majeure clause.
Furthermore, where there are alternative methods of performance, the defence of force majeure will not apply. Thus, if a party is prevented from performing its obligations in a particular manner as a result of the COVID-19,
then alternative methods of performance should be considered.
Certain contracts may also specify that parties take reasonable steps to overcome a force majeure event. What is “reasonable” will however be subjective as considerations such as the nature of the contract,
Certain contracts may also specify that parties take reasonable steps to overcome a force majeure event. What is “reasonable” will however be subjective as considerations such as the nature of the contract,
contractual obligation among other things would have to be made. In the case of the COVID-19, it would, therefore, be important to consider parties’ practical steps that have been taken to limit its impact.
It is important to check the notice provisions of any force majeure clause to check whether a notice is required when it is required and what information it must contain.
What does one do if they wish to make a force majeure claim as a result of the COVID-19 outbreak?
1. The affected party must give notice as soon as is practically possible to trigger force majeure protection under a force majeure clause or under the statute.
2. The individual receiving the notice should immediately share same with its legal department for analysis and preservation of its rights.
3. Save all documents related to the force majeure event, e.g., and local government regulations, news about the coronavirus outbreak, quarantines, restricted travel e.t.c.
4. Parties should work together to try to mitigate damages.
4. Parties should work together to try to mitigate damages.
5. Gather evidence and be prepared for litigation or any other form of dispute resolution.
It is pertinent to note that where a party wrongfully declares force majeure, it may be in breach of contract which would entitle the other party to claim damages.
It is, therefore, necessary to take caution when seeking the defence of “force majeure.” Basically, Egungun be kiaful.
All good things must come to an end so let us wrap this up.
Typically, a force majeure event is any circumstance, not within a party’s control. In our experience, many contracts have a template list of what constitutes force majeure such as Acts of God, terrorism, war etc.
Typically, a force majeure event is any circumstance, not within a party’s control. In our experience, many contracts have a template list of what constitutes force majeure such as Acts of God, terrorism, war etc.
However, it is important to have an exhaustive list when drafting the force majeure clause. While the omnibus clause largely covers events that may not be specifically worded in force majeure clauses, COVID-19 has been a major eye-opener and going forward,
to avoid stories that touch, it is advised that clients make specific reference to epidemics, pandemics and other disease outbreaks or disasters imaginable in their force majeure clauses to capture a wide range of occurrence and better protect themselves.
Finally, we must conclude on the note that force majeure scenarios will always be fact sensitive and should be approached on a case by case basis. Therefore, where in doubt, seek legal advice!
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