Berkeley Legal | Covid-19: Implications on Contractual Obligations
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03 Jul Covid-19: Implications on Contractual Obligations

Background

In March 2020, the World Health Organization declared the Covid-19 a “Public Health Emergency of International Concern”. In layman’s term, a “Pandemic” and there is no doubt that the entire world has been shocked by the severe effects that the Covid-19 pandemic has had on various walks of life and businesses.

In the pre-covid19 era, the norm was that except where a party to a contract defaults, parties to a contract are bound to honour the terms of the contract they have entered into.  However, with the alarming health crisis and the economic consequences of the pandemic some businesses are having challenges in meeting their contractual obligations.

Contractual Obligations

A contract is an exchange of an act or promise between two or more individuals or business entities. It involves one party (or a group of parties) offering something of value to another party (or group) as payment for a service, item, action, et al.

Due to the pandemic, a large number of SMEs and large businesses, which are the major drivers of the economic growth have been adversely affected and there has been a huge disruption of contractual obligations globally. To this end, there is need to highlight the implications of the interruption caused by the pandemic and the remedies available to Parties that suffer contractual breach as a result of the pandemic.

Defence

Besides the fact that contractual parties can hold discussions to agree changes to their contractual obligations in the light of this pandemic, there are two broad defences a party can rely on, which are

  • Doctrine of Frustration.
  • Force Majeure
  • Doctrine of Frustration

As noted above, a foremost principle of contract law is that promises must be kept. Parties are bound by the terms of a contract voluntarily made. However, one of the few exceptions for a party’s failure to keep contractual promises is where an unforeseeable supervening event occurs, which makes it impossible to perform the contract.

The legal doctrine of frustration makes provision for the discharge of a contract where, subsequent to its formation, a change of circumstances occurs without default of either party as to make it legally, physically, or commercially impossible to fulfil the contract. In other words, frustration of contract occurs whenever the law recognizes that without default of either party, a contractual obligation has become incapable of being performed due to special circumstances or events beyond the Parties control such as the current covid-19 pandemic.

It is pertinent to know that when a party successfully invokes the defence of frustration, the effect is that the contract would be brought to an end and parties are discharged from further contractual obligations. In Lagos State for instance, the law is that all sums paid or payable to a party in accordance with the provision of the contract before the time when the parties were so discharged will, in the case of sums so paid, be recoverable by the person who paid the sum and in the case of sums payable, cease to be payable. By implication, when a contract has become frustrated, and consequently, parties have been discharged from their obligations, every sum paid or payable to a party in accordance with the provisions of the contract before the contract became frustrated will in the case of sums already paid, be recoverable by the party that paid the said sums, and sums payable shall no longer be paid.

  • Force Majeure

Unlike frustration which is factual, for force majeure to apply, it must have been expressly provided for in the contract. When invoked, the effect of force majeure clause in a contract will seek to excuse either of these things; nonperformance or delay in the performance of a contractual obligation which has to have been engendered by an act or event beyond the control or reasonable contemplation of the contractual parties. However, because there is no generally accepted definition of force majeure, the words used in force majeure contract provisions are crucial, as a party will only be relieved from the performance of the obligations to the extent specifically described in the force majeure provision. Therefore, if there is likelihood that a Party would be unable to perform its contractual obligations due to covid-19, it is advised to first check if the contract provides for a force majeure provision, and most importantly if the force majeure clause in the contract includes specific words like “epidemic” and/or pandemic” in the list of events that constitute force majeure to the Parties in the contract.

Suffice to note that invoking a force majeure provision in contract or agreement does not automatically terminates the contract. Termination rights are usually triggered only where the force majeure event persists for a specified period of time, and only after this period may the party terminate the contract. Therefore, it advised that a party seeking to invoke a force majeure provision in a contract to terminate the contract should adhere strictly to termination clause or requirement under the contract.

The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact info@berkeleylegal.com.ng