Introduction:
The Covid-19 pandemic
is becoming one of the most serious threats to global markets and international
trade seen in recent times with the attendant job losses and many businesses
facing insolvency or bankruptcy coupled with the crash of the global stock
exchanges. The pandemic has squeezed both supply and demand with vast numbers
of businesses experiencing a collapse in revenue — and in many cases a complete
suspension of operations — there is an acute risk of inability to fulfill
contractual obligations due to the widespread bankruptcies and business
closures.
Given the supply
chain disruption caused by the Covid-19 pandemic, it is likely that
performances under many contracts will be delayed, interrupted, or even
cancelled. Counterparties (especially
suppliers) to such contracts may seek to delay and/or avoid performance (or
non-performance liability) of their contractual obligations and/or terminate
contracts, either because Covid-19 has legitimately prevented them from
performing their contractual obligations, or because they are seeking to use it
as an excuse to extricate themselves from an unfavorable deal.
As additional
restrictions are imposed on gatherings, work, and travel, businesses' ability
to perform their contractual obligations may be impaired or altogether precluded.
Fortunately, businesses may have contractual recourse as a result of a force
majeure clause or the common law doctrine of frustration of contract.
This paper seeks to
examine the impact of the pandemic vis-à-vis the impracticability or
impossibility of fulfilling contractual obligations and how the doctrines of
force majeure and frustration of contract can provide
relief to a party prevented (or hindered, impaired or adversely affected) from
performing its obligations under a commercial contract.
Basic
law:
Black's Law dictionary[i] and Merriam Webster dictionary defines force
majeure —as an event or effect that can be neither anticipated nor
controlled. The term is commonly understood to encompass both acts of nature,
such as floods and hurricanes, and acts of man, such as riots, strikes, and
wars.
From
a contractual perspective, a force majeure clause provides temporary reprieve
to a party from performing its obligations under a contract upon occurrence of
a force majeure event. A
force majeure clause in a contract would typically include an exhaustive list
of events such as acts of God, war, terrorism, earthquakes, hurricanes, acts of
government, explosions, fire, plagues or epidemics or a non- exhaustive list
wherein the parties simply narrate what generally constitute force majeure
events and thereafter add “and such other acts or events that are beyond the
control of parties”.
Frustration of
contract, on the other hand, is a defence
available to a defendant who would otherwise be liable for breach of contract
for non-performance of contractual obligations but for the occurrence of a
fundamental event that makes it impracticable or impossible to perform the
contract. Simply put, once an event occurs capable of rendering performance of
a contract impossible and different from what the parties contemplated and
strikes at the substratum of the contract, the doctrine of frustration applies.
Hence, frustration is the happening of an act
outside the contract and such act makes the completion of performance of a
contract impossible.
Historically, there
had been no way of setting aside an impossible contract after formation; it was not until
1863, and the case of Taylor v Caldwell[ii] that the beginnings
of the doctrine of frustration were established. Here, two parties contracted
on the hire of a music hall, for the performance
of concerts. Subsequent to contracting, but prior to the dates of hire, the music
hall burned down. It was held the contract was impossible to perform.
Hardship,
even if severe, does not constitute frustration. This was put in perspective in
the classic test of frustration from England, Davis Contractors Limited v.
Fareham Urban District Council[iii].
In that case, Davis Contractors agreed with Fareham UDC to build 78 houses over eight months for
£92,425. It ended up taking 22 months, because Davis was short of labour and
materials. It cost £115,223. Davis submitted the contract was frustrated, void,
and therefore they were entitled to quantum meruit for the value of work done.
The House of Lords held that although the performance of the contract had
become more onerous it was not frustrated.
Difference between force majeure and frustration of a contract:
Under
the doctrine of frustration, impossibility of a party to perform its
obligations under a contract is linked to occurrence of an event/circumstance
subsequent to the execution of a contract and which was not contemplated at the
time of execution of the contract. However, in the case of a force majeure, parties
typically identify, prior to the execution of a contract, an exhaustive list of
events, which would attract the applicability of the force majeure clause.
For
frustration of a contract to be invoked and applied requires that the entire
subject matter or underlying rationale for the contract be destroyed. Doctrine
of Frustration renders the contract void and consequently all contractual
obligations of the parties cease to exist. Frustration of a contract is a test
dehors of contractual provisions and is the end result of events arising after
the contract was executed.
Whereas
a force majeure is contractual provision contemplating an event, which can result
in deferment of performance of contractual obligations and therefore rights of
parties thereunder until such event continue and typically does not absolutely
excuse parties from performing their obligations.
Typically,
where a force majeure event is not specifically covered under a contract,
frustration of a contract may be claimed by the affected party, however, if the
case is opposite and a particular event is covered as a force majeure event
under a contract, frustration of such contract cannot be automatically claimed.
Force majeure clauses in a
contract suspend performance in the occurrence of supervening events not the
fault of either party but maintain the existence of the contract unlike
frustration of contract which puts an end to the contract.
Difference
between impracticability of performance and impossibility of performance:
Force majeure clause
does not give a blanket protection against any non-fulfillment of contractual
terms. In practice, most force majeure clauses
do not excuse a party's non-performance entirely, but only suspend it for the
duration of the force majeure. It is important to note that force
majeure clauses do not generally provide for termination of an agreement;
rather, they generally suspend a party's obligation to perform under
the agreement for the duration of the force majeure event.
Where the supervening event was contemplated as noted
above, the doctrine of frustration will not apply and recourse will be had to
the force majeure clause if not parties may have recourse to frustration of
contract if the circumstances permit.
In business
contracts, the language of the specific force majeure provision is the key
factor in determining whether the force majeure clause will apply in a pandemic
situation, such as the current COVID-19 situation. Some force majeure
provisions will expressly exclude pandemics or global health crises from the
application of the force majeure clause, while others will expressly include
such health events, and still others will be silent on the issue.
Whether performance
is excused depends on the event that makes performance impossible or
unfeasible, and whether that event was contemplated under the contract. If the
event was so unusual and unexpected that the parties could not reasonably have
foreseen it, and if it is unfair to place the risk of its happening on either
party, then a Court may excuse further performance of the contract on both
sides. On the other hand, if the risk that such an event could happen was one
that the parties should reasonably have anticipated, or if the contract
assigned that risk to one of the parties, then a Court normally would not
excuse further performance. Known risks assigned by contract will not excuse
performance no matter how disastrous the consequence of that risk.
There are at least
three levels of impossibility including:
Impossibility
of performance:
Where performance
becomes physically impossible, further performance would almost certainly be
excused. For example, a roofing contractor would not be in breach for failing
to complete a roof on a building destroyed by fire through no fault of his.
Frustration
of purpose:
Where the principal
purpose of a contract is destroyed, further performance would probably be
excused, absent a contract provision to the contrary. For example, the roofer
who contracts to buy material for use on a building destroyed by fire may be
able to cancel that material contract. While the purchase of roofing material
is not rendered impossible by the fire, the purpose for which the materials
were contracted is impossible to achieve through no one's fault.
Commercial
impracticability:
Where performance
becomes so difficult or costly that the value of the contract to one party is
destroyed, continuing that performance to completion may be financially
impractical. However, despite severe economic consequences, further performance
may not be legally excused unless the direct cause of the difficulty could
never have been foreseen. Absent extraordinary circumstances, losing money is
not a legal defence to a breach of contract action.
Where performance is
excused after work has begun, recovery will usually be allowed for the fair
value of work actually performed based on quantum meriut, but not for lost
profits on work not done as could be recovered in a breach of contract action.
In summary,
unanticipated circumstances may excuse a failure to perform contract work
completely but only where:
·
an unexpected event occurs without the
fault of the party invoking the defence;
·
that event makes further performance
impossible or so difficult or expensive as to frustrate the purpose of the
contract or destroy its value; and
·
Impossibility of performance is
often raised as a defence for breach of contract. For example, the party
that is accused of breach may be excused from the breach if
they can prove that it would have been impossible to perform the
contract.
Conversely, impracticability
is similar in some respects to the doctrine of impossibility because
it is triggered by the occurrence of a condition which prevents one party from
fulfilling the contract. The major difference between the two doctrines is that
while impossibility excuses performance where the contractual duty cannot
physically be performed, the doctrine of impracticability comes into play where
performance is still physically possible, but would be extremely burdensome for
the party whose performance is due. Thus, impossibility is
an objective condition, whereas impracticability is a subjective condition
for a court to determine.
In regards to
frustration of contract, a contract does not become frustrated merely because
it has "become difficult to perform" as against "become
impossible to perform". A contract is not frustrated merely because the
circumstances in which it was made are altered. The Courts have no general
power to absolve a party from the performance of its part of the contract
merely because its performance has become onerous on account of an unforeseen turn
of events.
In an instructive
English judgment namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH[iv],
despite the closure of the Suez canal, and despite the fact that the customary
route for shipping the goods was only through the Suez canal, it was held that
the contract of sale of groundnuts, in that case, was not frustrated, even
though it would have to be performed by an alternative mode of performance
which was much more expensive, namely, that the ship would now have to go
around the Cape of Good Hope, which is three times the distance from Hamburg to
Port Sudan. The freight for such a journey was also double. Despite this, the
House of Lords held that even though the contract had become more onerous to
perform, it was not fundamentally altered. Where performance is otherwise
possible, it is clear that a mere rise in freight price would not allow one of
the parties to say that the contract was discharged by the impossibility of
performance.
Flowing
from the foregoing, a contract is not frustrated merely because its
execution becomes more difficult or more expensive than either party
originally anticipated and has to be carried out in a manner not envisaged at
the time of its negotiation. See Davies Contractors Ltd v. Fareham N.D.C;
Tsakineglon & Co. v. Noblee Thorh G.M.B.H.
Secondly, if the obligation under a contract was due
before the frustrating event, the subsequent occurrence of the frustrating
event does not discharge that contract. Thus, all legal rights already accrued
or money already paid, which has become payable before the frustrating events
occurred remains intact, while obligations falling due for
performance after the event are discharged. See Nospecto Oil
& Gas Ltd v. Kenney & Ors[v].
In addition to the above two instances, it is
pertinent to note that the doctrine of frustration also does not occur where:
(i) the intervening circumstance is one which the law
would not regard as so fundamental as to destroy the basis of the agreement.
(ii) the
terms of the agreement show that the parties contemplated the possibility of
such an intervening circumstance arising.
(iii) one of the parties had deliberately brought
about the supervening event by his own choice. See Gold Link Insurance Co. Ltd v. PTF[vi].
Conclusion:
Whether a contractual
obligation can be avoided on the grounds of force majeure or frustration of
contract is a factual determination based on the specific terms of the contract
or the alleged frustrating event. The courts would examine, whether in each
case, impact of Covid-19 pandemic prevented the party from performing its
contractual obligation.
As we have seen
above, the terms “force majeure” and “frustration of contract” are not one and
the same thing in law as they have differing connotations and legal
implications. Simply put, frustration of
contract puts an end to a contract whereas force majeure only defers the
performance of the contract until the supervening event abates or is
extinguished.
The
relationship between both doctrines is such that force majeure clauses are used
in contracts to avoid frustration. To avoid a contract being found to have been
frustrated, parties should apportion risks, as far as possible in a force
majeure clause embedded in the contract.
Also
impracticability of performance may not excuse a party from performance unlike
impossibility of performance which will.
Read more at:
1. https://www.bloombergquint.com/coronavirus-outbreak/covid-19-coronavirus-force-majeure-and-impact-on-commercial-contracts
[i] 2nd
Ed.
[ii] (1863)
3 B & S 826
[iv] [1961
(2) All ER 179]
[v] (2014)
LPELR-23628(CA)
[vi] (2008)
LPELR-4211(CA)
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