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COVID-19: Contracting Issues

As the Novel Coronavirus (COVID-19) continue to impact and ground human activities globally, World leaders scramble to mitigate the deleterious effect of the rapidly spreading virus on the global economy and where businesses are concerned, millions worldwide have shut down, complying with various Governments’ “stay at- home, stay safe” orders.

The consequence of the shutdown on businesses has certainly affected businesses that are heavily reliant
on their trading partners, global trading relationships, and supply chains to fulfill their contractual
obligations.

Various issues with respect to the effect of the pandemic on contracts would indubitably arise. In this series, we explore some of these contractual issues in a bid to assisting contracting parties make informed decisions with respect to their rights and obligations under their existing contracts.

Force majeure

A force majeure event is an intervening event which affects the capacity of a contracting party or parties to fulfill their contractual obligations.

Nigerian courts have defined force majeure as something unexpected and unforeseen happening, making nonsense of the real situation envisaged by parties.1

Crucially, force majeure is strictly a contractual provision and therefore only entails what parties delineate it to contain in their contracts.

Typically, force majeure provisions would include acts of God, diseases, fires, earthquakes, natural disasters, outbreak of diseases, epidemics and pandemics.

It is pertinent to note that inability to perform a contractual obligation as a result of an event, without more, cannot trigger a force majeure provision.

A party seeking to rely on a force majeure provision must establish a nexus between the force majeure event sought to be relied upon and his inability to perform2.  It is for this reason that contractual disputes
post the pandemic would be rather tenuous, because whilst the effects of Covid- 19 cannot be
denied, the connection between the pandemic and various industries differ.

Typically, force majeure provisions would not automatically excuse the obligations of a party
upon the occurrence of the force majeure event, however, some contracts provide that should the
force majeure event subsist for more than a certain period, the affected party may elect to terminate
the contract.

We see that the existence of such a risk whereby parties may opt out of contracts should the pandemic last for an extended period, has alarmed businesses and business owners, and forced them to watch with bated breath the progression of the pandemic, with hope that a resolution is near.

How does this affect contracting parties during this pandemic? In relation to the effect of the pandemic on contractual obligations, it would be useful for contractual parties to properly examine their contracts to ensure that the force majeure provisions are wide to include events such as the Covid- 19 Pandemic.

Where the provisions are wide enough to include the Pandemic, parties should ensure that they
may invoke force majeure under their contracts in line with the prescribed procedure under such
a contract.

It is arguable that the phrase ‘Act of God’ is wide enough to cover the Pandemic. The phrase has
been defined as an event which involves no human agency, is not realistically possible to guard
against, is due directly and exclusively to natural causes and which could not have been prevented by
any amount of foresight, plans, and care3.

The phrase has been applied to natural disasters such as earthquakes, storms and we see no reason a pandemic (which has not been proven to be as a result of human intervention) that is adversely ravaging the globe should not fall under the phrase. Frustration of contracts Generally, frustration of contract
is the premature determination of an agreement between parties, owing to the occurrence of a supervening event, or change of circumstance so fundamental that it is regarded by law as striking at
the root of the agreement 4.

A contract is therefore frustrated where, subsequent to its formation, and without fault of either party, it is
incapable of being performed due to an unforeseen event (or events), resulting in the obligations under
the contract being radically different from those contemplated by the parties to the contract5.

The legal consequence of frustration is that the contract is automatically terminated at the point of frustration. This does not mean that the contract is void ab initio (“from the beginning”); only
future obligations are discharged. However, parties are still to perform obligations which fell due for
performance before the frustrating event6.

The events which have been listed by Nigerian courts as super vening and thereby constituting frustration include: (i) subsequent legal changes or statutory impossibility; (ii) outbreak of war; (iii) destruction of the subject matter of the contract or literal impossibility; (iv) Government requisition of the subject matter of the contract; and (v) cancellation by an unexpected event7.

” The shutdown of businesses has certainly affected businesses that are heavily reliant on their trading partners and global trading relationships”

 

 

We see that the Pandemic easily plugs into more than one category of supervening events as held by Nigerian courts.

How does this affect contracting parties during this pandemic?

It is likely that as a result of the spread of the virus, non-performing contracting parties may seek to rely on the common law concept of frustration, and argue that the Pandemic is a supervening event, thus rendering them unable to fulfill their contractual obligations. In this light, we envisage that parties may raise frustration as a defence with respect to actions against them for breach of contract.

We note that the focus of the court will be on the parties’ specific contractual obligations and whether they have radically changed as a result of the spread of a company. In relation to lending, a MAC clause is used in most loan agreements to enable a lender to call a default, and therefore to demand early repayment of a loan if there is an unforeseen adverse change in a borrower’s position or circumstances. With respect to a company, it relates to any event, circumstance, change or effect that, individually or in the aggregate, is materially adverse to the business, condition (financial or otherwise), assets, liabilities or results of operations of the Company and the Company Subsidiaries, taken as a whole.8

How does this affect contracting parties during this pandemic?

The Pandemic could have significant impacts on businesses and ultimately the values of companies. This may lead to investors pulling out from mergers and acquisitions transactions. Borrowers might be significantly affected, and banks could be tempted to call in loans where there it is evident that there is a material adverse change in the position or circumstances of its borrowers. However, as stated earlier, MAC events are not at large and must fall within the provision of a MAC clause in a contract for it to be triggered. The onus therefore lies on a party that alleges the occurrence of a MAC event to prove it.

We note that in triggering the acceleration of a loan repayment based on a MAC clause, it is not enough for there to be an adverse change, same must be material9. An adverse change is held to be material if it significantly affects a borrower’s ability to perform its obligations and to repay the loan and must not merely be temporary. Since the global position is that the Pandemic will undoubtedly come to an end (although a firm date cannot be ascertained), we take the view that the Pandemic may be viewed as a temporary10 circumstance, that businesses will recover from. In this guise, lender banks may find it difficult establishing before Nigerian courts, that the Pandemic caused a MAC.

Renegotiation of contractual relationships

The impact of Covid- 19 cannot be overstated, and we envisage the impact to extend to contractual relationships, thereby leading to an increase in demand by contracting parties to renegotiate the terms of their agreements. Whilst there would typically be provisions to cushion the effect of unforeseen events, the extent of the impact of the Virus is still yet to be fully realised, so that even those ‘cushion provisions’ may be inadequate in combatting the effects of Covid- 19.

For instance, where parties have agreed to a moratorium period, the extent of the impact of the Pandemic could very well render such a moratorium period inadequate, especially because the initial term of the contract has not stricto sensu been observed due to the intervening nature of the Virus on business in general, and the government imposed locked down.

We have already seen the impact of the Virus on oil prices (oil being the bedrock of the Nigerian economy), and this would invariably affect the stability of the Nigerian economy by resulting in a shortage of foreign exchange. The simple deduction would be that foreign exchange denominated facilities may become too onerous for parties, and parties would be seeking a conversion of such facility, or that due to the fall in oil prices, parties can simply not  obtain enough foreign exchange to service their loans.

How does this affect contracting parties during this pandemic? We recommend that parties examine their contracts in detail and begin to intimate counterparties about the prospects of a renegotiation
of terms, or a possible suspension of the said contracts till a time to be agreed by the parties, depending on the outcome of the Pandemic.

This is particularly important for industries that have been hit harder by the effects of
the virus. Interpretation of contracts In interpreting contracts, the role of the court is simply to give effect to the intention of parties as expressed in the terms of the contract, and nothing more11.

Courtesy: Olaniwun Ajayi LP,
Lagos

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