Governments across the world, in response to the COVID-19 pandemic outbreak, have initiated defensive mechanisms, which include but are not limited to restrictions on movement, social distancing, temporal closure of businesses, borders and ports etc., in an attempt to contain the spread of the disease.
Nigeria, which has recorded its own share of confirmed cases of the dreaded corona virus infections, responded by adopting some of the above precautionary measures in order to contain the spread of the virus.
As a result of the foregoing, businesses have been in turmoil for weeks and are bracing up for even more perilous times ahead. The Real Estate sector is not left out, as a slump in demand for real estate on one hand and an unwillingness to complete pending transactions on the other hand, amongst other challenges; are gradually impacting negatively on the sector.
Regarding Contracts and Agreements, between transacting parties, who have established contractual relationships for property purchase and sale of transactions, pledges to finance the said transactions, building contracts (Developers), leases, facility and property management agreements, the confusion caused by this COVID-19 response, has raised critical questions regarding how to best progress.
Ideally, contractual obligations must be performed, with the risk of potential litigation, arbitration or adjudication, an effective deterrence against any intention to default, unless of course something supervening occurs. The question is can coronavirus be regarded as supervening?
Practically, there are two major mechanisms to be considered. The first is force majeure, which depends for its existence, and effects, on the contract/agreement itself and the second, established by case law and legislation, is frustration. Force majeure is a legal concept in civil law countries, Nigeria inclusive, which unlike the doctrine of frustration is not codified, therefore mandating that terms should be and are set out in the contract.
This doctrine of Force Majeure is similar to frustration but the difference lies in the fact that it is open to the contracting parties to define, via the contract, exactly what circumstances are agreed to constitute force majeure.
For the same reason, the contract also needs to set out the consequences of any event of force majeure, for instance suspension of performance until the force majeure event ceases. A good example is the Rent suspension or Rent reduction clauses, which Lessors or Tenants can benefit from to provide some relief, if inserted under the force majeure clause, in their respective Lease or Tenancy Agreements.
Frustration on the other hand occurs when an event happens, after the contract commences, independent of any faults of the contracting parties and for which the contract makes no adequate provision, which so considerably alters the nature of the outstanding contractual rights and/or obligations from what the parties could reasonably have anticipated at the time it was made, that it would be unjust, in the new circumstances, to hold them to its precise wording.
Unlike Force Majeure, which is more flexible, when the doctrine of Frustration is successfully invoked under Nigerian law, both parties are automatically discharged from further performance. Legislation, in this case, will deal with the recovery of monies paid and compensation for any valuable benefit provided. Some of the applicable Legislation are: Section 8(2) & (3) Law Reform Contracts Law of Lagos State and Section 120 Federal Competition and Consumer Protection Act .
Can the principles of frustrating event or force majeure avail a defaulting party?
Corona virus can potentially affect different contracts in various ways. Where a Country, as is the case in Nigeria, takes necessary steps to contain the virus spread, which includes imposition of mandatory restrictions on movement into and out of an area (as in Nigeria), closure of ports and borders, temporal close of businesses, amongst other measures; parties are bound to struggle and ultimately default in meeting their contractual obligations.
Whether frustration or force majeure applies will depend on the individual circumstances of each case and how the virus has affected performance. Did it become illegal or impossible or radically different and how, if at all, does the contract in question deal with this situation? Is an epidemic, for instance, defined by the contract as an event of force majeure?
What are the steps to take in the event of a possible contractual default?
In light of supervening events, set in motion by the pandemic, the prospect(s) of failure to perform contractual obligations are plausible and these may ultimately culminate in possible litigation. It is very common for businesses to contest the failure to perform a contract, when normal business operations begin.
The importance of a Force Majeure Clause is to allow either party to a contract to suspend, renegotiate or terminate the performance of its contractual obligations when certain circumstances beyond their control suddenly occur. This is as opposed to Frustration which, when activated, operates to discharge the contract. Parties should ensures that they engage their respective Lawyers as follows:
- act quickly in studying contracts to ascertain the presence or otherwise of a Force Majeure clause, which covers the current situations; and
- if there is no Force Majeure Clause in the contracts, as of date,Counsel should take steps to contact the necessary counter-parties with the aim of negotiating a Force Majeure Clause that suits the peculiar circumstance;
- where the above negotiations fails, Counsel should immediately issue a default notice to the counter-party;
- if a contract is silent on force majeure provisioning and litigation eventually results as a result of a “failure to perform”, courts would generally render their decisions applying the doctrines of frustration of contracts;
- however, if the parties allocate the risk of the specified event, in the clearest possible terms, there should be no room for a court to inquire into the foreseeability or reasonability of that event and this is more advisable;
- Lawyers should be proactive in cases where counter-parties, who have been in breach or have proven difficult or demonstrated malice and bad faith, attempt to take unfair advantage of the party who has already performed its obligations under a contract;
- Finally, it is also advisable for Lawyers to embrace arbitration and mediation as possible options.