– lessons from COVID-19 pandemic
The COVID-19 pandemic that originated in Wuhan, China, and has spread across the world over the past few months has affected, perhaps, every sphere of human existence. It has had diverse effects on the politics of nations, health, law, and on human and business relations. Contractual relations between and among parties have not been left out. The ability of parties to perform under contracts entered into have come under strain. Pursuant to several instances of executive instruments, certain parts of the country were placed under a lockdown; movements into and out of the country have been curtailed, and intercity movements restricted.
The contractual questions that arise in these times are: What happens to contractual obligations under a contract? What remedies exist for a defaulting party under the contract? In this article, the common law doctrine of frustration and the force majeure clause in contracts will be discussed.
Absolute liability in a contract and frustration of a contract
Arguably, and as is known within the Ghanaian military parlance, the first rule is ‘Obey the rule, before you complain’. This rule explicates the understanding that a rule or ‘agreement’ laid down must be adhered to before the aggrieved party can later make a complaint on why s/he failed to comply with the rule.
In contractual relations, this applies as well. The cardinal rule is that the contractual parties must respect and adhere to dictates of the contract. At common law, parties under a contractual relationwere obligated, albeit mandatorily, to perform their duties under the contract by the doctrine of absolute liability. Under this doctrine, when a party contracts validly and voluntarily enters into a contractual relation with another part(ies), obligations under that contract must be performed at all costs – notwithstanding the fact that performance of said obligations might have been rendered impossible to perform.
The reason for this absolute doctrine to perform was premised on the fact that the contractual parties must always negotiate expressly for contingencies. The parties are also required to expressly state what will ensue in the event of the named contingency. This requirement, even on the face of it, appears arbitrary. Contractual parties are not always in control of events around them, especially those involving third, higher parties. Further, life is subject to events beyond the control of man. Clearly, the strict contours of this doctrine led to absurd judicial decisions.
The absolute doctrine to honour contracts was re-considered in 1863, when the court in the case of Taylor v Caldwellconsidered the hardship such an absolute obligation cast on contractual parties. The court reasoned that in any contract there should be an automatic mutual discharge of the contract where performance of the contract became impossible to perform – of which the impossibility was not through the fault of either party but was by a supervening event. That supervening event must have rendered obligations under the contract as being radically different from those contemplated by the parties at the inception of the contract.
The consequence of this, as espoused in the case of Taylor v. Caldwell, is to terminate the contract on grounds that the contract has been rendered impossible to perform. The contract, however, does not become void entirely. The parties are only discharged from the futuristic obligations they would have incurred under the contract. This means that obligations which were due before emergence of the impossible situation remain valid. The defaulting party may therefore be liable for a breach of a contract for the non-performance of those obligations.
The case of Taylor v. Caldwell bordered on a contract by the parties for the hiring of a particular music hall for four days. A week before the concert ensued, the hall was razed down by fire and the plaintiffs instituted an action against the hall-owners for failing to provide them with a hall for their concert. Within the contract there was no express provision that made room for such a contingency.
The court then espoused the implied condition theory, which was to the effect that notwithstanding the fact that the parties had no express term in the contract to cater for such an event as had arisen (the burning down of the music hall), the court will imply a term into the contract. The term implied will be to the effect that if the parties at the time of the contract had anticipated this event, they would have provided in their contract that upon its happening, the obligations in the contract would be discharged.
As time went on, the implied term theory – which forms the basis for the doctrine of frustration – was criticised heavily and construed as being fictitious. The courts have now held that they will apply frustration of contracts on the grounds that it is a just and reasonable approach to new situations arising which are beyond the parties.
Establishing the doctrine of frustration
It is argued, albeit established in law, that the decision in Taylor v. Caldwell espoused the newer and friendlier doctrine of Frustration of Contracts. This paved the way for a fresh regime in contract law. A party can successfully plead frustration, therefore, by establishing all the four main factors: namely the presence of a supervening event; the impossibility of the party to the contract to perform its contractual obligations; the un-foreseeability of the event; and the lack of fault on the part of the complaining party.
The frustration of a contract will ensue where there has been a supervening event. Any supervening event a party alludes to must have occurred after the parties entered into a contract. Here, the nature, scope and obligations to be performed under the contract must be considered by the court or the parties to ascertain whether the obligation prevented from being performed by the supervening event is one which is fundamental under the contract, such that its non-performance renders the contract redundant or whether the obligation is just a trivial one.
Where the obligation in question is one which is merely ancillary to the contract, the presence of a supervening event shall not be enough to frustrate the performance of the contract. In law, a supervening event is said to be any event that changes the circumstances of performance of the contract so significantly that the parties are unable to perform the contract. Invariably, an event such as a war or a state of emergency, depending on the exact nature of the emergency and nature of the contract may be deemed a supervening event.
Secondly, the contract must have been rendered impossible to perform. The impossibility to perform the contract ensues where the contract at the time of the supervening event has become radically or fundamentally different from what the parties contracted at the inception of the contract.
Also, the mere fact of a contract being rendered unprofitable, or expenses under the contract rising at a super-normal rate or loss of commercial viability is no reason to deem that contract impossible to perform. Where there is an unexpected change in the economic situation in the country, it must be shown that the situation has rendered the contract radically different from what the parties anticipated at the beginning. Failure to prove this therefore means that the doctrine of frustration cannot be applied. The threshold for establishing this factor is quite high.
Next, the foreseen or foreseeable risks involved in the contract must be considered. It must be established by the party complaining of the impossibility to perform that contract, that the event being complained of was not one which was within the reasonable contemplation of the parties at the time of the contract. The event must be totally unforeseen by the contractual parties.
The last factor to be established is that on fault and self-induced frustration. The supervening act complained of should not have been induced by a party to the contract. Frustration can only arise when the event in question is one which is beyond and out of the control of the parties. In the circumstance, where the act complained of was caused by a party to the contract, an attempt to invoke the frustration doctrine will not hold.
As noted, the doctrine of frustration is a common law doctrine which is not expressly stated in the contract but may be invoked to discharge the contract where the necessary factors are proven to be present. Force Majeure, on the other hand, does not originate from the common law. It is expressly provided for as a clause in the contract that specifies some laid-down events which will operate to discharge the contract. Parties to the contract have the liberty to agree on specified events which will be treated as force majeure events. As a necessary indication or circumstance of the force majeure clause in the contract, the force majeure event must be one which ensues as a reason of circumstances beyond the control of the parties.
The circumstances must in addition be unforeseeable, unavoidable and must make performance of that obligation impossible. The parties may invoke the force majeure provision to suspend the contract for a short while. However, where the event persists or becomes permanent, either party may terminate the agreement.
Where parties include a force majeure clause in their contract, the court turns to it in ascertaining whether the contract must be brought to an end. This is based on the wording of the force majeure clause, the relevant facts and the events. Thus, parties can either decide to rely on the common law doctrine of frustration which need not be written in the contract to bring their contract to an end, or they can expressly stipulate in their contract the nature and calibre of events which will bring their contract to an end by way of a force majeure clause.
In this era when many contracts include force majeure provisions, the question of whether or not the COVID-19 pandemic will amount to a force majeure event will depend on interpretation of the provision of force majeure in that particular contract.
Drafting force majeure clauses in contracts
In any contract, when parties attempt including a force majeure clause (which is highly recommended) some main considerations must engage their interest.
The first is definitions to ascribe to the events which must be construed as force majeure events. Typically, in contracts parties define the force majeure events in either an exhaustive or a non-exhaustive way.
Many contractual parties choose to define their events exhaustively in the bid to prevent either party from having many options to escape contractual obligations. Also, many of the definitions forforce majeure events in contracts have excluded specific instances – such as epidemics, pandemics and even acts of governments – as forming part of the scope of the force majeure events.
They probably only state an act of God as an event without defining it, or defining it in a limited manner. After this COVID-19 pandemic, the interests of contractual parties must be steered toward defining the force majeure event extensively; and including in the definition acts of governments, travel bans, forced quarantines, epidemics and pandemics (whether due to natural or man-made causes). Further, the definition must be in a non-exhaustive manner so as to cater for unforeseen occurrences which may ensue.
It must be indicated that the events in the force majeure clause defined must be beyond the reasonable control of the parties. These events must be such that the parties do not have the ability to resist or avoid their occurrence.
Also, the force majeure complained of must have rendered performance of the contractual obligation impossible and not merely uneasy to perform. The event must not have been caused by a party to the contract, whether intentionally or negligently.
A notice requirement must also be placed in the contract. The party who faces a force majeure event must give, within a timeframe to be stipulated in the contract, reasonable notice to the other party of the force majeure event; when it began; the effect it may have on the obligations of that party; the proposed mitigating steps being taken to reduce impacts of the event on the whole contractual arrangement; and the estimated length of the force majeure event. The notice requirement of the steps undertaken to mitigate the force majeure event then implies that the parties must also include in their contract a duty on either parties to mitigate/use efforts in abating impacts of the force majeure event on the contract.
Again, having in view the sudden nature of the COVID-19 pandemic and the abrupt halt it has brought to many sectors of the country, if not all, it is then reasonable to now include suspensions and automatic extensions of the contract in addition to termination clauses based on the force majeure events. With suspensions and automatic extensions, the parties must agree that the period within which the contractual obligations are suspended due to the force majeure event must be deemed to have extended the contract for that same amount of time.
In effect, if the force majeure event suspends performance for six months depending on the nature of the contract, the parties must extend the contractual relation for an extra six months to cover the period of suspension. This, however, should not prejudice the right of the parties to terminate the contract based on the force majeure event, if the nature of the contract cannot permit an extension or even a temporary suspension.
Parties to a contract affected by the COVID-19 pandemic which does not have force majeure clause can rely on the common law doctrine of frustration to relieve themselves of the contractual obligations. Those with force majeure clauses which do not have definitions to cover such pandemics may consider revising their contracts to anticipate such pandemics. Friendlier dispute resolution mechanisms must be explored by parties to help in resolving breaches of contracts as a result of such unfortunate pandemics.
For future contracts to be entered into, the parties must be guided by what and how contracts have been treated by the COVID-19 pandemic; and must make an extensive force majeure provisions to cater for such. It is conceded that depending on the interests of parties in the contract, one party will advocate for a narrower form of force majeure so as to prevent the other party from easily escaping liability under the contract; whereas the other party will advocate for a broader approach as proposed. The ultimate resolution lies in the negotiations by the parties and the compromise to be reached.