In all human endeavours, the principle of Sanctity of Contract guarantees the performance of contractual obligations ensuring that parties are bound by the terms of their agreement and cannot renege from the contract on the basis that the terms of the contract are onerous to perform or unfavorable to either party.
Like other principles of law, Sanctity of Contract is not without exceptions. For instance, parties can agree on the suspension or termination of contractual obligations upon occurrence of certain events. Such events can be in form of the actualization of the purpose of the contract or by the occurrence of a “force majeure” event.
Force Majeure has been defined as the superior force that prevents parties from meeting their contractual obligation. It is inserted as a protection clause in most contracts to remove liability for unavoidable catastrophes that interrupts the expected course of events and restricts the performance of a contract. However, in the absence of force majeure clause in the agreement of parties, the concept of Frustration of Contract can be pleaded and successfully relied upon by a party.
The concept of Frustration of Contract has been recognized as an exception to the Sanctity of Contract. In Nospecto Oil & Gas Ltd. v. Kenney & Ors. (2014) LPELR – 23628 (CA), the Courtheld that frustration in a contract arises when an event occurs without the culpability of any of the parties and which hinders or prevents the performance of an obligation or duty under the contract and fundamentally changes the circumstance and striking at the root of the Agreement.
Flowing from the above judicial authorities and the proactive measures adopted to curtail the spread of Coronavirus Disease 2019 [COVID–19], we consider it necessary to answer the following questions:–
– whether the global outbreak COVID–19 and the resulting measures employed by the Federal Government of Nigeria [i.e. the prohibition of mass gatherings and inter-territorial restrictions] can be regarded as a force majeure to constitute an unforeseen circumstance[s] capable of frustrating the Agreement of parties?
– if the answer is in the affirmative – what happens when the force majeure is longer than the period provided by parties for suspension of their contract? and
– what are the remedies available to parties?
COVID – 19 AND FORCE MAJEURE OR FRUSTRATION OF CONTRACT:
There will be no difficulty classifying COVID – 19 as force majeure even though parties do not include “pandemics” as part of circumstances constituting force majeure in their contracthowever there are other words that may be construed as addressing the issue of pandemics within the definition/description of what amounts to force majeure in most contracts. In the absence of such express provision, it will be necessary to have recourse to the principle of frustration of contract.
The Supreme Court in Nwaolisah v. Nwabufoh (2011) LPELR – 2115 (SC) held that “a contract is not frustrated merely because its execution becomes more difficult or more expensive that either party originally anticipated and has to be carried out in a manner not envisaged at the time of its negotiation”.
The Supreme Court’s decision in Nwaolisah v. Nwabufoh(Supra) made it pertinent to note that it is the nature of the contractual obligation to be performed by a party that determines whether COVID – 19 pandemic or the prohibition of mass gatherings and interterritorial restrictions can frustrate the contract.
In other words, where the contractual obligation to be performed by a party is such that cannot be performed due to restriction of movements, prohibition of mass gatherings orinterterritorial restrictions, then COVID – 19, can, in that circumstance, constitute circumstances capable of frustrating Agreement of parties.
Exceptions to the above;
– where other options are available to a party in the performance of his contractual obligations; and
– where COVID–19 caused the death of a party to a contract for personal service. In the latter situation it is the death of the party that frustrates the contract and not COVID–19.
In summary the
nature of the contractual obligations to be performed by a party to a contract
would determine if the COVID-19 pandemic and the Federal Government of
Nigeria’s restrictions can be regarded as a force majeure to constitute an unforeseen
circumstance[s] capable of frustrating the agreement of parties.
COVID – 19 AND THE SUSPENSION OF A CONTRACTUAL OBLIGATION:
For contractual obligations that cannot be performed, due to the COVID–19 pandemic and the resulting measures imposed by the Federal Government of Nigeria, these can be suspended temporarily until the frustrating intervening event has abated and parties resume business.
It is however not in all circumstances that a contract will be suspended due to frustration. Frustration a times may warrant the immediate discharge of a contract. For instance, the Court in Okereke & Anor v. Abia North L.G.A (2014) LPELR – 23770 (CA) recognized the frustration of contract as one of the ways in which a contract can be discharged.
A discharge of contract by frustration in the present circumstance is where, for instance the COVID-19 situation subsists beyond the period agreed by parties for suspension of their contract and time is of the essence in the performance of the contract; the contract will be discharged.
COVID – 19 – REMEDIES AVAILABLE TO PARTIES:
Except parties expressly provide otherwise in their agreement, the remedy available to them is dependent on whether the contract is suspended or discharged by frustration. Generally, suspension of contract merely puts the rights and obligations of parties in abeyance and does not affect the validity or subsistence of the contract.
– By an Injunctive Order, a party can be restrained from rescinding the contract during the period of suspension, and at the end of the suspension a party can seek an order of specific performance if the other party fails to discharge his contractual obligation.
– Contrarily, parties are legally relieved of all pending contractual obligations when a contract is discharged by frustration. However, where there is a payment of monetary sum without the performance of any contractual obligation, the party who paid the monetary sum is entitled to recover same in an action for money had and received and under the failure of consideration.
Non Judicial Remedies:
– Parties can proactively extend the agreed period for suspension of their contract. This can be done by an ADDENDUM to the already signed contract.
– Parties can extinguish the rights and obligations that the original contract has created and substitute the same with a new agreement.
The second option above has long been recognized and sanctioned by the Supreme Court in Grover v. Int’l Textile Ind. (Nig.) Ltd (1976) LPELR – 1342 (SC) when the Honourable Court held that:
“the law is well settled that a later Agreement by the parties to an original contract, to extinguish the rights and obligations that the original contract has created is itself a binding contract, provided that the later Agreement is either made under seal or is supported by consideration.”
From all intent and purposes, COVID–19 pandemic and its preventive measures may constitute a force majeure event or unforeseen circumstances capable of frustrating performance of the contract. However, it requires a fact-to-fact analysis of the terms of the Agreement of parties and the contractual obligation[s] to be performed to determine whether such a contract can be suspended or discharged and the applicable remedy.
WIGWE & PARTNERS
The information provided in the write-up does not, and is not intended to, constitute legal advice; instead, the information contained herein are for general informational purpose only. Readers of this write-up should contact their solicitors to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of the information herein without first seeking legal advice from their solicitor. All liability with respect to actions taken or not taken based on this write-up are hereby expressly disclaimed.