COVID-19: The Doctrine Of Frustration And Force Majeure By Chinedu I. Nwobodo And Ifunanya L. Nwafor  

 

FOD
 FOD
Joined: 5 months ago
Posts: 4
26/03/2020 3:52 pm  

The Doctrine of Frustration postulates that if an event or series of events occurs without the fault of any of the parties which hinders or prevents the performance of the duty under the contract, such contract is discharged and is considered terminated. Such event fundamentally changes the circumstance and strikes at the root of the agreement, This is expressed in Latin as “Non haec in foedera veni”. See NWAOLISAH V. NWABUFOH (2011) 14 NWLR (PT. 1268) 600; WECO ENGINEERING AND CONSTRUCTION CO. LTD v. DUFAN (NIG) LTD & ANOR (2019) LPELR-47211(CA), CHANDLER V. WEBSTER [1904] 1 KB 49.

The Supreme Court in NWAOLISAH v. NWABUFOH (2011) LPELR-2115(SC) observed that:

“Frustration occurs wherever the law recognizes that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it radically different from what was undertaken by the contract” The events which have been listed by the court to constitute frustration are: (1) Subsequent legal changes or statutory impossibility (2) Outbreak of war (3) Destruction of the subject matter of the contract or literal impossibility (4) Government acquisition of the subject matter of the contract (5) Cancellation by an unexpected event like where other party to a contract for personal service, dies or where either party is permanently incapacitated by ill-health, imprisonment etc., from rendering the service he has undertaken. Davies Contractors Ltd. v. Fareham DC (1956) AC 696, Akanmu v. Olugbode (2001) 13 WRN 132, NBCI v. Standard (Nig.) Eng. Co. Ltd. (2002) 8 NWLR (pt. 768) pg 104, Obayuwana v. The Governor of Bendel State (1982) SC pg. 167, Taylor v. Caldwel (1863) 3 B& Y S 826, J. P Dawodu v. B. Anderson & Co, Ltd (1925) 6 NLR Pg. 105, Adu v. Makanjuola (1944) 10 WACA Pg. 168.”See also Cricklewood Property & Investment Trust Ltd v. Leightons Investment Ltd. (1945) 1 All ER 252.

The Court of Appeal in GLOBE SPINNING MILLS (NIG) PLC v. RELIANCE TEXTILE INDUSTRIES LTD (2017) LPELR-41433(CA) held that where the commercial purpose of the contract has failed that it amounts to frustration.

Where a contract has been frustrated, the question of breach will not arise, as none of the parties can be held responsible for what has happened. The contract is generally discharged.

The question whether the doctrine of frustration applies to leases came up in ARAKA v. MONIER CONSTRUCTION COMPANY (NIGERIA) LTD (1978) LPELR-531(SC), the facts of the case are as follows:

The Appellant as Plaintiff claimed from the Respondents as Defendants, the sum of N4,400 being rents due to the Appellant for the period, 1st December 1967 to 30th November 1969, in respect of the Appellant’s house situated at 5 Wenike Tienabeso Street, formerly 5 Umuahia Street, Port Harcourt. At the trial of the action the Appellant gave evidence and called one witness. The Respondents did not adduce any evidence, but rested their case on the evidence of the Appellant and the correspondent between them and the appellant, which were admitted in evidence through the Appellant. In a reserved judgement, the learned trial Judge found that there was a lacuna in the case of the Plaintiff in that there was no evidence of the terms of the tenancy agreement for the period 1st December 1964 to 30th November 1966 and there was no such evidence for the period in question either. He further found that the occupant of the house, who was an expatriate, vacated the house in June 1967 which was six months before the next rent was due and that he did so because all expatriates had been asked by the Biafran rebels to leave that part of the country on account of the Nigerian civil war. Consequently, the learned trial Judge dismissed the Plaintiff’s claim. Being aggrieved at the Judgment, the plaintiff as appellant, appealed to the Supreme Court.

The Supreme Court held thus:

“We are inclined to accept the views of Viscount Simon and Lord Wright as being the correct statement of the law that the doctrine of frustration may in certain circumstances apply to a lease. We think that it may tantamount to injustice to deny a tenant the benefit of frustration in cases where, owing to circumstance of an intervening event or change of circumstances so fundamental as to be regarded by the law as striking at the root of the agreement, it has become impossible for the tenant to enjoy the fruits of his lease and at the same time to expect him on account of the abstract estate concept to honour his obligations under the lease. Such denial may also suffer injustice to a landlord who finds himself in the same situation as the landlord in DENMAN v. BRISE (Supra).

…the very purpose for which the lease had been taken was frustrated by the action of the Biafran rebels and that since that date the tenants have not enjoyed the benefits of the lease.

Furthermore, the tenants were compelled by the civil war to suspend their business in Port Harcourt and vacated the area and that before the end of the war the lease property had been taken over by the Abandoned Property Authority and consequently, neither the landlord nor the tenant had a right of access to the house after the secession of hostility in January 1970.

Under the circumstances we think it would be unjust and oppressive to cause the tenant to pay the rent for the period in question. That being the case, we think the learned Judge was right in regarding the contract as having been determined by frustration and holding that the Appellant was not entitled to recover any rent thereafter.

Accordingly, the appeal is dismissed and the cost of the appeal in favour of the Respondents is assessed at N310.”

In A-G CROSS RIVER STATE v. A-G FEDERATION & ANOR (2012) LPELR-9335 (SC) the Supreme Court held that the doctrine of frustration is applicable to all categories of contract.

COVID-19

In view of this raging pandemic disease; Coronavirus (COVID-19), there will be so many actions in court over breach of contracts. Some employers are already issuing notices for non-payment of their employees during this period they have asked them to stay at home, some loans can no longer be serviced, some persons that rented event centres can’t use them again and don’t have the assurance of getting their money, some that gave banks standing orders can’t fund the accounts to carry out these instructions, some booked airline but can’t travel, etc.

The writers wish to pause at this juncture to ascertain whether the outbreak of Coronavirus is a frustrating event?

Our answer to the above poser will be dependent on the peculiar facts of each case under consideration. While COVID-19 will amount to a frustrating event to discharge some contracts, it will not be enough to discharge some contracts as a frustrating event.

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 (1956) AC 696, TSAKINEGLON & CO. V. NOBLEE THORH G.M.B.H (1962) A.C. 93.

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 (2014) LPELR-23628(CA)

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 (2008) LPELR-4211(CA).

A scenario will be apt to explain when COVID-19 will amount to frustration and when it will not.

Mr Ugo who stays in Canada entered into an agreement with Mr Segun for the supply of 100 cartons of Wine on 1/3/2020, which 60% is payable on 5/3/2020. The Nigerian Government however closed its border on 7/3/2020 because of COVID-19 outbreak when Mr Segun has not paid the 60%. Meanwhile, Mr Ugo has expended money in buying the wine and other logistics. Mr Ugo who is aggrieved has brought an action to enforce the 60% that was due and payable before 7/3/2020.

In this event, Mr Ugo can successfully claim for the 60% because it was due and payable before the closure of the border. However, assuming the 60% was payable on 9/3/2020, the contract will be deemed frustrated and Mr Segun will be discharged from the obligation.

Flowing from the foregoing, it is clear that if the parties contemplated the possibility of such an intervening circumstance that the doctrine of frustration will not apply. Hence, such contemplation will usually come under the “Force Majeure clause” inserted in such commercial agreement in which the parties determine whether the contract is to be suspended during the period or to be discharged or for refund of any consideration that has passed, etc. In such circumstance the court will give sanctity to the agreement of the parties by applying whatever they have provided for in such Force Majeure Clause. This is on the principle of freedom of contract.

FORCE MAJEURE (VIZ MAJOR)

Force majeure, according to Black’s Law Dictionary 8th Ed, is an event or effect that can neither be anticipated nor controlled. It includes both natural and human acts. The human acts may be of political in nature including riots, strikes or war. This was affirmed by EJEMBI EKO, J.C.A in C.G.G. (NIG) LTD v. AUGUSTINE & ORS (2010) LPELR-8592(CA).

However, according to Wikipedia, Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, plague, or an event described by the legal term act of God (hurricane, flood, earthquake, volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract. 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 will be pertinent to note from the above that while the Black’s law dictionary equates Force majeure to the Doctrine of frustration, Wikipedia sees it as a clause in contract. In any event, it is our view that Frustration is the umbrella name that covers both Force majeure and other frustrating events. Hence, 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.

There are two possible instances, which may suggest that a force majeure clause covers a pandemic such as COVID-19:

(a) if the contractual definition of a force majeure event expressly includes a pandemic. The inclusion of pandemic to the list of force majeure events will provide clarity as to whether Covid-19 outbreak would trigger a force majeure clause in a contract; or

(b) if the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party.

The question that arises is: who has the duty to prove that COVID-19 really constituted a force majeure capable of frustrating the contract?

Courts place the burden on the party asserting force majeure defense to demonstrate the existence of force majeure. Such clauses are interpreted strictly by the courts.

It is not expected that contracting parties should fold their arms and wait till the end of the pandemic before they do something to salvage their contracts. It is therefore the opinion of the writers that contracting parties should:

Identify contracts that are likely to be affected by COVID-19.
Adhere to contractual notice requirement to notify the other party of the impracticability of completing the contract.
Take steps to mitigate their losses if the contract that is in existence now does not have Force majeure clause. The law imposes upon both parties an obligation to mitigate their losses.

In conclusion, we advise that a contracting party may need to engage a lawyer for proper advice on the next step to take.

 

SOURCE - https://thenigerialawyer.com/covid-19-the-doctrine-of-frustration-and-force-majeure-by-chinedu-i-nwobodo-and-ifunanya-l-nwafor/


Quote
Share:
Views All Time
Views All Time
289236
Views Today
Views Today
110