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INTRODUCTION
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 fulfil 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.
COVID-19:
CONTRACTING
ISSUES
APRIL 2020
The shutdown of businesses has certainly
affected businesses that are heavily reliant
on their trading partners and global
trading relationships
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.
COVID-19: CONTRACTING ISSUES
APRIL 2020
1. Globe Spinning Mills (Nig) Plc v Reliance Textile Industries Ltd [2017] LPELR-41433(CA) 27, para. E.
2. Section 136 (1) of The Evidence Act 2011 (As Amended) provides that “the burden of proof as to any particular fact lies on that person whowishes the court to believe its existence…”. See also Obiazikwor v. Obiazikwor [2008] 8 NWLR (Pt.1090) 551 at 569, paras. B-C where the Courtof Appeal, held that in civil cases, the onus of proof is always on the party who asserts.
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.
COVID-19: CONTRACTING ISSUES
APRIL 2020
3. Transco plc v Stockport Metropolitan Borough Council [2003] UKHL 61
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 agreement4. 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 supervening 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. We see that the
Pandemic easily plugs into more than one category of supervening events as held by Nigerian
courts.
COVID-19: CONTRACTING ISSUES
APRIL 2020
4. Mazin Engineering Limited v Tower Aluminum (Nig) Ltd. [1993] 5 NWLR (Pt 295) 526
5. Addax Petroleum Development (NIG) Ltd v. Loycy Investment Co. Ltd & Anor (2017) LPELR-42522 (CA) 10-12, paras. E-A
6. Pulseline Services Ltd. v. Equitorial Trust Bank (2010) LPELR-4886(CA) 31, paras. B-C)
7. Malik v Kadura Furniture & Carpets Co. Ltd (2016) LPELR-41308 (CA), 20, paras. C-E.
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 the
Virus to the extent that requiring a party to comply with its contractual obligations
would mean requiring it to do something fundamentally different from that which it
originally contracted to do. In other words, it will be important for the court to
identify the consequences of the Pandemic on the parties’ ability to perform the
specific contract in question. Thus, cases will be decided by the courts based on their
peculiar facts and circumstances.
MATERIAL ADVERSE CHANGE
A Material Adverse Change (MAC) clause is ‘transaction/deal’ specific. Thus, what will be a MAC
event under one contract/transaction might not be a MAC event under another. Usually, parties
carefully negotiate contract terms that deal with MAC and take into consideration the relevant
circumstances of each party. Consequently, the definition of MAC is unique to each contract.
In the field of corporate finance, mergers and acquisitions, a MAC event is a change in
circumstances that significantly reduces the value 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
COVID-19: CONTRACTING ISSUES
APRIL 2020
8. Rebecca Zaman, “Is Coronavirus a Material Adverse Change?” 19 March 2020
COVID-19: CONTRACTING ISSUES
APRIL 2020
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.
9. See Grupo Hotelero Urvasco SA v Carey Value Added SL and another [2013] EWHC 1039 (Comm)
10. Ibid.
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.
COVID-19: CONTRACTING ISSUES
APRIL 2020
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.
The impact will affect
contractual relationships,
thereby leading to an increase
in demand by contracting
parties to renegotiate the terms
of their agreements.
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. In the absence of any ambiguity in the
contract, the only interpretative jurisdiction of the court is to make pronouncement on the clear and
unambiguous agreement and agree with them12. The courts have however employed various
interpretation devices to as much as possible, give effect to the intention of parties.
COVID-19: CONTRACTING ISSUES
APRIL 2020
HOW DOES THIS AFFECT CONTRACTING PARTIES DURING THIS PANDEMIC?
It remains to be seen how this role of the courts may change in relation to post-
Pandemic litigation on breach of contract, and the expected debate as to whether the
Virus can be implied into a contract as amounting to frustration, in the absence of
force majeure provisions. Some may take the view that any form of ‘compassion’
adopted by judges would amount to ‘judicial sentiments’13 as opposed to giving effect
to parties’ intentions.
We however believe that the courts would appreciate the commercial realities of a
post Pandemic era, and do justice based on the peculiar facts and circumstances of
each case.
11. CAC v. Jude Elswitch Ltd (2016) LPELR-41217(CA) 18-19, paras. E-A.
12. Wema Bank Plc v. Osilaru (2008) 10 NWLR (Pt.1094) 150 at 177, paras. F-G.
13. It is trite that a court is not a court of sentiments and does not base its decisions on sentiments. See Ojo v. Gharoro [2006] ALL FWLR (Pt. 318)197 at 236
CONCLUSION
Covid- 19 has thrown up much uncertainty across the globe, and the effects which are already being
felt, will continue to compound. Situating the effect of the Pandemic in the context of commercial
contracts and litigation is an arduous task. It is hoped that contracting parties would be more
understanding in these turbulent times and take measures to preserve contracts rather than opting
out of them, except were doing so is inevitable in the circumstances.
COVID-19: CONTRACTING ISSUES
Olaniwun Ajayi LP Olaniwun Ajayi LP @OlaniwunAjayiLPwww.olaniwunajayi.net
For further information, please contact:
Dr. K.U.K. Ekwueme
Partner
+234-1-2702551 Ext 2600
Olabisi Makanjuola
Senior Associate
+234-1-2702551 Ext 2603
Dr. Echefu Ukattah
Senior Associate
+234-1-2702551 Ext 2718
Abayomi Okubote
Senior Associate
+234-1-2702551 Ext 2400
APRIL 2020