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COVID 19 has changed the dynamics of international trade and contracting so much that an increasing theme for contracts today appears to be invoking force majeure provisions to help ease the hardship the pandemic has spawned.

 

The unfolding COVID-19 scenarios -- with their inherent costly surprises no one could have prepared for -- dispels the notion of force majeure as a ‘one size fits all’ remedy for contracting parties who may now find it difficult to meet their contractual obligations. As well, several incorrect views could also stymie the contracting process.  

 The Blacks Law Dictionary1 defines force majeure as any event beyond a parties’ reasonable control that would affect the performance of the contract. Force majeure events could be pandemics like COVID-19, epidemics, acts of war, hostilities, strikes, riots, rebellion, terrorism, natural disasters, earthquakes, hurricanes, tsunamis, labor disputes and the like.

A force majeure clause can allow a party to a contract to either postpone, suspend, or altogether discontinue the performance of that party’s obligations and responsibilities under the contract. This is a very important safeguard for parties that are unable to meet their contractual obligations through no fault on their own. The force majeure clause helps them mitigate hardships from this event.

COVID -19 clearly is a force majeure event. It has been deemed by French law to be unpredictable, uncontrollable and external. It has interfered with many commercial arrangements and contracts – to the point of business collapse -- for far too many businesses. Therefore, where businesses have been affected, parties to contracts will benefit from reviewing the contractual terms, particularly any or all force majeure clauses.

In some jurisdictions, force majeure does not apply automatically by law. Force majeure may apply if either the contract or the existing law specifies, regardless of whether or not the affected parties have drafted the force majeure clause into their contracts.

This is certainly the case in many civil law jurisdictions, notably in France. Force majeure was codified into French law in 2016. The French civil code Article 1218 defines a Force Majeure Event as “an event beyond the control of the affected party, which could not have been reasonably foreseen at the time of conclusion of the contract and whose effects could not be avoided by appropriate measures”.2

It is noteworthy that before that codification, the French courts would not apply the concept of force majeure in the absence of a specific provision in the contract alluding to it. So, if there is no force majeure clause in the contract, then the elements of force majeure as contained in Article 1218 must be met before pandemic-affected businesses can apply force majeure.

In other jurisdictions where the concept of force majeure is not expressly recognized, some remedies still exist and can be applied. For nations that have signed the United Nations Convention on Contracts for the International Sale of Goods (CISG) -- which governs the contracts for sale of goods by signatory countries to the Convention -- Article 79 of the CISG may permit the non-performance of the contract where there is an unforeseeable impediment beyond the parties control that cannot be overcome. For example, in some states in the United States like New York and California, incidents of severe business interruption, frustration, or operational impossibility due to the effects of a pandemic may be acceptable justification for executing force majeure.  

Any party claiming the occurrence of a force majeure event must show -- in addition to the three defining conditions cited above (unpredictable, uncontrollable and external) -- a causal link between the force majeure event and the ability or inability (as the case may be) of any party to perform contractual obligations. Then, once the cause has been proven, parties will need to inquire further into the severity of the event. Then they must then determine if the severity will either significantly prevent them from performing contractual obligations, or allow them to meet their contractual obligations by making it possible for them to manage the effects of the force majeure.

Remember, don’t blur the lines between the contract and force majeure! For example, you cannot breach the contract deliberately and intentionally and then later try to pin it on COVID-19! This particularly applies to a party in default who could have taken reasonable measures to ensure that the effects of COVID-19 did not limit the party’s ability to fully discharge signed obligations under the contract.

A critical question to ask would be: did the party mitigate the impact of COVID-19? Where it is possible to mitigate and it is availed, then the contractual arrangements can continue under somewhat varied circumstances.

Force majeure will also not help a party who is already in breach of contract. We see this in the case of Kyocera Corporation v. Hemlock Semiconductor3 where the court’s judgement deemed that the force majeure clause cannot cover every scenario in spite of the parties’ belief that it would.

Force majeure is also not exactly the same as the concept of frustration rooted in common law that would apply where the subject of the contract no longer exists or where the contract is impossible to perform. In the case of Classic Maritime Inc v Limbungan Makmur Sdn Bhd4 the parties agreed that a flood event fell within the force majeure clause in the contract, but the parties disagreed on the effect of force majeure on the performance of contract obligations. The court of appeals awarded damages to the appellant party (party appealing or petitioner) ruling that even without the flood, the party in default would not have been able to fulfill its obligations under the contract. The damages awarded were to place the appellant in the position the appellant would have been in if the contract had been performed.

These cases, however, do not detract from the severity and far-reaching impact of the COVID-19 virus. Neither can we say or imply that -- in view of the evolving information around the epidemiology of the COVID-19 virus -- circumstances may arise after a contract is signed that were negotiated while the pandemic was ongoing that could precipitate a force majeure event.

Any contracts professional negotiating such contracts should itemize in advance, as many potential scenarios that could arise. Doing so will help the parties ensure that the agreement best reflects the parties’ original intent.

Remember, a force majeure event does not immediately relieve parties of their obligations under the contract, because force majeure clearly recognizes the ability of parties to mitigate the effects of the force majeure event. If a force majeure event occurs, the procedure for invoking the force majeure clause as contained in the contract, must be followed exactly to ensure the claiming party obtains the relief sought.

We must pay close attention to the mechanisms, the procedures and the laws governing the invoking of force majeure clauses. All force majeure clauses drafted into any contract must be clear, concise and easy to interpret.

Most importantly, the force majeure clause must be invoked correctly and not indiscriminately -- because the concept is wide enough to provide respite to an innocent party unable to perform the contract. Above all, when uncertain about the possible next steps, the preferred route is to seek legal and contractual advice on the issues arising from the contract, to ensure that all parties to the contract have their interests adequately represented and protected.

ABOUT THE AUTHOR

Aina Veronica Oyetunde is a Contracts Management Lawyer with Dangote Industries Limited, in Lagos, Nigeria. She has a Master’s Degree in Commercial and Corporate Law from Queen Mary University of London and is licensed to practice law in Nigeria.

DANGOTE INDUSTRIES, LTD

Dangote Group is a diversified business conglomerate in Lagos, Nigeria. They are recognized as a leading provider of essential needs for food and shelter in sub-Saharan Africa. They also have sustained market leadership in cement manufacturing, sugar milling and refining, salt refining, flour milling, and pasta manufacturing.

END NOTES

  1. Black’s Law, definition
  1. Article 1218 French Civil Code (paragraph 1)
  1. Kyocera Corporation v. Hemlock Semiconductor, LLC, Dockett No. 327974, 2015 WL 7779299 (Mich. Ct. App. Decided on Dec. 3, 2015).
  2. QCR Autumn 2019: Classic Maritime Inc v Limbungan Makmur SDN BHD & Anor [2019] EWCA Civ 1102



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Aina Veronica Oyetunde, Senior Contracts Lawyer and Contracts Management Specialist, Dangote Industries Limited, Lagos, Nigeria


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