Coronavirus (Covid-19) And the Legal Principle of Force Majeure
As Covid-19 continues to ravish almost all countries of the world, the rich or poor, the small and big, and as countries try to contain the spread of the dangerous pandemic by closing down businesses and restricting human movements, it is pretty obvious that contractual and business obligations will sooner or later bring about commercial disputes between stakeholders in some sphere of their operations.
Covid-19, the end of which is not yet in sight could lead to disputes of immense proportions. The timelines of performance or non-performance of contractual or business obligations will become the order of the day in many transactions. Seen in this light, Covid-19 is certainly a potentially force majeure event.
Thompson Okpoko & Partners therefore considers it necessary to address the issue of force majeure for the guidance of its clients and Stakeholders in the hope that clients will take into account, the possibility of the occurrence of a force majeure event in the implementation of ongoing contracts or contracts about to be entered into in the operation of their businesses or trades including mining, services, manufacture and even in agriculture.
Force majeure is not a device to cheat anyone but a conscious effort to consider in advance and provide in advance, in their contracting for the possibility of the occurrence of a force majeure event in their business operations and to provide for it in advance, so that parties know what steps to take to minimize disputes and business losses which force majeure event may thrust upon them.
Meaning of Force Majeure
Force Majeure is a French term which means, super force or major force or greater force. In its commercial sense, Force Majeure (FM) means a development or event or situation or any occurrence of something that is usually unforeseeable or uncontrollable or unavoidable or that is beyond the reasonable control of a party to a transaction. The present Covid-19 and the tsunami which occurred a few years ago are some examples of such events. In Nigeria, the Court of Appeal in the case of C.G.G. (Nig.) Ltd. V. Augustine & Others, 2010 LPELR 8592 CA adopted the Black Law Dictionary definition of Force Majeure when the Court held as follows:
“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.”
Force majeure events include natural disasters such as earthquakes, volcanoes, floods, avalanche, epidemic, pandemic, tsunami, tornadoes collectively often called acts of God. Force Majeure can also be caused by human actions. This category include wars, terrorism, riots, disturbances, armed conflicts, explosions, fire, general strikes and lock downs caused by enforcement of Government Regulations on Quarantine in Nigeria and other parts of the world.
Effects of Force Majeure on Contracts or Agreements
In law parties are bound by their agreements or contracts. No matter how onerous the provisions of a contract or agreement may be or how difficult the business environment may be physically, parties are expected under a Contract to perform their obligations to each other to the extent that the Agreement is not unlawful or illegal or contrary to public policy.
But at the same time, the law does not and cannot command the impossible. It is for this reason that diligent parties to a Contract often include a force majeure provision in their Contracts or Agreements. Force Majeure provision in a Contract is one of the financial waste controllers in a Contract which promotes fairness and justice.
Force majeure event can hinder or delay the performance of a Contract. It can even frustrate the entire performance of a Contract depending on the severity and the duration of the Force Majeure event. Yet, if the contract did not provide for a force majeure, parties, being bound by their contract, may have to discharge their contractual obligations or pay damages for failure to discharge their obligation no matter what.
The purpose of a good force majeure provision is to relieve a party claiming force majeure event occurrence from performing its obligations or duties in part or in full. If the inability to perform was caused by circumstances or things beyond its reasonable control by reason of the occurrence of a force majeure event.
There is no particular form of a force majeure clause prescribed by law for any contract or agreement. Each party to a Contract with the support of its advisers must design and include a force majeure provision capable of taking care of known and possible force majeure events that could negatively affect the due and timely performance of the Contract. The factors that should be taken into consideration in this regard include; type of business or trade, past experiences on force majeure events in the location, reliability and trustworthiness of the other party, the key risk factors of the contract, the state of infrastructural development in a country etc. For example, erratic energy supply may delay or hinder contract performance in some developing countries. In such situations it would be wise to include prolong or insufficient supply of energy including fuel as a force majeure event.
Key Practical Issues in Managing a Force Majeure Situation or Event
There is no general formula that is efficient for the management of all force majeure events or situations. But the following issues among others are important for effective management of a force majeure situation or event depending on the circumstances and the peculiar facts of each occasion.
- There must be a valid and enforceable Agreement between the parties during the period of the force majeure. It is therefore important that the Supply Chain Department, the Contract Holder with the support of the Legal Department of the company must ensure that no condition exists that could render a presumably ongoing contract unenforceable. For example, failure to give renewal notice or to renew an expired Contract may cause serious problem for both parties if the Contract is still running without the required signatures of the parties as required by the Contract for renewals.
- The inability of the party claiming force majeure to perform its contractual obligations to the other must be beyond its control. For example, if members of its labour force alone went on strike, that may not amount to force majeure unless it was a general strike or a strike by all workers in that industry.
- The party claiming force majeure must have taken all reasonable precautions and steps which a prudent and diligent business man of that kind would have taken whether prescribed under the Agreement or Contract or not. For example, if there is an offshore catering services Agreement between two parties and a clause of the Agreement requires that, the catering contractor must have at any time during the period of the Agreement, a stock of supplies, materials, raw foods, drinks including water for at least a period of six weeks minimum. If at the end of two weeks of the ongoing lockdown, the catering contractor announced lack of food materials and drinks due to force majeure, that would not qualify as force majeure because the contractor breached the Agreement before the commencement of the lockdown.
- The company claiming force majeure through the help of its lawyers must fully and clearly understand the provisions of the Agreement especially the provisions of the Contract on force majeure. The commercial importance of this is because even if there was a force majeure event, which was not properly managed in accordance with the provision of the Agreement, the party claiming force majeure may be guilty of contributory negligence and may be liable for part of the damages caused by the force majeure event to the other party. That liability may be substantial depending on the evidence and the opinion of the Court or Arbitrators on the role played by its contributory negligence to the damages suffered by the other party.
Contractual Management of Force Majeure Situation
- The management of a force majeure situation would depend largely but not solely on the force majeure provision in the Agreement, the nature or kind of business, the cause and nature of the event of force majeure etc. In general, each company with the support of its advisers must ensure robust force majeure provisions in its Contracts that could adequately protect force majeure risks and the business interests of the company. In addition, the force majeure provisions must be aligned with other provisions of the contract especially provisions on suspension and termination which should include the right of the other party to suspend or terminate the contract should the force majeure last for specified periods without appropriate remedy or solution.
- As soon as possible after the start of the force majeure events, the party claiming force majeure must inform the other party about the force majeure in writing with evidence of delivery. The letter should contain what the party claiming force majeure knows about the cause of the force majeure, how long the force majeure event may last and suggest ideas for solution where possible. The party claiming force majeure need not make a guess on critical issues which are not yet clear. Generally, a categorical opinion on how long the force majeure event may last at the onset is often impossible.
- As with all important and critical business communications, all third party communications including announcements to staff on force majeure event should receive the approval of the in house counsel and in some cases the external solicitors in order to ensure that the rights, interests and defences of the company as the case may be, are not unwittingly compromised.
- The party claiming benefits of a force majeure event must use all reasonable due care and diligence to mitigate, control or remedy the force majeure event and brief the other party in writing on progress and development regularly. In addition, if the nature of the force majeure is such that other stakeholders may be affected, the person claiming force majeure must brief them and educate them on the issue. Where regulatory reports on the force majeure must be made, this must be made timeously with the support of the advisers of the company.
- Any payment due from one party to the other before the occurrence of the Force majeure event must be paid by the party whose duty it is to pay that amount unless it is technologically and otherwise impossible to pay that amount as yet.
- Depending on the nature and effect of the event of force majeure on the assets of the party claiming force majeure, the other party if it so request, should be given access to the facilities of the party claiming force majeure and the force majeure management records of the event of force majeure. Provided that, the party that requested for a visit to the assets or facilities of the party claiming force majeure shall agree with the other party on the number of his staff to pay the visit, the date and time of the visit and shall comply with all HSSE precautions and requirements of the owner of the facility or asset to be visited.
COVID 19 and Claim of Force Majeure in Nigeria
Clearly and generally COVID 19 pandemic and epidemic qualifies as force majeure event. However, the effect and severity of it on businesses and individuals would depend on a number of factors including the kind of business or trade, location of the business within Nigeria or elsewhere, efforts made to overcome the effect of the force majeure event, etc. Our counsel is that each trade sector or industry should conduct a study on the impact of COVID 19 on each industry relying on cogent and credible evidence of the impact in short, medium and long terms for the industry or trade sector. This document may thereafter be used to engage policy makers at Federal and State Government levels as the case may be. Each industry should make proposals to Government on what the Government could do to reduce the effect of COVID 19 on each industry.
The CBN Policy on COVID 19
On the 16th of March 2020, the CBN sent a Circular to Deposit Money Banks and the General Public on the CBN Policy Measures and Response to COVID 19 Outbreak and Spill overs. Among other things, the Policy promised the following:
- All CBN intervention facilities granted moratorium of one year on all principal repayments effective from the 1st of March 2020.
- Reduction of the interest rates on all applicable CBN intervention facilities from 9 to 5 percent per annum with effect from March 1 2020
- Creation of N50 Billion targeted credit facility through NIRSAL Microfinance Bank for households, and SMEs particularly hit by COVID 19.
- Credit support for Health Care industry
- Regulatory forbearance under which CBN granted leave to all Deposit Money Banks leave to consider temporary and time limited restructuring in the tenor and loan terms for businesses and households most affected by COVID 19 particularly Oil and Gas, Agriculture and manufacturing.
The foregoing policy decisions of the CBN aimed at combatting or managing the effects of the force majeure created by COVID 19 on businesses and individuals is highly commendable. However, in order for the policies to better achieve the laudable objectives of the CBN, Thompson Okpoko and Partners suggest that, CBN should consider actively collaborating with the representatives of Banks, the key customers of the Banks in the identified sectors on policy ( e ) above. In the same stretch of thought, the CBN should engage the accredited leaders of SMEs because they know themselves and they can offer CBN suggestions on modalities for participation in the credit facility and repayment. It is very good that CBN has in mind support for households particularly hit by COVID 19. But the challenge is how can CBN identify these households? It would certainly require further thoughts and considerations by CBN and probably in collaboration with some credible NGOs who are close to the grass roots.
COVID 19 Legal Desk
It is not unlikely that COVID 19 would throw up some legal challenges sooner or later. This may involve businesses within Nigeria and those local companies doing businesses outside Nigeria especially those who are just venturing into international business newly. Some of these businesses and individuals may not have the resources to manage legal/business negative developments of COVID 19. We suggest that the Federal Ministry of Justice should consider the possibility of a COVID 19 LEGAL DESK in the Federal Ministry of Justice with the support of the Ministry of External Affairs and the Federal Ministry of Trade to support, on request, businesses that may need legal advice by reason of COVID 19 effect only. This could be treated as part of the palliatives of the Government to citizens, corporate citizens inclusive. It is only companies that survives COVID 19 that can pay companies income tax in future and boost rate of employment in the country. This should therefore be advantageous to the Government. If the existing personnel resources in the Federal Ministry of Justice may not be able to cope with this additional portfolio of services, the Ministry may engage on ad hoc basis, retired officers from the Ministry with good standing in all respects. The suggested COVID 19 LEGAL DESK may also be tasked with the responsibility of reviewing with various Ministries and Agencies of Government provisions of Contracts in which Government or any of its agencies is a party with a view that the Government and any of its agencies do not lose out as a result of inadequate management of the COVID 19 force majeure. In other words, where Government or its agencies need to declare force majeure by reason of COVID 19, they should not fail to do so immediately if they have not already done so. It is not sufficient for them to declare force majeure; they must also comply strictly with other provisions on force majeure under each Contract or Agreement. The Federal Ministry of Justice may also co-ordinate the management of issues relating to disappearance of Government properties during COVID 19 force majeure if any.
One final point we like to draw attention to is that, corporate organizations in areas where there is lockdown and stay at home policy of the Government should be very careful with respect to Contracts, they may sign now including contracts with Governments. The lockdown policies were issued under the Quarantine Act or Laws of the Governments as the case may be. If for example parties to any such Contracts or Agreements instead of obeying the stay at home orders of the Governments and are not exempted from lockdown officially, meet to negotiate a Contract in the office of one of the parties and signed the Contract or Agreement there, it is possible for such a contract to be declared void as the basis of it was tainted with illegality. We must add that, it is not certain what the view of the Court or Arbitral panel may be on this matter, but it is better to err on the side of caution. The situation may be different if without going out or breaching the lockdown order, the Contract was agreed upon through emails while working from their respective home, subject to compliance with the legal requirements for particular kinds of contracts.
Disasters by whatever name or kind or size or form often known as force majeure are probably, but sadly part of human inheritance. They must be planned for where possible or known. If and when they strike, they must be managed with additional resources, talents and energies. Lawyers and other professionals have a key role to play during and post disasters, the current COVID 19 pandemic not exempted.
Yours faithfully,
For:Thompson Okpoko & Partners
Chief T. J. Onomigbo Okpoko SAN
(Head of Chambers)
