COMMERCIAL CONTRACTS AND OBLIGATIONS: IS COVID-19 AN ACT OF GOD?

The impact of the deadly corona virus outbreak has been far reaching on the nation’s economy. It’s no longer news that a greater number of industries and businesses have been hit hard by this pandemic and indeed are facing a threat of collapse. Quite sadly, it is clear that all will suffer a humongous economic landslide.

While the Government and individuals are doing their best to manage this unfortunate crisis, one issue that comes to mind however is the legal implications of the pandemic on existing legal obligations and how this can be resolved? How can losses incurred as a result of the pandemic be mitigated?

For instance, what is the fate of Tina, who has just been employed by XYZ Company but cannot resume work as a result of the pandemic? Will Tina be entitled to receive her salaries even though she has not resumed her duties? How does XYZ Company resolve this legal obligation towards their employee, Tina?

And what about most big businesses that cannot carry on business as a result of Inflation, travel restrictions, disruption in the supply chain, etc due to this pandemic? How can they negotiate a fair settlement without incurring consequential damages? The list goes on…

A contract defines the terms of the contractual obligations of the parties entering into the same. It clearly defines whether a party will be legally excused from its obligation or terminate the contract. Most commercial contracts contain protection, limitation or exclusion clauses such as Force Majeure, Frustration or Quantum Meruit clauses. These clauses are designed and intended to parties from losses and damages which should ordinarily accrue where the strict performance of the contract becomes extremely difficult or impossible due to circumstances known as an ‘Act of God’.

An Act of God is a defence in both Torts and Contracts. It refers to the operation of natural forces, free from human intervention. Examples are: Violent storm, Earthquakes, Landslides, and Wars etc. It is worthy of mention to point out that the Courts are reluctant to uphold a plea of Act of God unless there is clear and concrete proof that human foresight and prudence could not have reasonably averted such an event.

The doctrine of frustration provides for the discharge of a contract where subsequent to its formation, a change of circumstances makes it legally, physically or commercially impossible to fulfill the contract. So, what is the fate of parties who fail to insert a frustration clause in their agreement? The common law has graciously provided the ‘implied term theory’. By this, the absence of a frustration clause is not fatal even though it is advisable and tidier to insert one.

In recent memory, no disease outbreak has had such a crippling global effect like the COVID-19 pandemic. It will be no wonder or surprise, that after this pandemic, arbitration panels and courts worldwide will be invited to answer the question of whether the virus is an Act of God or an event capable of frustrating a contract?  Put differently, should a party be excused from any legal or commercial obligation not performed due to the outbreak?

The foregoing questions are to be answered by the courts and hope that they hold the balance. Until then, I am of the view that in deserving cases, courts should be more willing to construe the pandemic as a frustrating event or an Act of God. But then it is simply what it is, my opinion.

Indeed, the coming months will be interesting in the legal world.

NDIDI NED-NWOGU
(Pro Bono Partner) 08036723496

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