The COVID-19 pandemic is changing life as we know it. The virus is affecting economics, politics, health and everyday life. Unfortunately, the law has not been excluded from its tentacles. Lawmakers worldwide are passing emergency legislation to regulate and control the spread of the virus. Another aspect of the law that the virus is affecting is the performance of contracts.
Employment contracts, contracts for services and commercial contracts have all been affected by the virus. Parties to these contracts are unable to perform their obligations. This may be a result of contracting the virus, precautionary measures to prevent the spread of the virus or they are simply in lockdown as part of government measures to fight the virus. The question that comes to mind is what the legal position of the parties to the contracts under these unforeseen circumstances is?
Introducing the force majeure clause!
Force majeure is the law’s response to such unforeseen circumstances. A force majeure frustrates a contract thereby discharging the parties of their obligations under the contract. The rules of frustration assist the parties to navigate their rights and obligations when unforeseen circumstances occur.
What then is force majeure?
According to Black’s Law Dictionary, force majeure (which translates from French as “superior force”) is an event or effect that can be neither anticipated nor controlled. Simply put, it is an event that neither party contemplated nor foresaw that prevents them from performing their contractual obligations. Such an event can also radically change the nature of the obligations of the parties under the contract. This is because the event may render the performance of the contractual obligation illegal or impossible.
Examples of such events include riots, strikes, war, floods, natural disasters and changes in government or law. The last example deals with uncontemplated changes such as coup d’etats and revolutions, as opposed to elections.
A practical illustration of force majeure is of the cases that arose from the coronation of King Edward VII. His majesty’s installation had originally been scheduled for the 26th of June 1902. As a result of the coronation, business minded persons entered into agreements to offer varied services during the ceremony. Unfortunately, the King fell ill with appendicitis a couple of days before the day on which he was to be crowned. This resulted in the postponement of the coronation for two months, which, in effect made the performance of such contracts impossible. This caused several disputes between the parties to the contracts.
One such case, for instance, is that of Krell v Henry . Mr. Henry rented a flat for £75 from Mr. Krell for two days during the coronation. He paid a £25 deposit to secure the flat. Due to the postponement, he was unable to use the flat. Mr. Krell sued to recover the remaining £50. The court found that the cancellation of the coronation deprived the contract of its commercial purpose. Therefore, Mr. Henry did not have to pay the £50.
Another situation borne out of the postponed Coronation is the case of Herne Bay Steam Boat v Hutton . Hutton hired a steamship from Herne Bay Steam Boat. The purpose was to take people to view the Naval Review which was part of King Edward VII’s coronation celebrations. The defendants were also offering a day’s cruise for the passengers. The Naval Review was canceled as the King was ill. As a result, Mr. Hutton did not use the steamship. The Steam Boat company sued him to recover the agreed price. Hutton argued that the cancellation of the coronation rendered the contract frustrated.
The Court held that the contract was not frustrated because it was still possible to perform the day cruise as such the contract had not been deprived of its commercial purpose.
The two cases arising from the same frustrating event, yet treated differently by the courts illustrate the difficulty and uncertainty that surrounds force majeure. Over the years the courts have developed multiple rules to resolve frustration cases.
Now, the options available to contracting parties as the Coronavirus continues to create chaos include:
1. Force majeure clauses
2. Default position under the Contracts Act
3. Other legal Systems
Force Majeure Clause
At the heart of contracts, is the freedom of the parties to assign for themselves obligations and duties. This does not change when it comes to force majeure events. Commercial men and women have adopted a common sense approach to ensure some certainty when a frustrating event occurs. Force majeure clauses are more common in commercial agreements. This is a contractual provision allocating the risk if performance becomes impossible or impracticable. Thus, parties insert these clauses in their contracts to define what happens when there is a frustrating event. Unfortunately, this measure is only available to parties who have such a provision in their contracts before the pandemic.
Default Position Under the Contracts Act
The Contracts Act, 1960 (Act 25) provides the default statutory position on rights and responsibilities when there is a force majeure. The position is that when a contract is frustrated the parties are discharged from their obligations. This means they no longer have to perform any obligation under the contract. Furthermore, any money paid under the contract can be recovered. However, this is subject to expenses incurred by the other party in the performance of the contract.
The Act also resolves the potential conflict between a force majeure clause and the default position in favour of the force majeure clause. In other words, where there is a force majeure clause, that provision will regulate the parties instead of the provisions of the Act.
Other Legal Systems
It is also possible that neither of the regimes mentioned above will regulate a COVID-19 inspired frustration. In the event that the parties have not inserted a force majeure clause in their agreement and have also decided that the governing law of the contract is not Ghanaian law, then the position of the governing law will determine the rights and obligations of the parties.
The next question that comes to mind is whether COVID-19 is a force majeure capable of frustrating a contract.
COVID-19 as Force Majeure
Critically looking at the definition of a force majeure given above, a virus on its own is not necessarily a frustrating event. Considering the coronation cases hitherto mentioned, the courts considered the impact of the King’s illness on the performance of the contract as opposed to the fact that the illness was unforeseeable. Furthermore, it may still be possible for parties to perform their contractual obligations. For example, the Ebola virus of 2014 did not prevent the performance of most contractual obligations. Similarly, a pandemic also on its own is not a frustrating event for the same reasons. Thus, COVID-19 simpliciter is not a force majeure.
However, the measures put in place by the government to combat the COVID-19 do constitute a force majeure in certain circumstances. The Imposition of Restrictions Coronavirus Disease (COVID-19) Pandemic (No.2) Instrument 2020 (E.I. 65) mandates a partial lockdown in some parts of the country (Ghana). This has the consequential effect of restricting movement in the affected areas. Such a restriction mandated by law makes it highly impossible to perform a contractual obligation that requires movement or physical presence.
It is conceded that this conclusion will not apply to every contract, as there will be contracts that can still be performed.
However, the performance of a majority of contractual obligations is hindered by the measures put in place. Frustration by a change of law is not a novel situation. In the decided case of R.T. Briscoe v Essien , a new legislation made the Ghana Timber Marketing Board the sole buyer of wawa and redwoods. The courts decided that the contract for the supply of logs between the parties had been frustrated by the new legislation.
For parties with a force majeure clause in their contract, the provisions of the contract may define what constitutes a force majeure. In that event, the provisions of the contract would take precedence over the reasoning and conclusion reached in this article.
However, where there is no such provision, and the measures put in place by the government, specifically E.I. 65, render performance of obligations impossible it can be concluded that the contract has been discharged by frustration.
As the Coronavirus continues to wreak havoc globally, it is foreseeable that the High Court complex in Accra will soon be flooded with litigants seeking resolution in contractual disputes that have arisen from the pandemic. Thankfully, unlike the coronation cases, there is a clearer framework to determine the rights and obligations of the parties.
As we wash our hands, cough into our elbows, practice social distancing by staying at home, let us start thinking about inserting force majeure clauses into our agreements. No matter how simple the agreement is. It may just save us the heavy traffic of the central business district, and the maze that is the legal system.