By Aniebiet-Abasi Akpan Esq, Peace Idiong Esq & Nsikak Effiong Esq

INTRODUCTION:

As at January 2020 or a couple of weeks ago, no business leader, politician, student, and/or regular government envisaged any halt in the world economic systems. Lots of business deals have not been concluded due to the Covid-19 pandemic. The havoc fomented by the surprising Covid-19 is likely to lead to the crash of several business organisations due to several internal and external factors.

 

This piece is aimed at throwing more light on certain clauses the writer considers fundamental and ‘worth-the-stress’ for every business transaction ranging from simple business transactions (contracts) to complex transactions.

The writer opines that these clauses should be and are an integral part of our daily commercial life as it is vital to plan for the unexpected during the contractual negotiation stage.

In this article the writer’s primary focus is on the Force Majeure Clause. Answers are given to certain questions such as ‘What is the essence of having a Force Majeure Clause?’ Why is it essential for commercial transactions?’

Force majeure as a concept is applicable in all categories of contracts whether mere simple agreements or complex commercial agreements. It’s a protection against undue liability resulting from certain unforeseen occurrences.

WHAT IS A FORCE MAJEURE (FM)?

Force Majeure, 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. While the natural act includes flood, earthquake, tsunami, etc.[i]For purpose of clarity, force majeure is something that is unexpected and unforeseen happening, making nonsense of the real situation envisaged by parties.[ii]

WHEN IS  FORCE MAJEURE SAID TO OCCUR?

In several cases, the court in Nigeria and other jurisdictions have held that for Force Majeure to occur; there must be an event which significantly changes the nature of the contractual rights of the parties that it would be unjust to expect the parties to perform those rights such as:

(1) Where the subject matter of the contract has been destroyed, or is no longer available. (2) Death or incapacity of a party to a contract.

(3) The contract has become illegal to perform as a result of new legislation.

(4) A contract can be frustrated on the outbreak of war.

(5) Where the commercial purpose of the contract has failed.[iii]

WHAT IS A FORCE MAJEURE CLAUSE (FMC)?

It is an express agreement in a contract as to how risk is to be allocated should part or non-performance occur because of certain specified Force Majeure events. These Force Majeure events can be defined by the parties in accordance to the doctrine of ‘freedom of contract- parties are free to define force majeure and set its parameters as they see fit.

EFFECT OF FORCE MAJEURE AND FORCE MAJEURE CLAUSES ON BUSINESSES

Force majeure significantly changes the nature of the contractual rights of the parties that it would be unjust to expect the non-performing party to perform those obligations.

While Force Majeure Clauses enables the non-performing party to escape liability for failing to perform because of a force majeure event.

DRAFTING THE FORCE MAJEURE CLAUSES

There are three essential ingredients to force majeure clauses when they are prepared:

–       It can occur by force either natural or human.

–       It cannot have been reasonably foreseen by the parties.

–       It was completely beyond the parties control and they could not have prevented its consequences.

KEY COMPONENTS OF THE FORCE MAJEURE CLAUSE:

An apt Force Majeure Clause should consist of two parts. The definition and Operative part.

  1. Definition part: 

Here parties must ensure that what is meant by an event of force majeure is aptly defined. Force majeure clauses can afford a contracting party some relief, it can also create a problem if it is ambiguous or too restrictive. Force majeure clauses being creatures of contract, their interpretation will be governed by:

  • the agreed width of the clause.
  • the normal rules of contractual construction.
  1. Operative part:

This part should focus on what happens once the Force Majeure Clause is triggered. It should be clear. It should identify the obligation, how it will be affected by the force majeure event, and be clear as to the:

  • Obligations on the parties arising when a force majeure event occurs. For example:
    • will there be an obligation of mitigation?
    • whether the buyer can engage another party to do the work if the seller cannot perform it due to a force majeure event, and whether the buyer can then charge the seller
    • will payments to the vendor continue notwithstanding the delay?
    • Obligations of the parties after the force majeure event ceases.

It should state whether or not notice of a Force Majeure event is to be given to the other party; how the notice is to be given and effect of not complying with the requirement for issuing a notice.

CONTEXTUAL MEANING OF CERTAIN PHRASES IN FORCE MAJEURE CLAUSES:

Prevention:This worded phrase typically implies absolute non-performance of a contract because of a major change in circumstance or occurrence of an event. Here, the responsibility of a party for the performance of a contractual obligation is nixed because of the impracticability of performance of the contract in which performance if called for would render it a thing radically different from that which was undertaken by the contract. The non-performance bar here is high and for a party to take advantage of this clause, it must stipulate the circumstances that made performance impossible which must be tenable from an objective point of view. All the options for the performance of a contract must be completely exhausted for the application of this clause.

Hindrance:The ascription of responsibility under this heading to a force majeure event is lower in standard but nonetheless rigorous. The vitiating element or circumstances is one that creates a difficulty in the performance of the contract that was unforeseen or unintended by the parties. For instance, a merchant contracted for the supply of raw materials which is delayed at sea because of a closure of port imposed by the government but for which supply could still be made but through more arduous routes which may impair or affect the general contract can be exempted under this heading. However, it is important to note that a mere effect on the profitability of transaction is not enough.

Delay:This term is less rigorous to proof. A party need only establish the fact the ability to carry out a particular obligation was deferred or postponed independent of the party. An instance is a temporary ban imposed by the government of a particular commodity. What is required here is that the time frame for meeting an obligation is considerably difficult or arduous.

WHEN IS A FORCE MAJEURE CLAUSE (FMC) TRIGGERED?

A Force Majeure Clause is triggered when the prerequisites (conditions) stated in the operative part of the Force Majeure Clause has been fulfilled. This varies from one contract to the other. For instance, where a Force Majeure Clause contains a Force Majeure notification proviso (that is, mandating the non-performing party to notify the other party) of a Force Majeure event, failure to so notify the other party renders the Force Majeure Clause inactive. Once a non-performing party satisfies the conditions set out in the Force Majeure Clause, the is Force Majeure Clause automatically activated.

Note: A Force Majeure Clause is unlikely to be triggered, for instance by the Covid-19 pandemic, if it does not affect an alternative method of performing a party’s obligation as provided in the contract. In such a case, relying to on the Force Majeure Clause would be a lame defence.

THE IMPORTANCE OF THE FORCE MAJEURE CLAUSE

  • Force Majeure Clause excludes liability where a party’s failure to perform an obligation is caused by forces (either natural or human) beyond its control and usually goes beyond ‘Act of God’.
  • It provides for certainty of liability of parties to a contract.
  • An apt force majeure clause enhances amicable settlement of contractual disputes that may arise in the performance of a contract.

THE DOCTRINE OF FRUSTRATION

The doctrine of frustration sprung up as a remedy to the hardship caused by the common-law doctrine of absolute liability. This doctrine held thus:

Where a party voluntarily enters a contract, the party must perform all its agreed obligations. 

The absolute liability doctrine gave no room for force majeure events or any excuse from liability by a non-performing party.

Failure to include a well- defined Force Majeure Clause simply triggers the common-law doctrine of frustration. This doctrine not only takes the stage but it unilaterally vitiates all liabilities of parties to the contract. The contracts automatically come to an end. Where the doctrine of frustration sets in, the entire contract is deemed to be frustrated.

While the doctrine of Frustration posits that, there should be an automatic mutual discharge of the contract where performance becomes impossible. However, for such discharge to be valid, it requires that:

  • Neither party is at fault.
  • Meeting the obligation under the contract has become radically different from that contemplated by the parties to the contract.

The legal consequence of a contract found to have been frustrated in this way is that the contract is automatically terminated at the point of frustration.[iv]

Note: Unlike fraud, the contract is not void ab initio. It is only future obligations that gets discharged. This means that after the point of frustration neither party can demand further performance by the other. Also, a party can seek remedy where an obligation which became due before the frustrating event was not performed.

In summary, once the doctrine of frustration sets in to mitigate the doctrine of absolute liability, losses lie where they fall. No need to notify the other party.

WHAT’S THE EFFECT OF FORCE MAJEURE CLAUSE?

The effect of a Force Majeure Clause is that it protects the non-performing party from liability for failing to perform contractual obligations because of the force majeure event.

Note: Parties cannot invoke a force majeure clause if they are relying on their own acts or omissions.

INTENT ON RELYING ON FORCE MAJEURE? STEPS TO BETAKEN

  • Keep a detailed note or record of the circumstances leading to non-performance of the contract and actions taken to mitigate or circumvent it.
  • Inform the other party of the circumstances and intention to rely on the force majeure clause.
  • If there is no force majeure clause but there is an impediment in obliging to a contract, you can rely on frustration of contract. But note that there is a high bar in establishing frustration of contract.
  • Comply with conditions set out by the clause where there is a provision dealing with the fall out contractual terms and obligations
  • Endeavour to use alternative means where feasible to comply with the obligations of the contract and thereafter sue for remuneration for extraneous cost induced in carrying out the contract.
  • Fashion out which provision you intend to rely on to establish the force majeure clause and wound your fact and case around it.
  • Note that reliance on increased cost or loss of profit is not enough to vitiate a contract.

CONCLUSION

Force Majeure Clauses (FMC) are vital. Covid-19 is classified as a Force Majeure. It is vital and of utmost importance to plan for the unexpected when negotiating contracts. So, the next time you get on the contractual table, do not rush to append your signature. Carefully examine the vital clauses included or excluded such as the FMC., arbitration Clause etc.  An apt Force Majeure Clause could exculpate any or all parties to the commercial agreement from liability whenever it is triggered.

POST-COVID-19 RECOMMENDATIONS

  • Engage in a proper review of recent contracts.
  • Watch out for Force Majeure Clause in all agreements
  • Engage the services of professionals when confronted by any contractual agreement for proper drafting and review of such agreements.
  • Seek the legal opinion of your lawyer before assenting to any business agreement. This is a recommend best business practice.
  • Initiate a well-structured contract Review system through in–house and external solicitors.

Writer:
ANIEBIET-ABASI AKPAN ESQ
(Anie A. of the Momentum23Africa)
[email protected]
[email protected]
Twitter:@momentum23A

Momentum23AfricaCo-Writers:
*PEACE IDIONG ESQ
(Head, Corporate Crisis Analysis & Advisory)
[email protected]

*NSIKAK EFFIONG ESQ
(Head, Corporate Finance and Start-Up Advisory)
[email protected]