Indiscriminate Invocation Of Frustration On Pre-Covid Contracts: Exploring Escape Routes

INTRODUCTION

It is unarguably true that since the end of the 2^nd World War, no calamity had rattled the world in the magnitude of the ravaging coronavirus. Most transnational engagements have been brought to a sudden halt, commercial and social activities are abruptly suspended or rendered inoperable. The pandemic led to total lockdown of the economies of most countries of the world; barring smooth running of various shades of contractual obligations. There are now evolving conversations around the potency and legal effects of contracts that existed prior to the emergence of the contagious disease. Most individuals and corporate entities are now indiscriminately citing frustration to exonerate from their pre-existing obligations. Our legal voyage herein is largely confined within the premise of Nigerian laws and geared towards establishing the legal status of the affected contracts in our enclave. Efforts would be made to proffer remedies to the conundrum.

 

 BACKGROUND FACTS

The Coronavirus disease (Covid-19) first surfaced in Nigeria in February, 2020. According to United Nations Secretary-General, Antonio Guterres, the pandemic has inflicted crisis to the globe in a proportion “that probably has no parallel in the recent past”. The Nigeria government took a clue from most affected countries of the world and proclaimed a total lockdown of the affected states to contain the global pandemic. Notwithstanding, the infectious disease permeated most states within the federation, albeit imperceptibly. Amidst the ill prepared lockdown, Nigerians witnessed excruciating economic downturns. Movements and gathering of any kind were restricted. Commerce, schools, sports, entertainment, governments, religious bodies, aviation, travel agencies, etc. suffered tremendous degree of misfortune as a result of the lockdown and ancillary restrictions.

Consequently, most individuals, businesses and corporate entities that had hitherto engaged in varying degree of contracts prior to the pandemic either became totally unable to carry out their contractual obligations or encountered severe difficulties that were not contemplated at the time of entering into the contract. Some parties had envisaged, whether expressly or impliedly, that time would be fundamental to their contracts but the lockdown may have suddenly rendered such contracts inoperable.

Most disturbing is the case of some multinationals and financial institutions that hinged their arbitrary staff retrenchments on the economic downturn occasioned by the Covid-19 pandemic. This is the pitiable plight of most businesses that cannot easily migrate to electronic platforms. These companies find solace in invoking frustration as a basis for their action. Oftentimes, the contract of employment and other relevant documents attendant thereto did not specify frustrating circumstances. On the other hand, some Nigerian who entered into different forms of contracts like leases have wondered if the lockdown can be interpreted to exempt them from carrying out their contractual obligations at least for the period in which economic activities were rendered comatose.

We have made strenuous efforts here to navigate our legal waters in order to give some answers that may address the nagging questions agitating the minds of most Nigerians in this rare and turbulent moment. It appears that there is a misconstruction as to the extent of applicability of frustration in the wake of Covid-19 disruption of commercial activities. Some individuals and business entities have employ the pandemic as subterfuge for pulling out of their contractual obligations. Others have bluntly refused to agree that the incident could amount to frustration. It depends on which side of the divide you fall. This paper frowns at the one-size-fits-all approach hitherto employed.

MEANING OF CONTRACT  

One of the most simplistic description of contract was given by the Supreme Court in the celebrated case of Orient Bank Of Nigeria PLC V. Bilante International Limited (19997)8 N.W.L.R (PT. 515) 37 wherein it held thus:

A contract is an agreement between two or more parties which creates reciprocal legal obligation(s) to do or not to do a particular thing. For a valid contract to be formed, there must be mutuality of purpose and intention. The two or more minds must meet at the same point, event or incidents. They must be saying the same thing at the same time. Where or when they say different things at different times, they are not ad idem and therefore no valid contract is formed. The meeting of the minds of the contracting parties is the most crucial and overriding factor or determinant in the law of contract.

Embedded in the above judicial pronouncement are the elements of offer, acceptance, consideration, intention to enter into a legal relationship and capacity to contract. A contract must contain all these ingredients to be valid and cognizable in law. It is pertinent to stress that it is only a valid contract that is capable of being frustrated as expressed herein.

BRIEF ORIGIN OF FRUSTRATION

The Nigerian legal architecture is largely an importation of the English system. This is apparently so considering its colonial umbilical cord hitherto tied to Britain. Most of our laws are reflections of the Common Law of England and its Siamese twin, the Chancery Court of Equity. The foregoing preamble is necessary to the uninitiated minds so as to convey the fact that the principle of frustration emanated, evolved and crystallized from the English Courts. There have been minor insertions to adapt the principle to suit our local circumstances in Nigeria. Nonetheless, the fundamental elements remain intact.

Prior to 1863, the English Courts adopted and operated the rule of absolute contract which envisaged the sacredness, sacrosanctity and inviolability of contracts. To this end, once a court establishes that there is a contract between conflicting parties, the court enforces the voluntary agreement of the parties to the letter.

The principle of absolute contract was pronounced and affirmed in English cases within this period. Apposite in this regard is the case of Paradine v. Jane (1646) , Aleyn, 26 wherein in 1643, the British Royalist forces, known as the Cavaliers, took possession of land owned by the Plaintiff, Paradine, which was a subject of lease to the Defendant, Jane. The Defendant was evicted and kept out of possession which deprived him of the profits of the land from which he expected to receive the money with which to pay the rent. The Royalists held the land for three years and finally relinquished it in 1646. Notwithstanding, Paradine sued Jane for arrears of rent. The court nevertheless found Jane liable. The Court held thus:

Where the law creates a duty or charge and the party is disabled to perform it and hath no remedy over, there the law will excuse him ….. but when the party on his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.

It can be gleaned from the above pronouncement of the court that the decision connotes a strict adherence to the tenets of a contract. The rationale for proponents of absolute contract is that a party to a contract can always guard against unforeseen contingencies by making express stipulation to that extent. But if he voluntarily undertakes an absolute and unconditional obligation he cannot complain merely because events turned out to his disadvantage.

The English system continued to enforce the doctrine in Paradine v. Jane (supra) until a gradual evolution surfaced to mitigate it harshness. The proper opportunity presented itself in 1863 by virtue of the case of Taylor v. Caldwell (1863) 3 B. & S.826. In Taylor v. Caldwell,  the Defendants agreed to permit the Plaintiffs to use a music hall for concerts on four specified nights. After the contract was concluded, but before the first night arrived, the hall was gutted by fire. The court invoked the principle of implied condition to hold that the Defendants were not liable. The court further held:

The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.

The above decision is premised on the physical destruction of subject matter. For purpose of this principle, if further fulfillment of the contract is brought to an abrupt end by some unforeseen and extraneous factors for which neither party is the cause, the contract shall terminate forthwith and the contracting parties shall be excused from further obligations in the said contract. The doctrine of frustration evolved gradually until it was firmly established in subsequent English and Nigerian case laws.

FORCE MAJUERE AND FRUSTRATION DISTINGUISHED

It is now common to use the words “force majeure “and “frustration” interchangeably. This is so even within the legal sphere. However, it is pertinent to stress that both concepts are related but they differ slightly in meaning.

In Diamond Bank Ltd. v Ugochukwu (2008) 1 NWLR (Pt. 1067) 1 C.A. the Court of Appeal per Rhodes-Vivour., JCA (as he then was) stated that:

Frustration would occur where it is established to the satisfaction of the court that due to a subsequent change in circumstances which was clearly not in the contemplation of the parties the contract has become impossible to perform. The doctrine of frustration has been restricted by the courts to:

(a) situations where the supervening event destroys a fundamental assumption; and

(b) where force majeure clauses are drafted into the contract.

Base on the above judicial authority, it suffices to state that frustration is an omnibus or umbrella legal word that connotes the discharge of contracting parties from further performance of the contract.

On the other hand, force majeure is a French word which literally translates to “superior force”. It is often used as “force majeure clause”. They seem to refer to the specified exceptional circumstances and events that may operate to terminate, suspend or vary the agreement entered by the parties. The scope and effect of a force majeure provision will depend on the words used, as interpreted in the context of the contract as a whole and the admissible factual background. A force majeure clause is expected to be exhaustive with all the events that would otherwise frustrate the contract. The inclusion of force majeure clause in contracts often implies that parties have clearly captured events that are capable of amounting to frustration in their contract. And the Court would only interpret the intention of parties as contained in the force majeure clause without more.

However, the more catastrophic an event, the less likely it is that a force majeure clause will be taken to have dealt “exhaustively” with that event. Given the severity of Covid-19 therefore, it may be argued that notwithstanding its non inclusion in a force majeure clause, frustration may be deemed to have taken place depending on the facts and circumstance of the case.

FRUSTATION UNDER NIGERIAN LAW

We have now established that the doctrine of frustration was adopted from the English laws and incorporated into our domestic legislations and particularly case laws. So far there are judicially acknowledged events that have been tested and accepted as capable of leading to frustration in contracts in Nigeria. In the case of Nwolisah v. Nwabufoh (2011) 14 NWLR (Pt.1268) 600 S.C the Supreme Court held that:

Frustration occurs wherever the law recognizes that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it radically different from what was undertaken by the contract.

The events which have been listed by the court to constitute frustration are:

(1)Subsequent legal changes and statutory impossibilities;

(2)outbreak of war;

(3)destruction of the subject matter of the contract or literal impossibility;

(4)government acquisition of the subject matter of the contract;

(5)Cancellation by an unexpected event like where other party to a contract for personal service dies or where either party is permanently incapacitated by ill-health, imprisonment etc from rendering the service he has undertaken.”

It must be noted that the above list of events as stated by the apex court are examples of events that may constitute frustration. However, they are not exhaustive. It is now trite that other similar events that fall within the fulcrum of the aforementioned events may give rise to frustration provided that it is of such intensity that it significantly changes the nature of the contractual rights of the parties that it would be unjust to expect the parties to perform those rights, (See Diamond Bank Ltd v Ugochukwu (supra). The Supreme Court has also held in the case of A-G Cross River State v A-G Federation (2012) LPELR – 9335 (SC), that frustration is applicable to all categories of contract.

However, the law is fairly settled that the mere fact that a person encountered difficulties in discharging his obligation in a contract does not warrant the invocation of frustration so as to discharge his subsisting obligation under the contract. In the celebrated case of Nwolisah v. Nwabufoh (supra), the Supreme Court observed that the mere fact that the Appellant subsequently faced difficulties in performing his obligation under the contract does not amount to frustration. The court further held that:

A contract is not frustrated merely because its execution becomes more difficult or more expensive than either party originally anticipated and has to be carried out in a manner not envisaged at the time of its negotiation. Davies Contractors Ltd. v. Fareham N.D.C. (1956) AC 696; Tsakineglon & Co. v. Noblee Thor G.M.B.H (1962) AC 93.

On the strength of the foregoing authority which emanated from the Supreme Court, being the final and policy court of Nigeria, we firmly submit that whether or not the lockdown is tantamount to frustration would depend on the fact and circumstances of the contract vis-à-vis the declaration of Covid-19 lockdown and lifting of the same by governments at Federal and State levels.

The sanctity of contracts voluntarily entered by contracting parties ought not to be disturbed or varied by the court. The duty of the court is to interpret the plain words of contracts; and where necessary, to discover the mutual intention of the contracting parties in the contract. No doubt, the introduction of frustration in appropriate circumstances is in conformity with good reasoning, fairness and justice. However, it should not be applied indiscriminately whenever a party encounters difficulties or where the contract suddenly becomes more expensive to effectuate, so as to whittle down the sanctity of the contract. In Adetoun Oladeji (Nig.) Ltd. v. Nigeria Breweries PLC (2007) 1 SCNJ 375, the Supreme Court, per Niki Tobi (of blessed memory) held thus:

Where there is a contract regulating any arrangement between the parties, the main duty of the court is to interpret that contract to give effect to the wishes of the parties as expressed in the contract document. See Oduye v. Nigeria Airways Limited (1987) 2 NWLR (Pt.55) 126. In the construction of documents, the question is not what the parties to the document may have intended to do by entering into that document, but what is the meaning of the words used in the document. See Amizu v. Dr. Nzeribe (1989) 4 NWLR (Pt.118) 755. However, where the meaning of words used is not clear, the court will fall back on the intention behind the words. Above all, it is not the function of a court of law to make agreements for parties or to change their agreement as made.

The effect of the coronavirus pandemic does not automatically amount to force majeure in all contractual circumstances. Parties invoking force majeure due to the Covid-19 must be circumspect. For instance, based on the coronavirus pandemic and its aftermath effects, contracts that had expressly stipulated or where it can be implied that parties intended that time would be of essence, such contracts may be deemed frustrated as a result of the pandemic. However, contracts (for instance, employment contracts) that are of long duration may not fall within the threshold of frustration. This however depends on the nature of the employment contract and the time frame within which the contracting parties may resume operations, as most establishments are yet to receive signals from the Federal and/or State governments to reopen.

Employers are not at liberty to unilaterally terminate employment contracts by indiscriminate invocation of frustration. There are other legally acceptable alternatives that employers and others may adopt to cushion the effect of the coronavirus pandemic, other than outright termination of the contract voluntarily entered into with their employees. An employee who is unfairly terminated as a result of the Covid-19 pandemic may institute an action at the National Industrial Court of Nigeria and obtain damages in addition to other remedies.

 

ESCAPE ROUTES FOR PRE-COVID CONTRACTS

Most Nigerians are probably united in the belief that the effect of the Covid-19 pandemic has inflicted some degree of difficulties on various shades of contracts. Therefore, it is only reasonable and just for parties to come down from their high horses, shift grounds and agree on some legally acceptable modifications to their contract. This would ensure the smooth running of businesses/organizations and guarantee cordial relationship/trust which is sine qua non for transaction of any nature. The different modifications for contracts suggested herein are cognizable in law and must be carefully adapted subject to the peculiar wordings of each contract. They are:

1. VARIATION

Simply put, variation connotes entering into a new contract by altering an existing agreement premised on the mutual consent of the parties. In a standard contract, there is usually inserted a variation clause which provides the modalities for effecting changes to the parent contract. As a new agreement, the usual components of a contract, that is – offer, acceptance, intention to create legal relations and consideration must be present, for it to be binding. In other words, parties must agree to every component of the new contract. It must also be devoid of vitiating factors like fraud, misrepresentation, undue influence, duress etc.

In the case of Wayne (W.A.) Limited v. Ekwunife (1989) 3 N.S.C.C 325 the Supreme Court held that:

Now it has not been disputed that parties to a contract may effect a variation of the contract by modifying or altering its terms by mutual agreement. If authorities are required for this, I may mention the cases of Goss v. Nugent (1835) 5 B & Ad. 58, Dodd v. Churton (1897) 1 Q.B. 562.

We firmly submit that variation of contract is one of the most efficacious ways for parties to shift grounds and adapt to the difficult realities of the Covid-19 pandemic. For instance President Muhammadu Buhari signed the 2020 Appropriation Act on 17^th December, 2019. However, following the Covid-19 pandemic and the subsequent decline in the price of Brent crude oil to an all time low of $19.125 per barrel as at 3^rd April, 2020, the content of the budget was varied and forwarded to the National Assemble for passage into law.

2. RESCISSION BY AGREEMENT

Parties who entered into contract prior to the Covid-19 pandemic may mutually agree to rescind their contract and discharge themselves from subsisting obligations. The manner in which a contract may be rescinded depends on the stage of execution of the contract. This kind of modification is different from repudiation by one of the parties as a result of breach. Rescission by agreement is suitable for contracts that are at executory stage and where it is apparent that executing the contract would entail great hardship on the parties. In some cases, the court can imply rescission by conducts of the parties in a contract.

 

3. FORBEARANCE OR WAIVER

Waiver occurs where one party voluntarily accedes to a request by the other that he should forbear to insist on the mode of performance fixed by the contract. The court may also hold that a party has waived his right to require that the contract be performed according to its original tenor. Waiver by estoppels also can be implied by conduct of the parties.

In the case of Oniah v. Onyia (1989) 1 NWLR (Pt. 99) 514 @ 534, the Supreme Court per Karibi Whyte JSC stated thus:

The concept of waiver presupposes that a person who is to benefit or who has the choice of two benefits is fully aware of the benefits and has either neglected to exercise his right to the benefit, or where there is choice has preferred one. The exercise must be voluntary.

The challenge with waiver is that it is usually devoid of one of the essential elements of contract which is consideration. This implies that the forbearing party, though bound by his waiver, may elect to withdraw the waiver. Notwithstanding, in certain circumstances where huge steps have been taken on account of the waiver, the court may interpret such waiver as constituting estoppels and the forbearing party may be prevented from insisting on the original tenor of the contract.

Conclusively, a party to a pre-Covid contract whose obligation is subsisting may implore the other party to expressly grant him/her forbearance in circumstances that may alleviate the hardship caused by the pandemic. Agreement reached on this basis and reduced in writing is cognizable in law and may be enforceable against the forbearing party.

 

4. RELEASE BY DEED

 Release by deed is one of the most effective methods parties to pre-Covid contracts may employ to discharge outstanding obligations in a contract. According to Chitty on Contracts, release by deed occurs where a contract has been executed by one party only, that is to say, where only one party has fully performed his obligation under the contract and the other party has some obligations still outstanding. The contract may be discharged at any time before breach by release by deed. A mere parol release is tantamount to nudum pactum (unenforceable promise).

 In this context, it is the duty of the party with outstanding obligation to approach the other party who has fully effected his obligation and make him/her see reasons for issuing a release. It cannot be over-emphasized that the success of this method of modification depends on the magnanimity of the forfeiting party as well as the quantum of the outstanding obligation.

 

5. PROPER INVOCATION OF REDUNDANCY

 

In the case of employers who have subsisting contract of employment with their staff, adopting the option of declaring their workers redundant, as has been advised in several quarters, is not a silver bullet. The Labour Act clearly stipulates the procedure for invoking the redundant clause. Persons who fit into the definition of “worker” under the Labour Act may follow the procedure to declare certain workers redundant even if it is not expressly contained in their contract of employment.

 

Section 20(1) of the Labour Act provides thus: 

In the event of redundancy, the employer shall inform the trade union or workers’ representative concerned of the reasons for and the extent of the anticipated redundancy; the principle of “last in, first out” shall be adopted in the discharge of the particular category of workers affected, subject to all factors of relative merit, including skill, ability and reliability; and the employer shall use his best endeavour to negotiate redundancy payments to any discharged workers who are not protected by regulations made under subsection (2) of this section.

Section 20(3) of Labour Act defines redundancy as an involuntary and permanent loss of em-ployment caused by an excess of manpower. A literal interpretation of this section implies that redundancy may only be applicable where there is excess of manpower and not where there is a temporary halt in business activities as a result of a pandemic. However, upon gradual resumption of duties redundancy may be an option that some employers may wield.

Notwithstanding, the definition section in Section 91 of the Act exempted many categories of employees as falling within the ambit of “workers” within the contemplation of section 20.Workers who fall within these exemption cannot be declared redundant unless the contract of employment makes clear provision for redundancy. They are:

1. any person employed otherwise than for the purposes of the employer‘s business; or
2. persons exercising administrative, executive, technical or professional functions as public officers or otherwise; or  
3. members of the employer‘s family; or  
4. representatives, agents and commercial travellers in so far as their work is car–  

ried on outside the permanent workplace of the employer‘s establishment; or 

1. e) any person to whom articles or materials are given out to be made up, cleaned,  

            washed, altered, ornamented, finished, repaired or adapted for sale in his own  

           home or on other premises not under the control or management of the person  

      who gave out the articles or the material;

1. f) or  any person employed in a vessel or aircraft to which the laws regulating mer–  

         chant shipping or civil aviation apply;

 

Therefore, it is not unlawful for employers to unilaterally invoke the redundancy section under the Labour Act to terminate their workers without adherence to the stipulated procedure. Any worker who is unjustly terminated has unfettered right to challenge same in a court of competent jurisdiction.

 

SUMMARY AND CONCLUSION

The doctrine of frustration seems to be founded on the laudable basis of equity which intends to mitigate the hard effect of sanctity of contracts in English common law. Over the years the Nigerian judiciary has adopted and applied the doctrine in different circumstances. The recent invasion and effect of Covid-19 pandemic in Nigeria has necessitated a compelling argument for its inclusion as an act of God capable of frustrating a contract. We have strenuously argued that applying frustration vis-à-vis the effect of the Covid-19 pandemic should not be a straight-jacket formular. It is not applicable in all circumstances of contract. Our position is succinctly itemized as follows:

1. The effect of the Covid-19 pandemic does not automatically constitute legal frustration of contracts in all cases, and parties to a contract must be wary of indiscriminate invocation of the doctrine.

 

2. The mere fact that a contracting party encountered difficulty in the course of executing a contract does not warrant the invocation of frustration.

 

3. Pre-covid contracts with force majeure cause that envisaged situations like the pandemic as force majeure may be interpreted as having discharged the parties from further obligation subject to the peculiar facts and wordings of the clause.

 

4. Where parties envisage that events such as Covid-19 would be deemed a force majeure in their force majeure clause, then the court may interpret the contract to suit the intention of the parties. Where no such clause exist, the court would have recourse to the legislation and the common law principle to determine whether in fact given the effect of the Covid-19 pandemic, a contract has met the requirement of frustration.

 

5. Most pre-covid contracts (without force majeure clause) including those that are strictly time-bound and contracts that require inter-state or international movement of restricted goods and persons may be categorized as frustrated by the pandemic.

 

6. Parties who are aware of the ravaging effect of the covid-19 but nevertheless enter into time bound contracts or a contract which requires traveling to restricted areas cannot complain that their contract has been frustrated as their predicament is self induced.

 

7. In pre-covid contracts wherein contracting parties have encountered difficulties in further performance, such persons and/or entities may adopt any of the modification options listed herein to salvage the situation.

 

8. Contracts of employment do not come under the hammer of frustration, apart from exceptional circumstances cases where there is clear evidence of impossibility of continuance.

 

9. Employers invoking redundancy must comply with the procedure and circumstances for its application to make it valid.

 

10. Where it becomes absolutely necessary, employers may explore any of the aforementioned contract modifications to address the benefits accruable to employees whilst the effect of the pandemic linger.

 

11. Above all, Nigerians must endeavour to seek the counsel of their lawyers before declaring a contract frustrated. It is equally expected that in future Nigerians would obtain the prior consent of their lawyers before endorsing contractual documents.

 

JONAH, VICTOR ANAYOCHUKWU

LEGAL PRACTITIONER FROM LAGOS

EMAIL: [email protected]