INTRODUCTION
Following the rapid spread of Corona Virus “COVID-19” that was first identified in Wuhan, China at the end of 2019, World Health Organization on March 11 th , 2020 declared Covid-19 to be a pandemic. The Kenyan Government reported the first case of Covid-19 on 14 th March 2020.
In response to the prevailing situation, the Government issued many directives and guidelines aimed at containing the pandemic and most of these directives have led to disruptions of many businesses and unfulfilled obligations between parties to contracts. Some of these restraints are; hitherto cessation of movement into and out of some counties, quarantine, travel restrictions, business closures, lockouts, work stoppage and nationwide curfew. Many parties to contracts will need to find ways of mitigating loss and ensuring continuity of operations so as to meet their contractual obligations.
Consequentially there is a possibility that contracts entered by parties may become impossible to perform resulting to breach of contracts. Therefore, parties and clients need to take necessary steps to mitigate the effect of COVID-19 on the performance of contractual obligations. Parties are advised to use the concept of force majeure that relieves them from performing their contractual obligations when certain events and circumstances beyond their control arise. This will therefore enable parties to avoid any disruptions on operations in case the virus continues.
The Black’s Law Dictionary defines ‘Force Majeure’ as an event or effect that can be neither anticipated nor controlled. It is used to describe an event or occurrence that makes contractual performance impossible. The court in the case of Pankaj Transport PVT Limited v SDV Transami Kenya Limited describes Force Majeure to be situations outside the control of a party and which prevent a party from performing its obligations under its contract.
Acts of God refers to an operation of natural forces which was not reasonably possible to foresee and guard against. Examples of these Acts of God are; lightning, extraordinary weather conditions, some extraordinary natural event or unexpected heart attack. In the case of Ryde v Bushell the plaintiff sued for damages occasioned to his coffee plants as a result of the defendant’s act by directing the flow of floodwater to the plaintiff’s coffee plantation. The defendant argued that heavy rains, which had corrosive effects, caused the damage. The East African Court of Appeal held that the event must be proved by the person setting up the plea to be due to natural causes of extraordinary nature.
Force majeure clauses are provisions in contracts that relieve parties’ nonperformance or breach of contract when an act of God or other extraordinary events prevent a party from fulfilling its contractual obligations. These force majeure clauses are currently gaining attention and used by many contractual parties due to the outbreak of Coronavirus which has affected the global economy and business in the whole world.
Force majeure events or circumstances include the following: an act of God such as severe acts of nature or weather events including floods, fires, earthquakes, drought, storm, hurricanes or explosions; act of public enemy; act of threat of terrorism; an act of war or conditions attributed or arising out of war; revolution; riot; insurrection; civil commotion and disturbances; public demonstration; sabotage; acts of vandalism; government restrain or Act of Parliament or other Legislation; strikes, lock out , work stoppage or other industrial action or disturbance by workers or employees and all other matters of nature beyond the control of parties.
The following requirements must be met for force majeure to be well founded:
- The event must be beyond the reasonable control of the affected party and not self-induced;
- Affected party’s ability to perform the obligations and liabilities under the contract must have been prevented, impeded or hindered by the event;
- Affected party must have taken all reasonable steps to seek to avoid or mitigate the event or the consequences; and
- There must be an effective casual connection between the event of force majeure and the failure to fulfill the obligation.
There are various exceptions of force majeure under contract law. The following are circumstances where force majeure will not apply:
- If the contract does not have a force majeure clause;
- If the force majeure clause does not cover the event being claimed by the party. For example if a force majeure clause does not include events such as pandemic, a party may not rely on it on the effects of COVID-19 on their contracts;
- Where a contract is entered into after the force majeure event; and
- Force Majeure event occurs after the affected party’s delay in performance of obligation.
In the instance where the contract does not include a force majeure clause or where the force majeure clause does not include a pandemic such as COVID-19, parties may invoke the doctrine of frustration.
The Doctrine of Frustration refers to unforeseen circumstances which prevent or render the attainment of the object or the main purpose of the parties. In such circumstances the parties may be excused from performing their part of the contract.
The case of Davis Contractors Ltd V. Fareham Urban District Council describes the Doctrine of Frustration to occur whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would render it as a thing radically different from that which was undertaken by the contract, that is, it was not this that I promised to do. The House of Lords in this case helpgd that a contract cannot be frustrated just because it becomes more onerous and expensive.
A contract may be frustrated by: Subsequent destruction of its subject matter or illegality due to change in statute law which renders the performance illegal. However, it is very difficult to show that the contract has been frustrated. Frustration requires that there is an occurrence of an event outside the control of the parties and that event has made the contract impossible to perform or the performance of contract has been transformed into something different from which the parties intended. In addition, the doctrine of frustration is not desirable as it brings all the parties obligations under the contract to an end immediately.
COVID-19 AND FORCE MAJEURE CLAUSES
The main issue in determining whether a party in a contract can successfully invoke a force majeure clause is whether the clause lists the specific event claimed to be preventing performance by the parties. Some clauses list epidemics and pandemics as force majeure events. An epidemic is an outbreak of disease that infects a large number of people within a community, population or region. On the other hand, a pandemic is an epidemic that spreads across the globe. Therefore since World Health Organization declared COVID-19 as a pandemic, it is considered as a force majeure event and thus parties to any contract which lists epidemics and pandemics as force majeure events may argue to be excused for any nonperformance.
The party invoking a force majeure clause should prove that the event falls within the clause in the contract and that the event has prevented or delayed performance of its obligations under the contract. In the case of Pankaj Transport PVT Limited (supra) the High Court stated, “a party pleading force majeure must prove that the failure to perform obligation was as a result of impediment beyond his control and that he could not reasonably be expected to have taken the impediment and its effect upon his ability to perform the contract into account at the time of the conclusion of the contract, and that he could not have reasonably have avoided or overcome it or its effect.”
However, if the force majeure clause does not list epidemic or pandemic as an event, parties to a contract may argue that the COVID-19 be covered as an act of government since the Kenyan Government provided many restrictions such as lockdown and curfew 16 to prevent the spread of Coronavirus.
The clause should therefore be the first reference point for the parties. This is in the case whereby the consequences of the occurrence of a ‘ force majeure event’ will usually be specified in the force majeure clause itself. The interpretation of a force majeure clause will depend on the wording of the clause with regard to the nature and general terms of the contract as a whole. Usually the clauses will refer to performance in a contract being hindered, delayed or prevented.
One of the fundamental principles governing contracts is performance. Performance as provided in Contract Law means meeting obligations stipulated in a contract. If a party to a contract fails to perform the obligations stated in the contract, it amounts to non-performance, which amounts to breach of contract. However, most contracts have a force majeure clause embedded in them. Therefore, if after a contract is made, and a party’s performance is made impracticable without the party’s fault by the occurrence of which was an assumption on which the contract was made, the party’s duty to render that performance is discharged unless the language or circumstances indicate the contrary.
POSITION OF CONTRACTING PARTIES
Parties to a contract must first demonstrate that the nonperformance is as a result of an unforeseen circumstance such as COVID-19.
Parties should ensure that their contracts and agreements contain well drafted force majeure event clauses in order for them to be able to rely on the same in the event of cases such as Covid-19 pandemic. However, validity of invoking a force majeure clause depends on a contract. Some contracts provide for termination while others provide for suspension of the obligations. Parties will have to agree what will amount to force majeure for the purpose of their contract and what the consequences will be if such an event occurs.
Parties in existing contracts should review their contracts and see if the contracts have an unforeseeable circumstance. Since the spread of COVID-19 led to unforeseen disruption to lives and businesses due to government restrictions, the pandemic is termed as a force majeure event.
Parties must however demonstrate that performance of their obligations has been prevented by the spread of Coronavirus and that it’s legally and physically impossible to perform duties.
If the contract of the parties has a force majeure clause and COVID-19 falls under it, the affected party seeking to rely on the force majeure clause should follow the following steps:
- Consider in detail the wording of force majeure clause. This will help in determining whether the performance is excused by force majeure clause;
- explore alternative means of performing, reducing delay or minimizing any loss;
- give notice to the other party and the consequences that may result;
- keep record of why the performance was impossible, hindered or delayed, steps taken to mitigate loss and service of notice; and
- consideration of the doctrine of frustration if there is no force majeure clause.
However, if the contract does not have a force majeure clause, the parties to a contract can consider discussing it among themselves so as to include an appropriate force majeure clause in the COVID- 19 and other circumstances.
If parties decide to enter into a new contract, they should carefully negotiate the contractual terms and consider the importance of having an appropriate force majeure clause.
Parties are also advised to establish the causal link between the event and its inability to perform. 22 For instance, inability to perform a contractual obligation due to parties having to self-isolate themselves or an office due to the outbreak of COVID-19 and the likelihood of spreading if employees visit the work place.
Parties must also show that they have taken reasonable steps to mitigate and avoid the event and that there are no alternatives to perform the obligation under the contract. For example parties in land sale contracts must show that they have taken steps to expedite the transaction but since the Land Registries are closed they have no other alternate means to perform the contract.
The effect of force majeure clause is that it will suspend the performance of the affected party’s obligation when a pandemic such as Coronavirus occurs. The aim is that the contract can be resurrected when the event is over and both parties can then perform their obligations as they originally intended.
Consequentially, parties have the following options in the event that performance of contracts is affected by COVID-19:
- Suspension of contracts where feasible under force majeure clauses;
- Reliance on contractual clauses to exclude liability;
- Extension of time and performance deadline;
- Negotiation of standstill arrangements;
- Mutual variation of contracts; and
- Termination of contracts under contractual clauses.
CONCLUSION
The Coronavirus is having a significant impact on our day to day life including businesses and the ability of parties to contract to perform their obligations. The usual remedy of invoking a force majeure clause is that the parties are excused from their liabilities and obligations under the contract and they are exempted from paying any damages.Force majeure sometimes provides for extension of time, suspension of time or termination in case the event prolongs and there is continued delay and nonperformance.
Parties to contracts should consider the potential impacts and effects of the Coronavirus and take necessary steps to mitigate and control the risks that may occur. By taking such measures it will decrease the likelihood of force majeure disputes in the future and help parties that are likely to assert claims of force majeure to establish that they took reasonable steps to avoid any contractual interruptions.
In conclusion, we recommend that parties should review their existing contracts in cases where they fear non-performance so as to assess the risks, potential consequences and solutions. Parties are always free to renegotiate their contracts in order to accommodate the impact of the outbreak of Coronavirus and to ensure further performance once the situation improves.