Over the last few months, we have seen the negative effect the COVID-19 pandemic has had on many businesses around the world. Whether micro, small, medium or large, most business would have been affected in some capacity. The people currently smiling from ear to ear are probably those who sell personal protective equipment, companies making hand sanitizers or those in tech.
Last week, a friend of mine called me in distress, she runs a small skincare training centre in Lagos. Just before the mandated lockdown, she had paid an international trainer a few thousand dollars to come to Nigeria to train some people. She had collected fees from her trainees and the training was scheduled to take place some time in April. We all know how we spent April 2020.
Now that the lockdown has been eased a little, she reached out to the trainer to try and reschedule the training for later in the year. Unfortunately, the trainer told her that he had no interest in travelling to Nigeria until the vaccine had been made. Unknown to her, he is sickle-cell anemic and at risk of potentially showing more severe symptoms of COVID-19.
She then proceeded to ask for a refund of the money she had paid him, that’s when the endless stories started. From what she said, the man just kept on repeating the words “force majeure”, “frustration”, “impossible” and“sorry”. She said that he told her that he didn’t believe that he owed her any kind of refund as the matter was an “act of God“.
What are the legal concepts of force majeure and the common law defense of frustration?
A Force Majeure Clause
The literal translation of force majeure is ‘superior force’. Simply put, a force majeure clause is a boilerplate clause, usually found at the end of most commercial agreements. The force majeure clause suspends or brings to end one party’s contractual performance obligations, where the said party is prevented from performing their obligations due to circumstances outside of the party’s control.
“Something that is unexpected and an unforeseen happening, making nonsense of the real situation envisaged by parties”.
Force Majeure events typically include the following events:
- Biological, nuclear or chemical contamination or sonic boom.
- Terrorist attack, civil war, civil commotion or riots, war, threat of or preparation for war, armed conflict, imposition of sanctions, embargo, or the breaking off of diplomatic relations.
- Fire, explosion, accident or collapse of buildings.
- Acts of God, including but not limited to flood, drought, earthquake or other natural disaster.
- Any action of any public body or Government.
Before a party may rely on the defence of force majeure, it must be specifically provided for in the contractual agreement.
Frustration of An Agreement
Where there is no contract or where the contract does not have a force majeure clause, the next available remedy to the parties to an agreement is the common law doctrine of frustration. Frustration occurs where after the formation of the contract, something happens which renders the agreement physically or commercially impossible to fulfill.
“The doctrine of frustration simply means that if the performance of a contract depends on the continued existence of a state of affairs, then the destruction or disappearance of the state of affairs – without the default of either of the parties – will discharge them from the contract. Frustration only occurs “under conditions that are totally out of the control of the parties”.
The defence of frustration may be raised in the following circumstances:
- Where there has been a change to any mutually agreed state of affairs (i.e. cancellation of an event or demolition of the subject matter).
- Impossibility of the purpose of the contract.
- Impossibility of the agreed performance.
The defence of frustration allows the automatic discharge of the contractual obligations and enables the parties to no longer be bound to perform their obligations. However, determination of matters, being hindered by frustration, is purely factual and can only be determined by the courts.
I must stress that under both doctrines, the defaulting party has the burden of proof. This means that they have the legal duty to prove that the matter does indeed fall under that defence. The party claiming this defence also has an obligation to try their utmost best to mitigate the effect of the event and to notify the other parties to the agreement as soon as possible. Certain contracts will specify specific timelines and means of communication.
Another important consideration to bear in mind is that where someone has an event that inhibits their ability to perform their contractual obligation, they will need to look at the exact wordings of the contract to see if this was specifically provided for in the force majeure clause. Usually, the force majeure clause will list specific events. However, we often find broad and unambiguous language being used when drafting these clauses as so to capture a wide variety of instances.
Most people would rather have the possibility of a force majeure event addressed in their contracts than having to wait for the courts to determine a contractual obligation as being “frustrated”. That’s because it’s often a long, tedious and expensive matter – that’s if the court ever makes a determination on the case.
Validly Arguing Force Majeure
A party arguing force majeure must successfully argue the following:
- That an event has happened which was out of the control of the defaulting party.
- That this event does constitute a force majeure event.
- That this event has made it impossible for the defaulting party to perform their contractual obligations.
- That the defaulting party has taken all reasonable steps to avoid or mitigate the effect of the consequences of this event.
Where the defaulting party is successfully able to prove the above points, they will be entitled to either terminate the agreement, suspend the performance of the agreement or any other actions as may be agreed by the parties.
Back to my friend’s story…
It turned out the trainer was trying to take advantage of the situation. After asking my usual catalogue of questions, I was able to decipher that the trainer’s argument was fundamentally flawed.
The World Health Organization had declared COVID-19 a worldwide pandemic on the 11th February 2020. However, the agreement was finalized and the trainer received payment on the 15th March 2020. At the point of the trainer finalizing the agreement and receiving the money, there had been over seventy thousand cases around the world and Nigeria already had several confirmed cases of the virus. Remember, at this point, only the trainer knew he was sickle-cell anemic. Thus, only the trainer could have foreseen the possible danger in entering the agreement.
As soon as my friend highlighted this fact to the trainer and threatened to report him to the governing body of their country, she saw an alert from her British banking app. Refund successful.