contracting issues - olaniwun ajayi · 1. globe spinning mills (nig) plc v reliance textile...

INTRODUCTION

As the Novel Coronavirus (COVID-19) continue to impact and ground human activities globally,

World leaders scramble to mitigate the deleterious effect of the rapidly spreading virus on the global

economy and where businesses are concerned, millions worldwide have shut down, complying with

various Governments’ “stay-at-home, stay safe” orders. The consequence of the shutdown on

businesses has certainly affected businesses that are heavily reliant on their trading partners, global

trading relationships, and supply chains to fulfil their contractual obligations. Various issues with

respect to the effect of the pandemic on contracts would indubitably arise. In this series, we explore

some of these contractual issues in a bid to assisting contracting parties make informed decisions

with respect to their rights and obligations under their existing contracts.

COVID-19:

CONTRACTING

ISSUES

APRIL 2020

The shutdown of businesses has certainly

affected businesses that are heavily reliant

on their trading partners and global

trading relationships

FORCE MAJEURE

A force majeure event is an intervening event which affects the capacity of a contracting party or

parties to fulfill their contractual obligations. Nigerian courts have defined force majeure as

something unexpected and unforeseen happening, making nonsense of the real situation envisaged

by parties.1

Crucially, force majeure is strictly a contractual provision and therefore only entails what parties

delineate it to contain in their contracts. Typically, force majeure provisions would include acts of

God, diseases, fires, earthquakes, natural disasters, outbreak of diseases, epidemics and

pandemics.

It is pertinent to note that inability to perform a contractual obligation as a result of an event,

without more, cannot trigger a force majeure provision. A party seeking to rely on a force majeure

provision must establish a nexus between the force majeure event sought to be relied upon and his

inability to perform2. It is for this reason that contractual disputes post the pandemic would be

rather tenuous, because whilst the effects of Covid- 19 cannot be denied, the connection between

the pandemic and various industries differ.

Typically, force majeure provisions would not automatically excuse the obligations of a party upon

the occurrence of the force majeure event, however, some contracts provide that should the force

majeure event subsist for more than a certain period, the affected party may elect to terminate the

contract. We see that the existence of such a risk whereby parties may opt out of contracts should

the pandemic last for an extended period, has alarmed businesses and business owners, and forced

them to watch with bated breath the progression of the pandemic, with hope that a resolution is

near.

COVID-19: CONTRACTING ISSUES

APRIL 2020

1. Globe Spinning Mills (Nig) Plc v Reliance Textile Industries Ltd [2017] LPELR-41433(CA) 27, para. E.

2. Section 136 (1) of The Evidence Act 2011 (As Amended) provides that “the burden of proof as to any particular fact lies on that person whowishes the court to believe its existence…”. See also Obiazikwor v. Obiazikwor [2008] 8 NWLR (Pt.1090) 551 at 569, paras. B-C where the Courtof Appeal, held that in civil cases, the onus of proof is always on the party who asserts.

HOW DOES THIS AFFECT CONTRACTING PARTIES DURING THIS PANDEMIC?

In relation to the effect of the pandemic on contractual obligations, it would be useful

for contractual parties to properly examine their contracts to ensure that the force

majeure provisions are wide to include events such as the Covid- 19 Pandemic.

Where the provisions are wide enough to include the Pandemic, parties should

ensure that they may invoke force majeure under their contracts in line with the

prescribed procedure under such a contract.

It is arguable that the phrase ‘Act of God’ is wide enough to cover the Pandemic. The

phrase has been defined as an event which involves no human agency, is not

realistically possible to guard against, is due directly and exclusively to natural

causes and which could not have been prevented by any amount of foresight, plans,

and care3. The phrase has been applied to natural disasters such as earthquakes,

storms and we see no reason a pandemic (which has not been proven to be as a

result of human intervention) that is adversely ravaging the globe should not fall

under the phrase.


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3. Transco plc v Stockport Metropolitan Borough Council [2003] UKHL 61

FRUSTRATION OF CONTRACTS

Generally, frustration of contract is the premature determination of an agreement between parties,

owing to the occurrence of a supervening event, or change of circumstance so fundamental that it is

regarded by law as striking at the root of the agreement4. A contract is therefore frustrated where,

subsequent to its formation, and without fault of either party, it is incapable of being performed due

to an unforeseen event (or events), resulting in the obligations under the contract being radically

different from those contemplated by the parties to the contract5.

The legal consequence of frustration is that the contract is automatically terminated at the point of

frustration. This does not mean that the contract is void ab initio ("from the beginning"); only future

obligations are discharged. However, parties are still to perform obligations which fell due for

performance before the frustrating event6.

The events which have been listed by Nigerian courts as supervening and thereby constituting

frustration include: (i) subsequent legal changes or statutory impossibility; (ii) outbreak of war; (iii)

destruction of the subject matter of the contract or literal impossibility; (iv) Government requisition

of the subject matter of the contract; and (v) cancellation by an unexpected event7. We see that the

Pandemic easily plugs into more than one category of supervening events as held by Nigerian

courts.


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4. Mazin Engineering Limited v Tower Aluminum (Nig) Ltd. [1993] 5 NWLR (Pt 295) 526

5. Addax Petroleum Development (NIG) Ltd v. Loycy Investment Co. Ltd & Anor (2017) LPELR-42522 (CA) 10-12, paras. E-A

6. Pulseline Services Ltd. v. Equitorial Trust Bank (2010) LPELR-4886(CA) 31, paras. B-C)

7. Malik v Kadura Furniture & Carpets Co. Ltd (2016) LPELR-41308 (CA), 20, paras. C-E.


It is likely that as a result of the spread of the virus, non-performing contracting

parties may seek to rely on the common law concept of frustration, and argue that

the Pandemic is a supervening event, thus rendering them unable to fulfill their

contractual obligations. In this light, we envisage that parties may raise frustration

as a defence with respect to actions against them for breach of contract.

We note that the focus of the court will be on the parties’ specific contractual

obligations and whether they have radically changed as a result of the spread of the

Virus to the extent that requiring a party to comply with its contractual obligations

would mean requiring it to do something fundamentally different from that which it

originally contracted to do. In other words, it will be important for the court to

identify the consequences of the Pandemic on the parties’ ability to perform the

specific contract in question. Thus, cases will be decided by the courts based on their

peculiar facts and circumstances.

MATERIAL ADVERSE CHANGE

A Material Adverse Change (MAC) clause is ‘transaction/deal’ specific. Thus, what will be a MAC

event under one contract/transaction might not be a MAC event under another. Usually, parties

carefully negotiate contract terms that deal with MAC and take into consideration the relevant

circumstances of each party. Consequently, the definition of MAC is unique to each contract.

In the field of corporate finance, mergers and acquisitions, a MAC event is a change in

circumstances that significantly reduces the value of a company. In relation to lending, a MAC

clause is used in most loan agreements to enable a lender to call a default, and therefore to

demand early repayment of a loan if there is an unforeseen adverse change in a borrower’s position

or circumstances. With respect to a company, it relates to any event, circumstance, change or

effect that, individually or in the aggregate, is materially adverse to the business, condition

(financial or otherwise), assets, liabilities or results of operations of the Company and the Company

Subsidiaries, taken as a whole.8


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8. Rebecca Zaman, “Is Coronavirus a Material Adverse Change?” 19 March 2020


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The Pandemic could have significant impacts on businesses and ultimately the values

of companies. This may lead to investors pulling out from mergers and acquisitions

transactions. Borrowers might be significantly affected, and banks could be tempted

to call in loans where there it is evident that there is a material adverse change in

the position or circumstances of its borrowers. However, as stated earlier, MAC

events are not at large and must fall within the provision of a MAC clause in a

contract for it to be triggered. The onus therefore lies on a party that alleges the

occurrence of a MAC event to prove it.

We note that in triggering the acceleration of a loan repayment based on a MAC

clause, it is not enough for there to be an adverse change, same must be material9.

An adverse change is held to be material if it significantly affects a borrower’s ability

to perform its obligations and to repay the loan and must not merely be temporary.

Since the global position is that the Pandemic will undoubtedly come to an end

(although a firm date cannot be ascertained), we take the view that the Pandemic

may be viewed as a temporary10 circumstance, that businesses will recover from. In

this guise, lender banks may find it difficult establishing before Nigerian courts, that

the Pandemic caused a MAC.

9. See Grupo Hotelero Urvasco SA v Carey Value Added SL and another [2013] EWHC 1039 (Comm)

10. Ibid.

RENEGOTIATION OF CONTRACTUAL RELATIONSHIPS

The impact of Covid- 19 cannot be overstated, and we envisage the impact to extend to contractual

relationships, thereby leading to an increase in demand by contracting parties to renegotiate the

terms of their agreements. Whilst there would typically be provisions to cushion the effect of

unforeseen events, the extent of the impact of the Virus is still yet to be fully realised, so that even

those ‘cushion provisions’ may be inadequate in combatting the effects of Covid- 19. For instance,

where parties have agreed to a moratorium period, the extent of the impact of the Pandemic could

very well render such a moratorium period inadequate, especially because the initial term of the

contract has not stricto sensu been observed due to the intervening nature of the Virus on business

in general, and the government imposed locked down.

We have already seen the impact of the Virus on oil prices (oil being the bedrock of the Nigerian

economy), and this would invariably affect the stability of the Nigerian economy by resulting in a

shortage of foreign exchange. The simple deduction would be that foreign exchange denominated

facilities may become too onerous for parties, and parties would be seeking a conversion of such

facility, or that due to the fall in oil prices, parties can simply not obtain enough foreign exchange

to service their loans.


APRIL 2020


We recommend that parties examine their contracts in detail and begin to intimate

counterparties about the prospects of a renegotiation of terms, or a possible

suspension of the said contracts till a time to be agreed by the parties, depending on

the outcome of the Pandemic. This is particularly important for industries that have

been hit harder by the effects of the virus.

The impact will affect

contractual relationships,

thereby leading to an increase

in demand by contracting

parties to renegotiate the terms

of their agreements.

INTERPRETATION OF CONTRACTS

In interpreting contracts, the role of the court is simply to give effect to the intention of parties as

expressed in the terms of the contract, and nothing more11. In the absence of any ambiguity in the

contract, the only interpretative jurisdiction of the court is to make pronouncement on the clear and

unambiguous agreement and agree with them12. The courts have however employed various

interpretation devices to as much as possible, give effect to the intention of parties.


APRIL 2020


It remains to be seen how this role of the courts may change in relation to post-

Pandemic litigation on breach of contract, and the expected debate as to whether the

Virus can be implied into a contract as amounting to frustration, in the absence of

force majeure provisions. Some may take the view that any form of ‘compassion’

adopted by judges would amount to ‘judicial sentiments’13 as opposed to giving effect

to parties’ intentions.

We however believe that the courts would appreciate the commercial realities of a

post Pandemic era, and do justice based on the peculiar facts and circumstances of

each case.

11. CAC v. Jude Elswitch Ltd (2016) LPELR-41217(CA) 18-19, paras. E-A.

12. Wema Bank Plc v. Osilaru (2008) 10 NWLR (Pt.1094) 150 at 177, paras. F-G.

13. It is trite that a court is not a court of sentiments and does not base its decisions on sentiments. See Ojo v. Gharoro [2006] ALL FWLR (Pt. 318)197 at 236

CONCLUSION

Covid- 19 has thrown up much uncertainty across the globe, and the effects which are already being

felt, will continue to compound. Situating the effect of the Pandemic in the context of commercial

contracts and litigation is an arduous task. It is hoped that contracting parties would be more

understanding in these turbulent times and take measures to preserve contracts rather than opting

out of them, except were doing so is inevitable in the circumstances.


Olaniwun Ajayi LP Olaniwun Ajayi LP @OlaniwunAjayiLPwww.olaniwunajayi.net

For further information, please contact:

Dr. K.U.K. Ekwueme

Partner

+234-1-2702551 Ext 2600

[email protected]

Olabisi Makanjuola

Senior Associate

+234-1-2702551 Ext 2603

[email protected]

Dr. Echefu Ukattah

Senior Associate

+234-1-2702551 Ext 2718

[email protected]

Abayomi Okubote

Senior Associate

+234-1-2702551 Ext 2400

[email protected]

APRIL 2020

mailto:[email protected]




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