Is the Act of God? - Force Majeure and the Contractual Implications of COVID-19

Corona Virus ("Covid-19") is the epicentre of every conversation today. At the time, there’s tireless politicking, streams of indices and data being peddled, tears being shed, warnings being sounded, measures being taken and between all that, continuous commentaries from every corner of the globe all centered squarely on Covid-19, as the world pauses to save itself. 

The virus which has already infected around 788,054 people and claimed the lives of over 37,000 people at the time of this article, has been declared a global pandemic. Its ravagement is seemingly endless and its effect on business and commerce largely unquantifiable.

Already stock markets are slumping around the world, business and commerce are on standstill as people have been forced to retreat into isolation, industries like aviation and tourism are on a compelled pause, health spend is skyrocketing and the global economy slowly teeters towards a recession. 

While the immediate consequences of the virus on people, businesses and markets is driving enough conversations around the world, the eventual business and contractual implication of the pandemic are already in focus. One of many contractual concerns raised by the ongoing crisis is as to the applicability of the contractual instrument of Force Majeure (“FM”) to instances of contractual breach caused by the Pandemic and/or resulting situations.

Already, at the time, the question of whether the Covid-19 pandemic expressly qualifies as a Force Majeure event as to protect parties from the consequences of contractual breaches caused by the pandemic and attendant conditions has generated considerable interests and has birthed engaging conversations in many quarters, as the world verges on recovery. As many who have read or written about the issue may have realised, it is a surprisingly tricky question to answer. 

Force Majeure is a French term that literally means "greater force." It refers to an event for which no person can be held accountable, such as a hurricane or a tornado. In Contracts, a Force Majeure is an occurrence which prevents the performance of a contract thereby leading to an inadvertent breach of contract, for which the breaching party is not to be held liable. 

There are two (major) schools of thought to the discussion around FM, the Covid-19 pandemic and contractual breach. One school of thought believes that the pandemic is a FM event, and the other believes that while there may be some succor yet for parties who are unable to perform contracts due to the pandemic (such as in the form of the doctrine of frustration of contract), the pandemic of itself is not a FM event within the context of contractual relationships. The latter school believes that the current crisis does not qualify as a FM event by contractual rules as the ingredients required to establish FM are not all present in the current scenario. 

The main elements that are necessary for establishing that an event is FM are that:

1. The occurrence was irresistible; 
2. The occurrence was unforeseeable; 
3. The occurrence was external to the parties and 
4. Performance of the contractual obligation must have been made an impossibility and not merely more difficult or impracticable.

Irresistible means that the occurrence of such an event could not have been prevented by the party seeking to rely on FM. 

Unforeseeable means that the parties could not have reasonably anticipated the occurrence of the event.

External to the parties, means that the event or situation was not caused or exacerbated into becoming an impediment by the party seeking to rely on FM.

Impossibility means that the event should have rendered performance impossible, not merely impracticable. 

A FM clause in a contract is meant to absolve the relevant party or parties of consequences for breach where a situation satisfying all these conditions occurs. The Supreme Court of Canada proffered a succinct opinion of this purpose of a FM clause as one that;

“….generally operates to discharge a contracting party when a supervening, sometimes supernatural event, beyond the control of either party makes performance impossible.”

The United Nations Convention on the International Sale of Goods (CISG) 1990 offers a simpler expression on the nature of FM in Article 75(1):

 A party is not liable for a failure to perform any of its obligations if he proves the failure was due to an impediment beyond his control and that he could not reasonably be expected to take the impediment into account at the time of the conclusion of the contract or have avoided or overcome its consequences.

From the foregoing, the nature and purpose of FM in contracts is vivid. The issue, as with most contractual issues, is with application to context. While at the surface, it appears that FM should apply to the Covid-19 pandemic, the reality of it is layered with difficulties both in establishing that the prerequisite ingredients of FM are present in the Covid-19 situation and in proving that the parties envisaged an occurrence such as Covid-19 as being within the scope of occurrences captured under their FM clause. Let's examine the first issue.

Establishing that the ingredients of FM are satisfied by the current pandemic (as earlier mentioned) and perhaps in any other scenario for that matter, is more difficult than would ordinarily seem. 

In establishing the ingredients of FM, the case of Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm) (03 July 2018) ("Seadrill Ghana") is instructive. In that case, Tullow Ghana had contracted with Seadrill Ghana to hire an oil rig for the drilling and extraction of oil in two offshore petroleum concessions off the coast of Ghana. After various circumstances prevented use of the rig, Tullow Ghana claimed FM and terminated the contract.

The Judge found that although the Government of Ghana had issued a moratorium on drilling, which was the claimed FM event by Tullow Ghana, and although the moratorium did prevent the rig from drilling in certain areas, a contributing cause of the failure to perform was the Government's failure to approve Tullow Ghana’s Greater Jubilee Plan (a drilling plan covering a wider area than that affected by the moratorium). And so, the FM claim failed. 

What is evident from this case is that FM is construed strictly. If the underlying ingredients are not proven and proven satisfactorily, a case for FM fails. In this case, the breach was not exclusively caused by the FM event, but was rather exacerbated not by the parties, but by an intervening non-Force Majeure occurrence. And so, the claim couldn't stand. 

As it has to do with Covid-19, two ingredients may prove especially dicey. While, from the surface, it may not prove much of a problem to establish that Covid-19 was irresistible and external to the party or parties seeking to rely on the doctrine, issues may arise in proving that the occurrence was unforeseeable on the one hand and made performance impossible on the other hand.

On unforeseeability, It has been argued that Covid-19 was not unforeseeable because it has been touted by scientists and epidemiologist long before it occurred and that considering that similar outbreaks such as SARS (Severe Acute Respiratory Syndrome) and Ebola had recently hit the world, an outbreak such as Covid-19 was certainly within reasonable anticipation. 

Unforeseeability as it has to do with FM, is a problematic concept and care must be taken in interpreting it. That an event was unforeseeable does not mean that it could not have been anticipated by any human person. The doctrine of FM does not accommodate such a large scope and in truth, it would not be reasonable if it did. The ingredient of unforeseeability rather infers that the event capable of preventing performance of the contract is one which the performance debtor would not reasonably be expected to take into account at the time of conclusion of the contract. With Covid-19, while many a scientist may have suspected that there is a chance that a global pandemic could be in the offing, it would be rather incomprehensible to argue that parties entering contracts would have reasonably anticipated a pandemic in the nature of Covid-19 or any pandemic for that matter, and as such, would not have allocated risks along those lines. 

The question on impossibility is any even trickier one. While the scourge of Covid-19 has manifested in consequences ranging from the crash of the stock market, to business shut down, to crumbling of industries, to compulsory isolation, whether these made it impossible to perform a contract is strictly a question of circumstances of the particular case and the intricacies around the facts. Generally though, it is very likely that Covid-19 would make the performance of a contract impossible. Care is advised here - with FM, it is not enough that the pandemic, and the resultant effects, hindered, delayed or made impracticable the performance of the contract or increased the expense associated with the performance of the contract; it must have completely rendered performance of the particular contract a complete impossibility. In here may lie one of the more irresistible challenges to making a case for Covid-19 as FM. But while it may be difficult to prove, it is quite possible to successfully prove it - e.g. with contracts that could not have been; performed remotely, before the heights of the scourge, personally by someone who caught the virus, or that is time based, with such time-window falling with the period of the worst of the scourge and hindered completely by governmental restrictions compelled by the pandemic etc.   

Ultimately, a successful case could be made for the applicability of FM on account of the Covid-19 pandemic before a court. The issue however, is as to if it can be established that the prerequisites are present in the specific case. Apparently, the chances of this is slimmer than evident at the surface. 

The chances are even slimmer where there are other technical issues militating against the performance debtor - particularly, issues such as where the contract between the parties does not contain a FM clause or where the FM clause does not capture the event of a pandemic like Covid-19. On the first issue, where a contract does not contain a FM clause, it may effectively render any further considerations moot. In many jurisdictions, such as in England and in Nigeria (being a common law country), FM is a creature of contract and not of the general common law. Where parties do not make provisions on it in their contracts, they cannot rely on it. In some other legal systems though, FM is a general legal concept and courts may declare that a particular event, such as a pandemic like Covid-19, is a FM event and allow parties to argue on it. In the former jurisdictions, only performance debtors whose contracts contain FM clauses will remain in the conversation. 

On the second issue, and as said, FM clauses are construed very strictly; where the clause to be relied upon by the performance debtor does not itemise a global pandemic specifically or make provisions that can effectively capture the effects of Covid-19 (such as provisions expressly covering government quarantine measures, travel restrictions, business shutdowns, compelled restriction of movement, wide scale sickness, ill-health of workers, government action or an omnibus provisions such as "other circumstance which by extension prevents performance"), a performance debtor seeking to rely on FM may be effectively ousted.

In the end of the day, the question of whether or not a case for FM can be made for contracts frustrated by the events of Covid-19 is a question of specifics. Ultimately, Covid-19 can be successfully argued to be a Force FM event. The real question is, would it?