THE LEGAL EFFECTOF CORONA VIRUS PANDEMIC ON THE DOCTRINE OF FORCE MAJEURE CLAUSE IN COMMERCIAL CONTRACTS; THE LAGOS-IBADAN RAIL PROJECT EXAMPLE
The ongoing spread of the Corona Virus (covid-19) has become one of the biggest threats to the global economy and financial markets. Major institutions and banks have cut their forecasts for the global economy2.
The virus was first detected in the city of Wuhan in China and has affected the general business activities in the Country. The impact of the virus on business and production output is not confined to China. The South Korean carmaker; Hyundai has halted production lines because of disruption to the supply chain of parts that usually flow between the two countries. The Japanese economy minister, Yasutoshi Nishimura, said factory production and company profits could take a hit from the virus. Honda has three plants in Wuhan, the city at the center of the epidemic3.
In Nigeria for instance, the ongoing construction work on the Lagos-Ibadan rail project has been put on hold due to the outbreak of the corona virus. This was declared by the Federal Government of Nigeria4. The implication of this is that, there is going to be delay in the completion of the rail project and the deadline already set for the delivery of this essential facility for the good people of Nigeria further extended.
This may consequently amount to breach of commercial agreement between the Federal Republic of Nigeria and the China Civil Engineering Construction Corporation (CCECC), the contractor handling the project who has both agreed on a due date for the execution of the project if the deadline is extended.
Corona virus is likely to affect more businesses than we thought, from maritime to transport, hospitality, food, fashion, entertainment, electronics etc. This paper therefore seeks to examine the legal effect of the corona virus pandemic on doctrine of Force Majeure in commercial contracts especially as it relates to the ongoing Lagos-Ibadan Rail project in Nigeria
The Doctrine of “Force Majeure Clause”
Force majeure is the happening of an inevitable accident which the parties, in spite of taking due care and caution could not have reasonably foreseen. The term “force majeure” is a French phrase and literally translates to mean a ‘superior or greater force’. It originates from old Roman law which recognised unforeseeable and irresistible events which may prevent a contracting party from performance5.
Events such as war, riots, invasion, famine, civil commotion, extreme weather, floods, strikes, fire, and government action (i.e. serious intervening events that are outside the control of ordinary commercial counterparties) are typically included within the scope of Force Majeure Events.
The Black’s Law Dictionary defines Force Majeure as an event or event that can be neither anticipated nor controlled, especially an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do6.
Traditionally, Force Majeure clauses, in referring to circumstances beyond the control of the parties, were intended to deal with unforeseen acts of God or of Governments and regulatory authorities. More recently, Force Majeure clauses have been drafted to cover a wider range of circumstances that might impact on the commercial interests of the parties to the contract. It is now quite common for Force Majeure clauses to deal not only with impossibility of performance, but also with questions of commercial impracticability7.
Force Majeure clauses are used in contracts because the only similar common law concept- “the doctrine of frustration” has limited application. For Frustration to apply in contracts, the performance of a contract must be radically different from what was intended by the parties8.
Corona Virus Epidemic and Force Majeure
The Corona virus epidemic ravaging the world since December 2019 have reinforced the importance of carefully planning for the unexpected when negotiating contracts. The virus has quarantined the entire cities in China until recently, overwhelmed hospitals, and left streets and workplaces empty all over the world.
As the corona virus outbreak across the world shows no signs of abating any time soon, some companies that buy and sell goods, render contractual services in the international market are considering the legal defense of force majeure.
Force majeure clauses rarely mention diseases and corona virus isn’t a common virus. But the world has been thrown into economic uncertainty since the beginning of the health crisis. For Instance, China’s biggest importer of liquefied natural gas (LNG), China National Offshore Oil Corp (CNOOC), has invoked force majeure to suspend contracts with at least three suppliers, two sources told Reuters on Feb 6th 2020, without specifying whether the corona virus is what triggered the action9.
A Chinese international trade promotion agency has also said that it would offer force majeure certificates to companies struggling to cope with the impact of the corona virus on their business with overseas partners.
Anyone who can’t perform their contractual obligations for extraordinary reasons such as this pandemic may declare force majeure. It happens from time to time in energy and commodity markets, for both buyers and sellers. In Nigeria, where pipelines can be subject to sabotage, oil sales are occasionally subject to the clause.
Applicability of Force Majeure Clause in the Lagos-Ibadan Rail Project.
People have entered into various contracts before the outbreak of the Corona virus epidemic in China and later the rest of the World. Nigeria is not an exception to this. The Federal Government of Nigeria had signed a Memorandum of Understanding of $ 1.5billion Lagos – Ibadan rail project with China Civil Engineering Construction Corporation (CCECC); a Chinese company10.
The project had been expected to be completed by the end of April 2020 until the outbreak of Corona virus epidemic11.However, the Minister for Transport has since January declared that the April date will no longer be feasible while accessing the level of works on ground.
With the outbreak of the Corona virus epidemic in China and across the world, the time for the completion of this important project will have to be extended since the manpower, resources and technical experts involved in the construction of the rail are all imported from China.
The construction site has been abandoned since the outbreak of the Pandemic. This will be even more complicated as the Nigerian Government has ordered a total closure of the Country’s Land and Sea borders12. The Legal question then arises as to whether the Corona Virus can legally count as unforeseen event in Force Majeure clause thus allowing the Chinese Company to avoid liability in the further delay in the completion of the Lagos-Ibadan railway project?
Many contractual force majeure provisions will include a list of examples of force majeure events. However, from previous experience, force majeure clauses rarely include epidemic events on their own.
If epidemics are not explicitly listed in the force majeure clause, or otherwise addressed in the contract, contractors must analyse whether such epidemic cases are covered by the general definition of force majeure events which is to be found in the force majeure clause or under another category of circumstances specifically mentioned. While the contract might not mention the epidemic, emergency measures to address or contain an outbreak may be listed or covered under general terms such as civil unrest, quarantines, lockouts, or governmental injunctions13.
In the wake of the corona virus, certain matters may result in the impossibility for parties to continue their performance further, such as:
Government directions / regulations / laws which impose prohibitions on certain events;
Non-occurrence or cancellation of an activity or event which forms the basis of the contract;
Inordinate delay which renders the delayed performance commercially or fundamentally different from that contemplated in the contract14.
Force majeure has been invoked in the past by companies seeking to explain contractual failures stemming from the Sept. 11 terrorist attacks, Hurricane Sandy, SARS, and Ebola. But the international response to the corona virus quarantines, shutdowns, and travel ban has suspended business as usual around the world in an unprecedented way.
The China Council for the Promotion of International Trade (CCPIT), a quasi-public Chinese government agency, has issued 3,325 so-called force majeure permits to Chinese shippers since February, worth $38.5 billion said Financial Times15. The permits attempt to shield Chinese shippers from potential lawsuits stemming from their failure to deliver on contractual terms.
As the Corona virus continues to spread across Africa, the Nigerian Government and the Chinese Company in charge of the construction of the Lagos-Ibadan rail may have to review their contract and terms of Agreement to include this situation as a Force Majeure incident if this hasn’t already been done in this period of uncertainty. This is so because even though China appears to have been able to contain the virus to a minimal level, the virus continues to spread in Nigeria with Lagos having the highest number of corona virus cases.
As the outbreak of corona virus continues, we can see that it is likely that imports to and exports of materials and human capitals from China will continue to be affected, not only because of the unavailability of ports, but also because workers including expatriates have been asked to stay at home to avoid the spread of the virus.
The Nigerian Government and the Chinese company should therefore carefully consider the terms of their contracts and the applicable laws in formulating their responses to safeguard their interests in the wake of the corona virus outbreak.
In the English case of SEADRILL GHANA OPERATIONS LTD V TULLOW GHANA LTD16 it was held that a party who seeks to rely on a force majeure provision to excuse it from non-performance bears the burden of proving (on the balance of probabilities) that:
“a Force Majeure Event has occurred and that it had the effect specified in the contract (e.g. it prevented / hindered / impeded performance), its failure to perform was due to circumstances outside its control, and there was nothing it could reasonably have done to avoid the Force Majeure Event or mitigate its effects”
The fact of this case is that; Tullow had entered into a hire contract for a drilling rig with Seadrill which it intended to use in two fields and later in a wider field it planned to develop. A moratorium imposed by the Ghanaian government stopped Tullow from drilling, which Tullow claimed made it impossible to provide a drilling programme. The government had also refused to approve the plan for the wider oil field for other reasons. The Judge held that Tullow was not entitled to rely on the force majeure provision to terminate the agreement because, although the moratorium was a force majeure event, the refusal to approve the new field was not force majeure and was an effective cause (and, in fact, the greater cause) of Tullow not being able to provide a drilling programme. The Judge also stated that Tullow had a contractual duty to use its reasonable endeavours to avoid the moratorium stopping it performing its obligations to provide drilling instructions, and Tullow had the opportunity to provide drilling instructions in different locations. Not doing so would have meant that Tullow was unable to utilise the force majeure clause because it had not used its reasonable endeavours to avoid the effects of the event.
As the Corona virus epidemic continues to ravage the world and the cases increasing in Nigeria daily, the international business community and the Nigerian Government should take a time to reflect going forward on the ephemerality of life and the uncertainties of contracts execution in the world we live in. it is important that these uncertainties are well prepared for by making sure that commercial contracts include clauses that could cater for unforeseeable events like the Corona virus. No one could have thought just few months ago, that the world economic order and international trade would be so disrupted by this ravaging pandemic. Parties can agree in advance on what should happen if one side’s performance is delayed by events beyond its control by including a force majeure provision in their contract. While it is very crucial for contracts to be executed within the timelines set for them, it is more important that the people for which the contract is to benefit stay healthy and alive to enjoy the benefit of the contracts.
The doctrine of “Force Majeure” clause if applied to the ongoing Lagos-Ibadan Rail project will provide a Win-Win situation for the Federal Government of Nigeria and the Chinese Company (CCECC) in charge of the project.