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Lessons from Covid-19 Pandemic: Newer ways of drafting force majeure clauses in a contract

By PrimeNewsGhana

The COVID-19 pandemic which originated in Wuhan, China, and has spread across the world over the past few months has affected perhaps every sphere of human existence currently.

It has had diverse effects on the politics of nations, health, law, and on human and business relations. Contractual relations between and amongst parties have not been left out.

The abilities of parties to perform under contracts entered into have come under strain. Pursuant to several pieces of executive instruments, certain parts of the country were placed under a lock down, movement into and out of the country has been curtailed and intercity movements restricted.

The contractual questions that arise in these times are: What happens to the contractual obligations under a contract? What remedies lie to a defaulting party under the contract? In this article, the common law doctrine of frustration and the force majeure clause in contracts will be discussed.

Absolute liability in a contract and frustration of a contract

Arguably and as is known within the Ghanaian military parlance, the first rule is “Obey the rule, before you complain”. This rule explicates the understanding that the rule or “agreement” laid down must be adhered to before the aggrieved party can later make a complaint on why s/he failed to comply with the rule.

In contractual relations, this applies as well. The cardinal rule is that the contractual parties must respect and adhere to the dictates of the contract. At common law, parties under a contractual relation were obligated albeit mandatorily to perform their duties under the contract by the doctrine of absolute liability (Paradine v Jane, 1647).

Under this doctrine, when a party contracts validly and voluntarily enters into a contractual relation with another part (ies), the obligations under that contract must be performed at all cost notwithstanding the fact that the performance of the obligations might have been rendered impossible to perform.

The reason for this absolute doctrine to perform was premised on the fact that the contractual parties must always negotiate expressly for contingencies. The parties were also required to expressly state what shall ensue in the event of the named contingency (Ibid).

This requirement even on the face of it appears arbitrary. Contractual parties are not always in control of events around them, especially those involving third higher parties. Further, life is subject to events beyond the control of man. Clearly the strict contours of this doctrine led to absurd judicial decisions.

The absolute doctrine to honour contracts was re-considered in 1863 where the court in the case of Taylor v Caldwell (1863) considered the hardship such an absolute obligation cast on contractual parties.

The court reasoned that in any contract, there should be an automatic mutual discharge of the contract where the performance of the contract became impossible to perform of which the impossibility was neither through the fault of either of the parties but was by a supervening event.

That supervening event must have rendered obligations under the contract as being radically different from those contemplated by the parties at the inception of the contract. The consequence of this, as espoused in the case of Taylor v. Caldwell is to terminate the contract on the grounds that the contract has been rendered impossible to perform.

The contract however does not become void entirely. The parties are only discharged from the futuristic obligations they would have incurred under the contract.

This means that obligations which are due before the emergence of the impossible situation remain valid. The defaulting party may therefore be liable for a breach of a contract for the non-performance of those obligations.

The case of Taylor v. Caldwell bordered on a contract by the parties for the hiring of a particular music hall for four days. A week before the concert ensued, the hall was raged down by fire and the plaintiff instituted an action against the hall owners for failing to provide them with a hall for their concert.

Within the contract there was no express provision which made room for such a contingency. The court then espoused the implied condition theory which was to the effect that notwithstanding the fact that the parties had no express term in the contract to cater for such an event as had arisen (the burning down of the music hall), the court will imply a term into the contract.

The term implied will be to the effect that if the parties at the time of the contract had anticipated this event, they would have provided in their contract that upon its happening, the obligations in the contract would be discharged.

As time went on, the implied term theory which forms the basis for the doctrine of frustration was criticised heavily and was construed as being fictitious. The courts have now held that they will apply frustration of contracts on the grounds that it is a just and reasonable approach to new situations arising which are beyond the parties.

ESTABLISHING THE DOCTRINE OF FRUSTRATION

It is argued, albeit established in law that the decision in Taylor v. Caldwell espoused the newer and friendlier doctrine of Frustration of Contracts.

This paved way for a fresh regime in contract law. A party can successfully plead frustration therefore by establishing all the four main factors namely the presence of a supervening event, the impossibility of the party to the contract to perform its contractual obligations, the un-foreseeability of the event and the lack of fault on the part of the complaining party.

The frustration of a contract will ensue where there has been a supervening event. Any supervening event a party alludes to must have occurred after the parties entered into the contract.

Here, the nature, scope and the obligations to be performed under the contract must be considered by the court or the parties to ascertain whether the obligation prevented from being performed by the supervening event is one which is fundamental under the contract such that its non-performance renders the contract redundant or whether the obligation is just a trivial one.

Where the obligation in question is one which is merely ancillary to the contract, the presence of a supervening event shall not be enough to frustrate the performance of the contract.

In law, a supervening event is said to be any event that changes the circumstances of performance of the contract so significantly that the parties are unable to perform the contract.

Invariably, an event such as a war or a state of emergency, depending on the exact nature of the emergency and the nature of the contract may be deemed a supervening event.

Secondly, the contract must have been rendered impossible to perform. The impossibility to perform the contract ensues where the contract at the time of the supervening event has become radically or fundamentally different from what the parties contracted at the inception of the contract.

Also, the mere fact of a contract being rendered unprofitable, or expenses under the contract rising at a super-normal rate or loss of commercial viability is no reason to deem that contract impossible to perform.

Where there is an unexpected change in the economic situation in the country, it must be shown that the situation has rendered the contract radically different from what the parties anticipated at the beginning.

Failure to prove this therefore means that the doctrine of frustration cannot be applied. The threshold of establishing this factor is quite high.

Next the foreseen or foreseeable risks involved in the contract must be considered. It must be established by the party complaining of the impossibility to perform that contract, that the event being complained of was not one which was within the reasonable contemplation of the parties at the time of the contract. The event must be totally unforeseen by the contractual parties.

The last factor to be established is that on fault and self-induced frustration. The supervening act complained of should not have been induced by a party to the contract.

Frustration can only arise when the event in question is one which is beyond and out of the control of the parties. In the circumstance, where the act complained of was caused by a party to the contract, an attempt to invoke the frustration doctrine will not hold.

By Kweku Attakorah Dwomoh