What are the Effects of COVID-19 on Contracts

The Corona Virus Pandemic also known as the COVID-19 virus has disrupted many events of the world. It has affected almost all the industries and has raised a lot of uncertainties, most especially, in the field of commerce. Due to the nature of the virus and the rate of its spread, people have been forced into a compulsory quarantine and most jobs, businesses and schools have gone virtual. This has definitely impacted the normal lifestyle of many individuals, but some have been more hit than the others. The most hit are those who, as a result of the nature of their jobs, cannot move performance from a physical location to a virtual location. 

Before I go into details on the impact of COVID-19 on contracts, I would like to highlight some basic principles of a valid contract. 

In normal colloquial parlance, a contract is an agreement between two or more persons. However, from a legal perspective, a valid and legally binding contract involves more than a mere agreement between two or more persons. In many cases, a person might be under the impression that she has entered into a contract where in the actual sense, there is no valid contract enforceable or protected by the law. Therefore, a contract is an agreement enforceable by the law between two or more persons to do or abstain from doing some act or acts, their intention being to create legal relations and not merely to exchange mutual promises, which is backed by valid consideration. From this definition, there are 4 basic elements of a contract, viz, an offer, acceptance, intention to enter legal relation and a valid consideration. An offer is a clear statement made by a person (“offeror”) to another person (“offeree”) indicating her willingness to enter into a binding relationship with the offeree based on the terms made in the statement. An acceptance is an unconditional expression by the offeree that she agrees to create a binding relationship with the offeror based on the terms contained in the offer. A valid consideration is any benefit, interest or forbearance which arises from an offer or an acceptance. Where this is absent there is no valid contract even though there was an offer and an acceptance.  In addition to the above, the parties must intend that their agreement must be binding on them, where this intention is lacking, the agreement would be synonymous to a mere promise. 

A contract creates binding obligations on the parties and under Nigerian Law, these obligations are mandatory. Failure to perform an obligation in a contract leads to a breach of the contract, which is usually remedied by the payment of damages, specific performance, an injunction, amongst others. The COVID-19 Virus has and would affect the performance of many contracts, this is because, as I have earlier stated, not all contract is capable of being performed on an online scale. Some contracts actually require physical performance. Example of such contracts include building contracts, sale and purchase agreements, and some other forms of services. Given the current state of affairs, does it mean that these parties who are unable to perform their own end of the contract would be liable to damages for breach of contract? In most cases, the answer is in the negative. 

There are instances where the obligation of a party to the contract may be discharged without the actual performance of the contract. A party can do this by relying on a Force Majeure clause in the contract.

A Force Majeure Clause, (French for “super force”) is a clause in a contract which allows a party to suspend or terminate the performance of its obligations under a contract, upon the occurrence of certain circumstances beyond the control of the parties to the contract. The extent to which a Force Majeure clause can exclude a party from performance depends on the way in which the clause is drafted. An example of a Force Majeure Clause reads as follows: 

“A party is not liable for failure to perform the party’s obligations if such failure is as a result of acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, invasion act of foreign enemies, hostilities (regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalization, government sanction, blockage, embargo, labor dispute, strike, lockout or interruption or failure of electricity or telephone service.”

From the above quote, it can be seen that the Force Majeure clause is broadly written and covers a lot of circumstances. However, in the era of the COVID-19 virus, this Force Majeure Clause would be of no help to a party seeking exclusion from performance. This is because, despite the broad language of the clause, it failed to include ‘a pandemic’ in the list of circumstances that can qualify as a Force Majeure. This is a usual occurrence in most contracts as many never envisioned a pandemic as big as this which would disrupt the state of things globally. There are however contracts which include an omnibus clause, “or any other causes or events beyond the control of the parties.” This omnibus clause is usually construed by the court as having a wider meaning which is not limited to the classes of events specified. However, it should be noted that Nigerian courts are usually unwilling to re-write parties’ contract or import into contract, terms which have not been agreed to by the parties. Thus, the attitude of Nigerian courts with regards to the difficulties of the COVID-19 virus are unlikely to grant a party any remedy which the law or their contract does not contemplate.

A party seeking to rely on a Force Majeure Clause must show that failure to perform its obligation was due to circumstances beyond its control and as a result of the Force Majeure event; and that there were no reasonable steps it would have taken to prevent the occurrence of the event. 

Apart from a Force Majuere Clause, a contract can also include a Material Adverse Change (“MAC”) clause. This performs similar function as a Force Majuere clause and permits the suspension or revision of the obligations in a contract in the event of a material adverse change. It is mostly used in finance and investment contracts.

Where a contract does not include a Force Majeure Clause or a MAC, a party to a contract can rely on the common law principle of Frustration. Frustration is a doctrine whereby parties to a contract are excused from further performance of their obligations when a supervening event(s) occurs during the existence of the contract, without the fault of either party; and the event makes further performance of the contract impossible, illegal or makes the contract something radically different from what was originally undertaken by the parties. Thus, parties to a contract can rely on this common law doctrine to escape liability from non-performance of obligations in the contract. However, parties should keep in mind the attitude of the courts in rewriting contracts.

In conclusion, it is pertinent to state that neither frustration, a Force Majeure or a MAC clause protects a party from liability when there was non-performance as a result of adverse economic condition which makes performance of a contract more expensive. In other words, performance cannot be excused because the contract has become more expensive or is now a bad bargain. Therefore, in addition to seeking means of escaping liabilities arising as a result of the consequences of the COVID-19 virus, parties to a contract can also explore other methods of making performance possible by review of the terms of their contracts such as including flexibility on payment and extension of timelines for performance.


Written by Alli-Udo Chinwe

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