On 11th March 2020, the World Health Organization declared Covid-19 a pandemic, which by definition is an outbreak of a disease world-wide or over a wide geographical area (usually across international borders) and affects a proportionately high number of the popoulation. In Kenya, the first case of the disease was reported on 13th March, with a steadily increasing raft of measures announced by the Ministry of Health to combat its spread following thereafter to-date.
These unpredictable and unsettling times have already had a great impact on all sectors of our economy. Of particular focus, with the onsent of the pandemic came a myriad of issues and complexities in performance of contractaul obligations and interpretation of those contractual terms.
THE DOCTRINE OF FRUSTRATION
This is a Common Law doctrine that applies to contracts, more often than not, those of a commercial nature, whereby parties are excused from performing their contractual obligations if subsequent events make performance unlawful or impossible to perform. Impossible why?
- The subject matter has been destroyed
- The death of one of the parties
- The incapacity of the one of the parties
- Impossibility in the method of performance
- Legal changes making performance illegal
- Cancellation due to an unexpected event.
The doctrine of frustration may be relied upon by an party to a contract and does not have to be incorporated explicitly in the terms of the contract. The party relying on this doctrine therefore has to meet a higher threshold for its reliance for non-performance than that of force majeure. To rely on this doctrine, you have to prove that the event:
- Was unforseen;
- Is beyond the parties’ control;
- Makes performance impossible or radically different from the contemplaton of the parties to the contract.
This is a French term that means “superior force”. According to Black’s Law Dictionary, force majeure is an event or effect that cannot be anticipated nor controlled and includes both acts of God or nature such as floods, epidemics and famine; and those of people such as riots, strikes and wars. Black’s Law Dictionary further defines force majeure clauses as contractual provisions that address circumstances in which contractual performance becomes impossible or impracticable due to events that could not have been foreseen, and are not within a party’s control.
The consequences of invoking the Force Majeure clause are to:
a- Excuse the affected party from performing the whole or part of the contract;
b- Excuse the affected party from delay in performance of the obligations under the contract;
c- Entitle the affected party to suspend or claim for an extension of time for performance;
d- Entitle the affected party a right to terminate the contract.
Force Majeure under English Law is a creature of contract rather than a general common law concept. For one to rely on it, you must therefore prove the following:
a- It is explicitly stated in the contract, it is not an inference (as is the case with the Common Law doctrine of frustration);
b- Its impact on the affected party’s ability to perform contractual obligations. Becoming merely more difficult or expensive does not cut it:
– Does it prevent?- It must be physically or legally impossible to perform.
– Does it hinder/impede/impair/interfere with?- It makes performance substantially more difficult.
– Does it delay?- It makes compliance as quickly as required substantially more difficult.
c- It is the cause of inability or delay to perform.
d- Non-performance or delay in performance is due to circumstances beyond your control.
e- No reasonable steps could have been taken to mitigate the event or cirsumstances.
The 3 main differences between the doctrine of frustration and force majeure are:
- The doctrine of frustration may be relied upon by an party to a contract and does not have to be incorporated explicitly in the terms of the contract unlike force majeure.
- The party relying on the doctrine of frustration has to meet a higher threshold for its reliance for non-performance than that of force majeure.
- Reliance on the doctrine of frustration automatically results in discharge of all parties from their obligations unlike reliance on force majeure which avails flexibilities to the parties to the contract to fashion their reactions to the event.
From the foregoing definitions of the 2 doctrines, Covid-19 may relieve a party of its contractual obligations under the doctrine of frustration but not necessarily relieve a party from their contractual obligations under force majeure as whether or not it constitutes a force majeure event depends on:
- Whether or not the clause or statement is actually incorporated in the contract;
- What is encompassed in the definition of a force majeure event in the clause or statement;
- How the courts or parties choose to interprete broad statements in the clause or statement in the contract such as ‘events or circumstances beyond the parties reasonable control’;
- Observance of all procedural requirements such as notices and service of notices.
In conclusion, below are the measures that parties can take during this period of the pandemic and beyond to safeguard their contractual obligations:
- Draft new contracts that include reference to pandemics such as Covid-19 in their force majeure clauses (It goes without say that we should now always ensure that all our contracts incorporate force majeure clauses).
- Amend existing contracts or prepare addendums to supplement or vary existing contractual terms to include reference to pandemics such as Covid-19 in the force majeure clauses.
- Advise your clients to take proactive steps to mitigate the risks that have resulted from the pandemic in relation to their businesses and also prepare for interruption of their operations or those of others in their industry that will affect their operations by either:
- Suspending the completion period during the duration of the pandemic or termination of the contract altogether under the doctrine of frustration.
- Extending performance deadlines and negotiation of standstill arragements with the parties to the contract.