How the unforeseen corona pandemic impacts contracts

Sekou Owino: How the unforeseen corona pandemic impacts contracts

Recently, the High Court of Kenya delivered a judgment in a case between the parents and the administration of a school in Nairobi, which arose from the fact that the school had to render educational instruction to students online rather than by physical class attendance.

The dispute arose from the fact that the parents had thought that the school administration needed to give a higher discount on the tuition fees payable in lieu of the physical attendance by the students due to the pandemic.

The court decided that it could not determine the fees to be paid by students by compelling the school to give the discounts on the fees desired by the parents.

In the judge’s view, this was an issue that should be left to the laws of the market, that is, supply and demand.

The essence of the decision was that the agreement between the school and the parents was a contract in which the court could not interfere to force the terms and conditions by determining the cost of the services, notwithstanding the intervention of the pandemic.

This case is not the only one in the world in which the fact of the hitherto unforeseen pandemic had led to disruptions that have affected the ability of parties to a contract and resulted in disputes between them which landed in courts.

The kind of agreements which have been affected by the Covid-19 pandemic are mostly service contracts, where parties agreed to render service for money.

Basic principle

While the basic principle in law is that parties must be held to their bargains in terms of the agreements they make, there are instances where a party to an agreement may be excused from performing it if a situation arises, which makes the performance impossible. This often involves an occurrence that was unforeseen and does not arise from the conduct of a party to the contract.

An example could be an obvious issue like the outbreak of war or, as is currently the case, the outbreak of a pandemic. It is a time-honoured principle that has applied in contract law for a long time.

One of the earliest examples would be in a case in the late 19th century where the plaintiff and the defendant agreed to hire a music hall for the performance of some concerts scheduled for four days.

The hall was razed by a fire just before the concerts began. In a dispute seeking to compel payment, the court decision absolved both parties from blame. It said that neither party could be held responsible for the fire and that each would be relieved of its obligation to make the hall available or to make payment for the use of the hall as had been agreed.

In India, the High Court in Delhi got to determine a case between two parties who had agreed on a contract for one party to drill three wells for the other in the state of Rajasthan. The contract required the drilling company to provide a performance guarantee that it would drill the wells as agreed and that in the event of breach, the performance guarantee would be enforced by the other party or get compensation for the failure to drill the wells.

The drilling company therefore provided eight guarantees from a bank in which it agreed that it would make payment to the other company if it failed to complete the drilling within a given time.

Shortly after the guarantees were given, India was placed on lockdown because of the pandemic.

Drilling company

The drilling company could therefore not complete the project on time. When the company that had commissioned the drilling of the wells sought to enforce the guarantees for the delay, the drilling company filed a petition in court to prevent the enforcement of the guarantees. It relied on a clause in the contract known as force majeure.

Force majeure is a principle in law which provides that parties to an agreement may be relieved from performing their obligations if an eventuality that was not foreseen at the time of the contract makes it impossible or extremely difficult for one of the parties to perform the contract as agreed.

The Delhi High court agreed with the drilling company that the countrywide lockdown due to the pandemic constituted an occasion of force majeure over which none of the parties had control. It therefore allowed the petition by the drilling company and restricted the enforcement of the guarantees.

But it needs to be said that the mere fact is a supervening issue, like the pandemic in this case, is not in itself sufficient to relieve a party of its obligations to perform the agreement. The person seeking the relief from performing the agreement needs to show that the intervention is not just beyond its control but also renders it impossible or extremely difficult to deliver on what it agreed under the contract.

This was held in 1988 in the United Kingdom where a party which wanted to rely on force majeure event to relieve it from the obligations to make two sailing vessels available to another party, was rebuffed by the court which stated that they had failed to search for alternative vessels.

In other words, a party relying on force majeure must show that the agreement had become impossible to perform despite the best efforts to do so.

In South Africa it was workers who have mainly borne the brunt of force majeure instigated by the Covid-19 pandemic. In Gauteng, the High Court placed two restaurants in Johannesburg under business rescue following complaints by their employees that they had failed to pay salaries due to the closures occasioned by the pandemic.

Covid pandemic

The court held, however, that the force majeure did not apply to a contract of employment because the contracts did not contain specific force majeure clauses. For that reason, the restaurants’ claim for the court to hold the contracts unenforceable due to the Covid pandemic failed.

But in the USA, the Ritz Restaurant Group had a different outcome when they blamed their inability to pay rent for their restaurants to the suspensions to on-premises dining on the government shutdown in response the pandemic.

The Bankruptcy Court held that the forced closure to the dining amounted to a force majeure event.

As a result, the court relieved the restaurant of the duty to pay a portion of the rent.

 But, the court noted that because the restaurant still generated revenue form the takeout delivery services, the restaurant should not be exempted from the payment of all the rent but would have to pay one quarter of the rent specified in the lease.

 While it is stated that the Covid-19 pandemic will change the personal and relations between persons, it has also come with chaos in and changes to the commercial arrangements between parties .

One sure effect is that most agreements will henceforth include a force majeure clause as a matter of course.

Mr Owino is head of legal services at Nation Media Group PLC