The plight of the business world in COVID-19, frustration or continuation? by Christine Selikem Lassey

The business world has been gravely hit by the impact of COVID-19. A few weeks ago, the Director-General of the World Health Organization, Dr Tedros Adhanom Ghebreyesus, declared COVID-19 as a pandemic. The governments of various countries have issued directives for business activities to drive to a halt. What is its legal implication for the numerous contracts entered into across the world?  The law is not oblivious of unforeseen circumstances. As such leeway is created for parties to be discharged from the performance of their obligations under a contract when an unforeseen event occurs. The said event is not in the control of the parties. This is not mere hardship or inconvenience. Parties may either invoke a force majeure provision in the contract or rely on the common law principle of frustration.

However, will a pandemic result in frustration of contracts or the invocation of a force majeure clause? A precedent has established that the destruction of a thing which is fundamental to the performance of a contract or the loss of life inter alia constitutes frustration of contract. Also, legislation or policy changes by the government may frustrate a contract. Can a party rely on the WHO announcement to avoid the performance of a contractual obligation?  It is doubtful whether such a claim would succeed. Using Ghana as a case study, at the time of the announcement, there was no recorded case. As such contracts which are to be performed strictly within the jurisdiction may not be frustrated. For example, a contract between an event organizer and an artiste for the latter to perform at an event is not frustrated. However, multinational companies in Ghana whose activities transcend borders may invoke the common law principle. In essence, the effect of the WHO announcement on contractual relations is relative and would be assessed on a case by case basis.

Also, a contract is frustrated if legislation or change in policy by the government renders performance of the contract impossible or illegal. Some countries have taken proactive measures after the WHO announcement. Travel bans, closure of business centres and social distancing protocols have been adopted. In Ghana, the Imposition of Restrictions Act 2020 vests the President with powers to impose restrictions in the bid of containing COVID-19. A policy directive issued by the President, banning social gatherings, will render the performance of certain contracts illegal or impossible to perform. However, if the restriction does not affect the fundamental obligation of the contract, then it’s not frustrated.

The effect of frustration places Ghana in a better position. This is because The Contracts Act 1960, Act 25, provides an equitable solution to prevent unjust enrichment of one party. Per the act, when a contract is frustrated all sums paid are recoverable. Also, all sums payable before the frustration cease to be payable. However, where a party has incurred expenses, the court may allow such person to recover or retain the amount not exceeding the expenses incurred and the contract price. At common law, when a contract is frustrated the contract ends forthwith. Where money is paid for the performance of the contract then the money is recoverable only if there was a total failure of consideration.

In considering whether a contract has been frustrated by the chain effect of COVID-19, the time of the contract is material. Contracts entered into before COVID-19 was declared a pandemic could not have reasonably foreseen these turn of events. This cannot be said for contracts after COVID-19. Thus contracts in the former category and not the latter can plead frustration.

It is worthy of note that millions of contracts have been entered into around the world. What happens when everyone begins to plead frustration by COVID-19? The law may prescribe a particular outcome but the public policy may propose another. Courts have in many cases adopted a public policy approach in limiting the applicability of strict legal principles. A typical example is the neighbour principle in the law of torts. This principle places a duty on a person to avoid acts which he can reasonably foresee is likely to injure his neighbour. In another case, the court reiterated that strict adherence to the neighbour principle will open the flood gate for litigation. Hence the court held that in addition to the neighbour principle, the duty would be imposed if it is fair, just and equitable to impose a duty in the circumstances.

What will be the approach of the courts when presented with COVID-19 frustration cases? Well, the writer will not purport to give prophecies of what Judges will say. The altar of the court awaits the lamentations of the people.