Betty Biayeibo, Rukevwe Ekpobedefe and Sharon Juwah

INTRODUCTION

The worldwide outbreak of the Corona Virus Disease (COVID-19) has disrupted trade[1] and affected cashflow projections for many businesses, especially SMEs[2], inevitably leading to repayment delays or outright inability to repay loans[3] or credit facilities taken before the pandemic.  From the creditor’s perspective, due obligations ought to be paid so that he also remains in business, else available remedies to recover such debts would be explored.

This paper seeks to consider the propriety of arguments by the debtor premised on the adverse effect of the COVID-19 pandemic on its business against the legitimate claim of a creditor for the repayment of past due debts.

Debt Recovery Litigation and Force Majeure Arguments

Debt recovery encompasses all steps and actions taken by a creditor to obtain and reclaim monies owed to them which if not amicably handled, often results in litigation. 

On the other hand, the concept of force majeure connotes that no party is liable for any responsibilities contained in an agreement or transaction due to the occurrence of certain events beyond their control.

In view of the adverse effect of the COVID-19 pandemic on businesses, there is likely to be a flood gate of litigation primarily hinged on breach of financial/loan contracts on the part of the borrower. However, it is contemplated that force majeure and the doctrine of frustration would be employed as a defense to such debt recovery actions.

It is pertinent to note that Force majeure as a concept has its origin in French Civil Law. There are express provisions in the French Civil Code which excuse contractual performance where events have happened outside the parties’ control which could not have been foreseen at the time of contracting and which could not have been avoided by appropriate measures.[4]

The concept of Force Majeure, however, does not have general applicability in common law jurisdictions like Nigeria in the sense in which it does under Civil law jurisdictions. In common law jurisdictions, the applicability of the doctrine of force majeure may only be a creation of contract^[5] which a party can rely on if it is a term or clause contained in the contract. Whether the COVID-19 pandemic would qualify as a force majeure event would then depend on the scope and language of the force majeure clause in a contract.

What obtains in common law jurisdictions which can be likened to the force majeure principle which is an intrinsic part of the French Civil Code is the doctrine of frustration which exonerates parties in similar unforeseen and unavoidable situations from fulfilling their obligations under the contract.[6] So regardless of whether a contract contained a force majeure clause, the principle of the frustration of contracts may be invoked in deserving cases. However, this will depend on the peculiar facts of the case and whether the frustrating event is sufficient to render performance impossible or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended, that it would be unfair to hold the parties to their obligations.

It is noteworthy to state that in Nigeria, force majeure arguments will only apply where the contract has a force majeure clause that covers unforeseen events like the COVID -19 pandemic, or the Government imposed lockdown. The nature of the contract, a party’s obligation therein and its duty to mitigate loss which usually entail all reasonable endeavors undertaken by the Borrower to perform its obligations would be considered and the Borrower would be expected to establish its bona fide intention in this regard. [7] Conversely, the doctrine of frustration may also be raised to invoke the equitable jurisdiction of the court in deserving circumstances notwithstanding that there is no contractual clause exculpating parties from the performance of their contractual obligations.

It is the duty of the court to determine whether or not a contract has been frustrated or if a force majeure clause has come into effect.[8] In doing so, the court has to consider and balance the competing interests of the parties.

It appears that the Indian courts are recognizing the current COVID-19 situation as a supervening event that impairs or affects the ability of borrowers under loan agreements. The underlying principle is that the borrowers have not committed a ‘willful’ default and the situation is beyond the ‘reasonable’ control of the borrower and these circumstances could not have been pre-empted or mitigated by the borrower.[9]

Whilst the Indian courts appear to have taken a borrower-friendly position, the fact remains that debt recovery litigation in Nigeria would fail or succeed on the strength of the evidence adduced by the parties and the compelling nature of one party’s arguments in line with established laws and practices on the subject.

CONCLUSION

The authors take the view that restructuring of loans and credit facilities may be a desirable alternative which creditors may need to consider as this would put a human face to their business since in reality the COVID-19 pandemic was not foreseen or avoidable and its impact on businesses all over the world is very obvious. Dialogue and mutual concessions may be explored with focus on the business rescue for the debtor’s business.

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DISCLAIMER– The views expressed in this article are those of the authors and not of the firm. Also note that this article does not constitute legal advice.

[1] According to World Bank forecasts, the global economy will shrink by 5.2% in 2020, see World Bank June 2020 Global Economic Prospects, “COVID-19 to Plunge Global Economy into Worst Recession since World War II”, Press Release of June 8, 2020 retrieved from https://www.worldbank.org/en/news/press-release/2020/06/08/covid-19-to-plunge-global-economy-into-worst-recession-since-world-war-ii, Accessed on June 28, 2020.

[2] https://www.forbes.com/sites/pamdanziger/2020/04/03/retail-companies-on-death-watch-is-growing-fast-as-covid-19-puts-non-essential-retailers-on-life-support/#17b6083625ea accessed on May 18, 2020.

[3]ILKHA, ‘Lebanon announces bankruptcy’, https://ilkha.com/english/world/lebanon-announces-bankruptcy-7492, accessed May 14, 2020.

[4]Norton Rose Fulbright, “Force majeure/hardship clauses and frustration in English law contracts amid COVID-19”, March 2020 publication retrieved from https://www.nortonrosefulbright.com/en/knowledge/publications/b54cf723/force-majeure-hardship-clauses-and-frustration-in-english-law-contracts-amid-covid-19, Accessed on May 20, 2020

[5]Micheal Pokinghome and Charles B Rosenberg, Paris Energy Series No. 9: Expecting the Unexpected: The Force Majeure Clause published in February 2015 (Whitecase.com,2015) Retrieved from <https://www.whitecase.com/sites/whitecase/files/files/download/publications/article-paris-energy-series-9-force-majeure-clause.pdf> Accessed on May 19, 2020.

[6] Attorney General, Cross River State Vs Attorney General of the Federation (2012) LPELR-SC.250/2009

[7]https://www.pinsentmasons.com/out-law/guides/covid-19-force-majeure-clause Accessed on May 19, 2020.

[8] Attorney General, Cross River State Vs Attorney General of the Federation (2012) LPELR-SC.250/2009; Â Revenue Mobilization, Allocation & Fiscal Commission Vs Units Environmental Sciences Ltd (2010) LPELR-CA/A/213/09

[9]HSA Advocates publication, “COVID-19 and its Aftermath, Impact on Financing Transactions” RBI’s COVID-19 Regulatory Package. The article also referred to the recent ad-interim judgment dated March 30, 2020, passed by the Bombay HC in the matter of Rural Fairprice Wholesale Limited & Anr v. IDBI Trusteeship Services Limited & Ors, where the court refused an enforcement action on pledged shares over the borrowers default on the basis that the COVID 19 pandemic’s effect had plummeted the price of shares and allowing enforcement currently would cause loss to the borrower and put him in perilous times.