AUTHORS: Oluwatosin Odebiyi, Joan Monye and Sharon Juwah
INTRODUCTION
The Nigerian Ports Authority has opted to take one hundred percent of the financial burden of waivers at the seaports and have gone a step further to issue credit notes to Port Terminal Operators.[1] The Aviation sector is however not as fortunate as the Nigerian Aviation Handling (NAHCO) in conjunction with other Ground Handling Companies have been at the helm of providing critical handling services to contribute their quota in the fight against COVID-19. This prompts the question- who bears the brunt of such similar fees and expenses in light of the pandemic strain? This article aims to review the effect of COVID-19 on contractual obligations in existing contracts in the maritime and aviation sectors.
SCOPE OF FORCE MAJEURE CLAUSES IN COMMERCIAL CONTRACTS
It is an elementary principle of law that where parties have entered into a contract or an agreement, they are bound by the provisions of the contract or agreement. This is because a party cannot ordinarily resile from a contract or agreement just because he later found that the conditions of the contract or some events relating to the execution of agreement are not favourable to him, subject to certain exceptions such as frustration of contract or the doctrine of force majeure amongst others.
A particular event can be regarded as Force Majeure:
- if the contractual provision for force majeure expressly or impliedly mentions the event as an event of force majeure;
- if the contractual obligations are rendered incapable of being performed after the occurrence of the event, and
- if parties have no control over the occurrence and continuance of the event.[2]
As discussed above, a force majeure event is determinable from the provisions of the contract. In many instances, events such as ‘outbreak of disease’, ‘epidemic’, ‘lockdown’ or ‘pandemic’, may be listed as triggering event in the Force Majeure clause. In such cases, it is likely that the COVID-19 pandemic shall be deemed to be a Force Majeure event. On the other hand, where no relevant event is specifically mentioned, the intention of parties will have to be looked at, otherwise, a non-performing party cannot rely on the defence of force majeure. This is because in a contract, the best source material to determine the expressed intention of the parties is the contract itself.[3] In the case of Layadev. Panalpina World Transport Nig. Ltd(1996) LPELR-1768(SC), the apex court held inter alia –
“The general rule is that where the parties have embodied the terms of their agreement or contract in a written document as it was done in this case, extrinsic evidence is not admissible to add to, vary, subtract from or contradict the terms of the written instrument. See Glaloye v. Balogun (1990) 5 NWLR (Pt. 148) and Union Bank of Nigeria Ltd. v. Gzigi (1994) 3 NWLR (Pt. 333) 385. So, where the parties enter into a contract, they are bound by the terms of that contract and it is unfair to read into such a contract the terms on which there was no agreement”
In the past, similar events such as SARS and Ebola have occurred, but interestingly the law in relation to pandemic/epidemic and Force Majeure is still not settled. There is hardly any case law that may be considered even indicative or purposive for the same. However, in a few cases, executive orders to stop production, supply or manufacturing have been deemed to be force majeure events.[4] Similarly, travel restrictions, lockdowns, suspension of free movement, can be argued for claiming force majeure.
Effectively, the option of either suspending, terminating the contract or waiver of damages/penalty for non-performance by the parties is hinged on a contract that is tailor-suited to cover scenarios like pandemics or epidemics under the respective force Majeure clauses. For example, at the time of outbreak of Spanish Flu (in 1918), in 1921, the Illinois Supreme Court in Phelps v. School District No. 109, Wayne County,[5] held that an epidemic was not an Act of God that would allow the school district to avoid paying teachers who were ready, willing, and able to teach, but were prohibited from doing so by school closures. In contrast to this, the North Dakota Supreme Court in Sandry v. Brooklyn School District No. 78 of Williams County[6] held that a school district was excused from paying a driver for his services during the school closure, by determining that the pandemic was an Act of God and that non-payment be exempted.
In the absence of a force majeure clause,[7] the common law principle of frustration entitles parties to suspend obligations pending the resolution of the said event hindering the acting of either party. This means that parties are at liberty to determine the contract at first instance. Regardless of the pandemic, if the existing contracts do not contain force majeure clauses and effects of the pandemic are not sufficient to frustrate the contract, such contracts would continue to subsist. An instance is a contract guiding maintenance of vessels in a maritime agreement.
EFFECTS OF COVID-19 ON EXISTING CONTRACTS IN AVIATION
A downside effect of the pandemic concerning the financial affairs of airlines is the failure of airlines to refund flight tickets to all passengers whose travelling has been canceled. The pleas of a large populace are urging the Supreme Court to declare the action of airlines not fully refunding canceled tickets as illegal and also in violation of the Civil Aviation Requirement.[8] In addition, in aviation agreements, there is a clause that may vitiate the concept of force majeure. It is known as the Hell or High Water clause which stipulates that regardless of any prevailing or eventual circumstances, the lessee’s obligation to pay rent on an unconditional basis throughout the lease subsists.[9] In essence, the effects of the pandemic would not vitiate any standing lease agreement.
EFFECTS OF COVID-19 ON EXISTING CONTRACTS IN MARITIME SECTOR
The Off hire clause and other clauses in the time charter party may specify the circumstances which could cause the ship to become off hire and payment of hire to be reduced.[10] The Off hire clause can also be known in some charter parties as a “Suspension of hire” clause. Most Time Charter party agreements contain clauses that run for a stipulated number of days else the defaulting party is liable to the other party in penalties or damages. However, if there is a breakdown of the main engine but the ship is waiting outside a port waiting for a berth, the vessel is not off-hire.
In the case of Classic Maritime Inc. v. Limbungan Makmur[11] the defendant in the relied on force majeure to excuse or permit them from performance in the contract. The court held[12] that ….Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be Responsible for loss or damage to, or failure to supply, load, discharge or deliver the cargo resulting From Act of God, act of war, act of public enemies, pirates or assailing thieves; arrest or restraint of princes, rulers or people; embargoes; seizure under legal process, provided bond is prompt; floods; fogs; fires; epidemics; quarantine etc
The inclusion of a Contagious Disease Clause (IOCD) permits the owner of a vessel to refuse to proceed or remain at a port which is deemed an affected area. In this case, an area infected or overrun with cases of the COVID-19. This must be done in tandem with what the Masters or Owners would reasonably do in the same or similar circumstances. In this event, the choice to refuse to proceed or remain at a ‘safe’ area regardless of timelines in the charter or agreement will not amount to a breach of same. [13] The Charterers shall indemnify the Owners if after the currency of this Charter Party any delays, costs, expenses or liabilities whatsoever are incurred as a result of the Vessel having visited an Affected Area during the currency of this Charter Party.
CONCLUSION
Generally, for other sector basic contracts such as Risk allocation (liability, indemnity, warranties, etc.), Airline conditions of carriage, Marketing and distribution contracts, Interline agreements, Code share agreements[14], Maintenance and catering agreements, Jet fuel purchase agreements, Ground handling agreements, Dry, wet and damp leases and even blocked space agreements, the principles of force majeure and frustration may either suspend or terminate such agreements due to the current circumstances.[15]
The fact remains that in the economy and especially in the aviation and maritime sector, no one can really answer the question as to who pays for COVID 19 and its lingering effects. The economic damage is quite substantial. There is a clear need for re-negotiation and addressing the issue of Force majeure and frustration viz a viz contractual obligations.
[1] I. Okele, ‘NAHCO explains why it cannot bear brunt for 100% demurrage waiver’, https://businessday.ng/coronavirus/article/nahco-explains-why-it-cannot-bear-brunt-for-100-demurrage-waiver/last accessed on May 28th, 2020.
[2]See C.G.G. (Nig) Limited v. Anthony Augustine &Ors(2010) LPELR-8592(CA)and;Globe Spinning Mills (Nig) Plc v. Reliance Textile Industries Ltd(2017) LPELR-41433(CA)
[3]Edet v. Chagoon (2008) 2 NWLR (Pt. 1070) 85 at P. 101, paras D – E
[4]Malik v. Kadura Furniture & Carpets Co. Ltd(2016) LPELR-41308(CA);
[5]134 N.E. 312, 312 (Ill. 1922).
[6]182 N.W. 689, 690-91 (N.D. 1921); Farris, A. and Chee, H., 2020. Contract Performance During Pandemic: Lessons From 1918 – Law360. [online] Law360.com. Available at: <. [online] Law360.com. Available at: < https://www.law360.com/articles/1264775/contract-performance-during-pandemic-lessons-from-1918>Last accessed on 31st of May 2020.
[7] G.N Nwaolisah v. Paschal Nwabufoh (2011) LPELR-SC.211/2003)
[8]Yash shukla , ‘Supreme court to decide on full refund of canceled air tickets during covid-19 lockdown’ <https://www.financialexpress.com/lifestyle/travel-tourism/supreme-court-to-decide-on-full-refund-of-canceled-air-tickets-during-covid-19-lockdown/1934367/> accessed on 29th May, 2020
[9]https://www.kinstellar.com/insights/detail/1059/regional-covid-19-as-force-majeure-in-aviation-contracts-comparative-analysis-across-10-jurisdictions accessed on 21st May, 2020
[10]http://shipinspection.eu/off-hire-clause/ accessed on 29thMay, 2020
[11] SDN BHD [2019] EWCA Civ 1102
[12]Under a COA between Classic Maritime Inc. (“Owners”) and Limbungan Makmur SND BHD (“Charterers”), the Charterers agreed to supply and load 59 shipments of iron ore pellets from Brazil to Malaysia between 2009 and 2017. The cargo was to be supplied from one of two ports: (i) Ponta Ubu with SamarcoMineracao SA (“Samarco”) as the shipper or (ii) Tubarao with Vale SA (“Vale”) as the shipper. On 5 November 2015, a dam at Samarco’s mine burst, causing one of Brazil’s worst environmental disasters. Samarco’s iron ore production was immediately stopped and shipments from Ponta Ubu were suspended. Charterers tried to arrange for a supply of cargo from Tubarao, however, Vale did not provide any for reasons unrelated to the dam burst. Charterers were, therefore, unable to fulfil the remaining five shipments under the COA. Owners sought damages from Charterers for the lost freight.
[13]https://iclg.com/briefing/11497-covid-19-understanding-contractural-issues-in-africa-s-maritime-industry#_ftn11 accessed on 21stMay, 2020
[14]https://www.hklaw.com/en/insights/publications/2020/04/carrier-obligations-to-make-covid19-related-flight-refunds accessed on 20thMay, 2020
[15]https://www.nortonrosefulbright.com/en/knowledge/publications/895cf5ba/covid-19-and-the-practical-implications-for-the-global-aviation-industry accessed on 22nd May, 2020.
