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Implications of COVID-19 on Contracts: Doctrine of Frustration

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Implications of COVID-19 on Contracts: Doctrine of Frustration 46

Economic activities around the World are almost grounded to a halt due to the Global pandemic, Coronavirus (COVID-19). To ensure the control of the virus in Ghana, the President of the Republic on March 30, 2020, under the Imposition of Restriction Act, 2020 restricted the movements of persons in the Greater Accra and the Greater Kumasi for a period of fourteen days subject to review. Prior to that, some countries around the world had instituted a lockdown, which resulted in most people not being able to go by their normal businesses as they ordinarily do.

This situation has affected business operations, and the likelihood that some contracts or agreements would be affected as a result of this pandemic is very high. All around the world, there are reports of workers being laid off
because of this pandemic. The issue of undischarged contracts would be discussed with the common law
doctrine of frustration.

What is the Doctrine of  Frustration

A contract is said to be frustrated when unforeseen events occur through no fault of the parties, making the performance of obligations arising from the contract physically impossible or radically changing the  nature of the obligations under the contract. This  doctrine is a common law doctrine and the standard used  by the court to determine that a contract has been frustrated is very high. The Court has laid down a  test to determine how a contract can be frustrated.

The  Court does this by:

a) construing the contract itself, that is the nature or type of the contract and relevant  surrounding circumstances existing at the time the  contract was made;

(b) determining the scope and the  nature of the original obligations of the parties to the  contract;

(c) assessing the original obligation after the occurrence of the event; and

(d) determining whether the nature of the original obligation has changed or has become radically different after the occurrence of the event.

The Court has also held that, in the application of this test, events which caused serious inconveniences, hardships, financial delays or losses in the performance of the contract would not be sufficient to constitute frustration of the contract. The doctrine of frustration has the effect of bringing the contract automatically to an end. The Court does not have the power at common law to allow the contract to continue or vary the terms of the contract for the changed situation than the terms contained in the original contract.

The effect of the doctrine of frustration could also be seen in the case of Chandler v Webster. It was held that if
the obligation to pay accrued before the contract, then the debtor must pay in the amount owed. In the situation
where the obligation becomes due after the frustration of the contract, the debtor pays nothing.

This case was overruled in the case of Fibrosa Spolka Akcyjna Fairbairn Lawson Combe Barbour Ltd(The Fibrosa Case). In that case it was held that where money is paid to secure performance of a contract, and the performance fails as a result of the frustration of the contract, the party who paid can recover the amount if there is total
failure of consideration. The Fibrosa case has been criticised on the basis that in the situation where the onsideration has been partly performed, the ratio in the case would not apply. In addition if a party to a contract made some expenses in the beginning to perform the contract he cannot recover such expenses looking at the holding in the case.

The Contract Act, 1960, has managed to deal with this loophole in the Fibrosa case.  The provisions in Section 1, Act 25 were applied in the case of RT Briscoe (Ghana) Limited v Essien, and it was held that where a contract is frustrated, the moneys paid are recoverable. However, they are subject to deductions for reasonable expenses incurred in the
performance of the contract. Can a Party Rely on Covid- 19 to Invoke the Doctrine of Frustration?

Assuming Company ‘A Ltd’ contracts with Company ‘B Ltd’, to supply and install new machinery in their factory. The
contract was executed in February and per the contract, the machinery would be supplied and completely installed
by May. A month after the parties executed the contract; the government through an enactment restricted the
movements of persons in the entire country for about two months. This was because of the outbreak of a novel
disease and a way the government could curb the spread of that disease is to order all persons to stay at home
for that period. People could not go about their daily activities. Meanwhile, one of the obligations that ‘B
Ltd’ was supposed to perform in the contract was to do what is reasonably possible to follow all rules and
regulations that govern the country in the performance of their side of the contract. ‘B Ltd’ was not able to
complete the performance of the contract at the stipulated time; hence, ‘A Ltd’ sued ‘B Ltd’ Company
Limited for breach of contract. ‘B Ltd’ however argues that their contract was frustrated because of the
restrictions imposed by the government.

In a scenario like this, there is a likelihood that the court will deem the contract to be frustrated because of the nature of obligation that ‘B Ltd’ was supposed to perform.The situation would be different from a loan contract
between Mr. “A” and ABC Bank Limited, where the obligation of Mr. “A” is to repay the loan within a specified period of time. Assuming Mr. “A” contracted a loan from ABC Bank Limited to expand his business but because of some government intervention, Mr. “A” is unable to service the loan on time. It would be difficult for Mr. “A” to say his loan contract has been frustrated. This is because, in the loan agreement, the obligation of Mr. “A” was to repay the loan within a certain period.

So, in the instance where Mr. “A” goes for a loan from a bank and he avers that the hardships he faced during the period of COVID-19 have resulted in the collapse of his business, thus his inability to service his loan, the court is unlikely to look at the event that led to Mr. “A” not to fulfill his loan obligation but rather look into the nature of the loan contract and the obligation that Mr. “A” has to fulfill.  The financial hardship or inconvenience Mr. “A”
experienced will not be the reason for a loan contract to be frustrated.

In the case of Barclays Bank v. Sakari, it was explained that, if a bank loans money to a customer, the obligation of the customer is to repay the loan. If the customer uses the money to expand his or her business and the business collapses resulting in financial loss of the customer, the cause of the misfortune though it may not be the fault of the
customer would not change the obligation of the customer to repay the loan. To the court, the obligation of the
borrower in a loan contract as opposed to other types of a contract is to repay the loan.

Therefore, for an affected party to be successful in proving that COVID-19 has frustrated the performance of his or her obligation in a contract, he should be able to pass the test outlined in the case of Fidelity Bank v Anita Asare &
ors.[13]This will bring the contract to an end and do justice between the parties. If there has been some
money paid before the performance of the contract, the money paid is recoverable. However, all reasonable
expenses incurred by a party in the performance of the contract are subject to deductions.

It is for this reason that some parties incorporate into their contracts a suitable force majeure clause. This brings flexibility in the interpretation of the terms of the contract as well as limits the enquiry of the court by focusing
their attention upon the construction of the particular clause at issue rather than relying on the vague notion
and the strict rule of the doctrine of frustration.