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 expression of this goodwill has however, come at great and demanding cost since the lockdown and closure of borders.2 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.
As the world is collectively entangled in fighting the Coronavirus or COVID-19 pandemic3, businesses globally are facing several financial and physical hardships due to the mandatory government lockdowns, restrictions on foreign travel and sealed international borders. One of the major concerns which arose out of this standstill position is whether business will ever go back to 'normalcy' and will parties continue to perform their obligations as agreed under the contracts entered.4This situation has resulted to several discussions around whether or not this pandemic will be treated as 'Act of God' or 'Force Majeure' event, to excuse a party of non-performance of contract or renegotiate the terms of contracts entered into between parties, particularly within the maritime and aviation sector. If so, what are the effects on already issued tickets, carriage of goods or passengers either on air or by sea and what role would Courts play if such non-performing party is sued for breach of contract.
Without an ominous disaster or in this case- pandemic, force majeure clauses are usually treated as a boilerplate term. 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. Force Majeure5 refers to a clause that is usually included in contracts to eliminate the likelihood or possibility for natural and inevitable disasters that may interrupt the expected order of events as well as stop parties (of the contract) from fulfilling their obligations.6 Generally, a Force Majeure event is an event, which the contracting party has no control over and due to which, the contractual obligations cannot be performed. For a Force Majeure claim to succeed, it must be established that the event goes to the root of the contractual obligation and the damage/ failure would not have occurred but for the Force Majeure event. Mostly, a Force Majeure clause is expressly mentioned and will not ordinarily be implied into contracts.
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.7
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.8 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.9 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,10 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 County11 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,12 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. In place of refunding fully, flight tickets to passengers, airlines have issued vouchers that expire in a year or the chance to rebook.13 Some passengers have taken to legal actions to ensure their refunds are effected.14 The United States Congress introduced a new bill that requires airlines to provide a full refund of all flights that have been canceled regardless of whether the passengers canceled the tickets before the general government order to do so. The Cash Refunds for Coronavirus Cancellations Act15 would let airlines pay for the refunds using the signed emergency money provided by the Congress, on the condition that funds intended for employee benefits remains intact.
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. 16 Similarly, under the Code of Conduct of Canada's Airlines, passengers are legally entitled to refunds if a flight is canceled.17 In the United Kingdom18, the Civil Aviation Authority (CAA) is taking action against airlines who refuse to effect refunds, terming the undignifying display as illegal and coy. If a flight is canceled by the airline, passengers are entitled to a full refund back to the original form of payment, even if the airline denies it or if the ticket is nonrefundable.
Interestingly, there are arguments in this line of action. The first being whether the clients who purchased non-refundable tickets are also entitled to refunds. Secondly, many airlines question if they should actually be mandated to refund tickets and wonder if they are not covered by Force majeure as the cancellations are not occasioned by their negligence or through any fault of theirs. Customarily, in both aviation and maritime sectors, tickets purchased by passengers for travel are to be refunded in an instance that the flights are canceled.
In Nigeria, it is the law that whose flight was canceled has a right to reimbursement in cash on both domestic and international flight, subject to contract between the passenger and the airline provider. This right is well encapsulated in section 19.9.1 (i) of Part 19 of the NCAA Consumer Protection Regulations which provides as follows:
19.9.1 Where reference to reimbursement or re-routing is made in this section, passengers shall be provided any of the following choices:
immediate reimbursement in cash for domestic flights and reimbursement within fourteen days for international flights, by the means provided for in sections 19.8.3(mode of payment), of the full cost of unutilized ticket at the price at which it was bought, for the part or parts of the journey not made, and for the part or parts already made if the flight is no longer serving any purpose in relation to the passenger's original travel plan, together with, when relevant, a return flight to the first point of departure, at the earliest opportunity.
Furthermore, section 19.7.1 of Part 19 of the NCAA Consumer Protection Regulations provides that in case of cancellation of a flight, the passengers concerned shall:
(i) Be offered assistance by the operating air carrier in accordance with Sections 19.6. and;
(ii) Be offered assistance by the operating air carrier in accordance with Sections19.9.1(i) and 19.9.2 as well as, in the event of re-routing when the reasonably expected time of departure of the new flight is at least the day after the departure as it was planned for the canceled flight, the assistance specified in Sections 19.9.1(ii) and 19.9.1(iii);
(iii) In respect of domestic flights, have the right to compensation by the operating air carrier in accordance with Section 19.10 unless they are informed of the cancellation at least twenty-four hours before the scheduled time of departure; and
(iv) In respect of international flights, have the right to compensation by the operating air carrier in accordance with Section 19.10, unless:
(a) they are informed of the cancellation at least seven days before the scheduled time of departure;
(b) they are informed of the cancellation between three and seven days before the scheduled time of departure and are offered re-routing, allowing them to depart not more than two hours before the scheduled time of departure and to reach their final destination less than four hours after the scheduled time of arrival; or
(c) they are informed of the cancellation less than seven days before the scheduled time of departure and are offered re-routing, allowing them to depart not more than one hour before the scheduled time of departure and to reach their final destination less than two hours after the scheduled time of arrival.
When passengers are informed of the cancellation, an explanation shall be given concerning possible alternative transport.19 It is noteworthy that an operating airline shall not be obliged to pay compensation for cancellation (subject to the right of reimbursement under section 19.9.1) if it can prove that the cancellation is caused by extraordinary circumstances which could not have been avoided even if all reasonable measures had been taken. The burden of proof concerning any question as to whether and when the passenger has been informed of the cancellation of the flight shall rest with the operating airline.20
To prevent bankruptcy and potential closure of some airlines, regulators may have to step in and stipulate a timeline or guideline for these refunds to be spanned out and eventually effected. Some European Union countries have altogether passed a law21 to suspend the refunds by these airlines for a couple of months.
Hell or High Water Clause
In the aviation sector, there is however 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.22 In essence, the effects of the pandemic would not vitiate any standing lease agreement.
EFFECTS OF COVID-19 ON EXISTING CONTRACTS IN MARITIME SECTOR
Off- Hire Clauses
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.23The 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. In the New York Produce Exchange form the Off hire clause states that if there is loss of time (for one of the agreed reasons) thus preventing the full working of the ship, the payment of hire ceases for the time lost.24 A sterling example is the 'Off- Hire Clause' in Vessel deliveries.25 A vessel shall be deemed to be off-hire when there is a strike of officers or crew members, damage to the haul, grounding26, detention by the arrest of the Vessel (unless such arrest is caused by events for which the Charterers, their sub-charterers, servants, agents or sub-contractors are responsible)27, detention by competent authority for vessel defects, dry docking for the purpose of examination and cleaning and/or painting of underwater parts and/or repair, or by any other similar cause or preventing the full working of the vessel. This phrase, "loss of time", is significant.
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. The breakdown must prevent the full use of the vessel at the time of the breakdown. When the ship is waiting for a berth it is not being "used" by the charterer- payment of hire ceases for the time lost.28 It is important to note that where an event is not specifically named an off-hire event under contract, such event must qualify as a "similar cause" to other events specifically named, and must be capable of "preventing the full working of the vessel, in order to qualify as an off-hire event.
Thus, a government's mandate that a ship be delayed for 14 days before being allowed to berth as a result of a pandemic would generally not trigger the off-hire provision in the time charter party. Precedence for this order can be cited from the negligence of the Egyptian government in a dark period of 1347 to 1349 when Egypt was visited with a Plague killed hundreds and sometimes thousands of people daily during the early years of the Black Death. The dreaded plague slipped into the country through its chief port- Alexandria with Italian merchants on ships coming from Constantinople (Instanbul).29 The vessels carried rats with diseased fleas. This disease was eventually termed an epidemic. The order given by the Nigerian government is to stay a vessel for a period of 14 days and ensure it does not bring infected goods ashore. This ensures that workers and other members of the community are not infected with the dreaded virus. During this period, the ship will be deemed to remain 'on-hire', meaning all contractual and financial obligations and computations will continue to run.
The Status of Cargos onboard vessels
In the case of Classic Maritime Inc. v. Limbungan Makmur30 the defendant in the relied on force majeure to excuse or permit them from performance in the contract. The court held31 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 promptly; floods; fogs; fires; epidemics; quarantine etc.
Payment of Salaries
Unfortunately, an owner of a cargo, vessel or ship may find himself liable for wages of both a crew member who have had to remain on board and for the intended replacement who is about to join or has joined the vessel.
Expiry of Seafarer's Contracts
Contracts binding crew workers, captain often last as long as three months to nine months. As a result of the pandemic, not only have seafarers been ordered to stay ashore, but told to continue to work long hours. Under the International Maritime Labour Law, seafarers have the right to return home at the end of their contract at no cost to themselves. The right however, has been denied seafarers as they are not allowed entry to the countries they have docked, almost as if held captive. Due to inability to rotate, crew have to remain on board - contracts, certification, "overlap" wages. Under the Maritime Labour Convention ("MLC") seafarer's contracts should not exceed 12 months.32 A number of Countries have declared that extensions due to the pandemic will not be challenged.
Contagious Disease Clause (IOCD)
This clause 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 reasonable 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. 33 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.
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 agreements34, 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.35
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.
* Authors are all Associates of Punuka Attorneys and Solicitors
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. The need to keep warehousing services and other related duties in good condition has only been a huge cost due to the challenging circumstances.
3.The World Health Organization ("WHO") declared COVID-19 to be a pandemic on March 11, 2020.
4.Yugandhara Pawar Jha et al,India: Performance of Contractual Obligations During The COVID-19 Pandemichttps://www.mondaq.com/india/litigation-contracts-and-force-majeure/932798/performance-of-contractual-obligations-during-the-covid-19-pandemic?login=true last accessed on 2ndof June 2020.
5. see the case of Diamond Bank Ltd V Ugochukwu (2008) 1 NMLR (Pt 1067) where the court explained the doctrine of frustration would occur where it is established to the satisfaction of the Court that due to a subsequent change in circumstances which was clearly not is the contemplation of the parties, the contract has become impossible to perform.
6. See also the cases of AG Cross River State V. AG Federation & Anor (2012) LPELR-9335(SC), Engineering Limited v Tower Aluminium (Nigeria) Ltd. (1993) 5 NWLR (Pt.295) andAraka v. Monier Construction Company Ltd. (1978) 2 LME
7.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)
8.Edet v. Chagoon (2008) 2 NWLR (Pt. 1070) 85 at P. 101, paras D - E
9.Malik v. Kadura Furniture & Carpets Co. Ltd(2016) LPELR-41308(CA);
10.134 N.E. 312, 312 (Ill. 1922).
11.182 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: <. law360.com.="" available="" at:="" href="file:///C:/Users/OluwatosinOdebiyi/Downloads/%C2%A0https:/www.law360.com/articles/1264775/contract-performance-during-pandemic-lessons-from-1918%3E" target="_blank"> https://www.law360.com/articles/1264775/contract-performance-during-pandemic-lessons-from-1918>Last accessed on 31st of May 2020.
12. G.N Nwaolisah v. Paschal Nwabufoh (2011) LPELR-SC.211/2003)
13. C. Elliot, Refund-related lawsuits against airlines are taking off, but will they succeed?'' <https://amp.usatoday.com/amp/5185753002> accessed on 21st May, 2020
14. A passenger in Chicago sued United Airlines for refusing to issue refunds for a canceled flight despite being able legible for a total refund. Another passenger sued Delta Air Lines for behaving in an unfair manner but turning deaf ears to the outbreak of claims for refunds by passengers.
15. D. Jones, Congress introduced new bill requiring cash refunds from airlines- regardless of who cancels the trip.'' <https://www.google.com/amp/s/www.washingtonpost.com/travel/2020/05/14/congress-introduces-new-bill-requiring-cash-refunds-airlines-regardless-who-cancels-trip/%3foutputType=amp> accessed on 21st May, 2020
16.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
17.https://bc.ctvnews.ca/covid-19-impact-on-flights-are-you-entitled-to-a-refund-for-cancellations-1.4901763 accessed on 28th May, 2020
18. Under European Union Regulation EC261
19.Section 19.7.3 of Part 19 of the NCAA Consumer Protection Regulations
20. Section 19.7.4, Ibid.
25.The BALTIME charter party "Suspension of Hire" clause provides that if certain circumstances hinder or prevent the working of the vessel and continue for more than 24 hours: no hire to be paid in respect of any time lost thereby during the period in which the vessel is unable to perform the service immediately required. The LINERTIME Suspension of Hire clause is in almost identical terms to the BALTIME clause. These are also "net loss of time" clauses but there is a "threshold" of an agreed number of hours after which the ship is treated as being off hire, and the non-payment is for any time lost from the event causing the off hire.
27.The New York Produce Exchange Form (NYPE) 2015
29. George C. Kohn, 'Encyclopedia of Plague and Pestilence: From Ancient Times to the Present' <https://books.google.com.ng/books?id=tzRwRmb09rgC&pg=PA97&lpg=PA97&dq=paris+vessel+1942+infects+the+city&source=bl&ots=hR8O9j-7CW&sig=ACfU3U1sVF2zBtpnwtwAG75fU4eBIH9W1A&hl=en&sa=X&ved=2ahUKEwjz1pzwmdjpAhXbQhUIHa3qAmoQ6AEwAnoECAcQAQ#v=onepage&q=paris%20vessel%201942%20infects%20the%20city&f=false> accessed on May 29, 2020
30. SDN BHD  EWCA Civ 1102
31.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.
32.However, the ITF have stated (E-Circular 087 dated 17 March 2020) that until 16 April 2020, it will not challenge extensions of up to one month, even where they exceed the MLC period or other periods allowable under ITF approved collective bargaining agreements, provided individual seafarers consent to such an extension.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.