The worldwide outbreak of the Corona Virus Disease (COVID-19) has disrupted trade2 and stifled the economy of many Countries. In a bid to contain the spread of the virus, Governments of affected countries have imposed various restrictions which include stay at home orders for persons and businesses who are not providing essential services, restrictions on public gatherings, closure of entertainment outlets, closure of borders and travel bans, amongst others. The consequence of these restrictions has been catastrophic to cash flow projections for many businesses, especially SMEs. 2 Inevitably, there would be repayment delays or outright inability to repay loans4 or credit facilities taken before the pandemic despite several interventions by the Government. 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 a creditor's debt recovery action.
Debt Recovery Litigation
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. In the case of Eco Bank Plc V. Udo5, the Court of Appeal defined a debt as 'a specific sum of money due by agreement or otherwise'. It was held that the action of debt lies where a party claims the recovery of a debt; that is, a liquidated or certain sum of money due to him. 6 It is settled law that the onus lies on he who asserts that money is owed to prove. 7
Amongst the many severe impacts of the pandemic on the economy is the impact of debt recovery and financial/loan transactions. With the decline in business operations and loss of revenue, many businesses and individuals alike are finding it difficult to fulfill their financial obligations to their creditors majorly because of low cash flow. The real problem lies in the creditor's enforcement of its right to payment of such debts under the contracts.
The court set out the primary pre-condition to the payment of a debt in the case of Wema Bank PLc. v. Osilaru8 when it stated that a debt is payable either on demand, or on notice given or upon any other condition agreed upon by the parties. 9 For instance, once a banker makes a formal demand for payment of a loan which has become due and payable, and the customer refuses to pay within a stated deadline or a reasonable period, the banker's cause of action for debt recovery would accrue. 10
In view of the above, the question that begs to be answered is whether creditors can enforce their rights to payment amidst the adverse effect of the COVID- 19 pandemic? This would largely depend on the provisions of the contract between the parties.
The Effects of Force Majeure
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.
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. 11 Three factors that ought to be considered for the application of force majeure are that the event was an unforeseeable event, an external event and an unavoidable event. 12
The concept of Force Majeure however does not have a 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 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. So regardless of whether a contract contained a force majeure clause, the principle of 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.
In the case of Davis Contractors Ltd v Fareham Urban District Council  AC 696, The test for a frustrated contract was defined by Lord Radcliffe where he stated that;
...frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. ... It was not this that I promised to do.
Flowing from the above definition, the doctrine of frustration will only avail parties where the unforeseen event substantially made performance of the contract impossible such that any performance would deviate from the general intention of the parties to the contract. It must also be proven that the frustrating event has led to the fundamental basis of the contract being dislodged. In the case of Urban Archaeology v. 207 East 57th Street, 34 Misc.3d 1222(A) (N.Y. Co. 2009), Justice O. Peter Sherwood of the New York County Commercial Division rejected an argument that the doctrine should apply in the case of a severe economic crisis. In that case, a Manhattan commercial tenant brought a claim for declaratory judgment, arguing that its performance under a lease was impossible because of the nationwide economic crisis in 2009. The tenant supported its argument by citing an out-of-state federal court decision embracing a similar argument and an economist's analysis opining that the "'economic tsunami'" sweeping the country was "'unforeseeable as to its occurrence'" or its "'extent and length.'" The court rejected this argument and dismissed the tenant's claim, reasoning that the tenant, a sophisticated commercial party, could have anticipated financial disadvantage, even if not its "precise cause or extent." The court observed that allowing the doctrine to apply because of the crisis would allow "'every debtor in a country suffering economic distress [to] avoid its debts."
In the Nigerian case of Malik V. Kadura Furniture & Carpets Co. Ltd, 14 the court highlighted some instances that may constitute frustration. These instances include 15 subsequent legal changes or statutory impossibility, outbreak of war, destruction of the subject matter of the contract or literal impossibility, Government requisition of the subject matter of the contract and cancellation by an unexpected event. Whether force majeure or the doctrine of frustration will apply to loan agreements will be determined based on the peculiar facts and circumstances of each case as well as the agreement of the parties.
The Relationship between Force Majeure, frustration and Debt Recovery
It is trite that a creditor is entitled to receive payment as at when due. The right crystallizes upon the creditor making a demand for the outstanding sums due from the debtor. 16 In view of the effects of the COVID-19 pandemic, 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 noteworthy to state that in Nigeria, force majeure 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. 17 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. 18 In doing so, the court has to consider and balance the competing interests of the parties. The interest of the creditor/lender who requires the funds for business survival as well as the interest of the borrower whose means of livelihood may have been affected by the pandemic and in turn impaired his ability to repay the loan. However, even if COVID-19 qualifies as a 'force majeure' event or an event frustrating the contract, it may become necessary for a borrower to establish and factually prove that the pandemic caused the borrower to be unable to perform its obligations under the loan documents. In the case of Wuhan Airlines v. Air Alaska, Inc., 97 Civ. 8924 (JSR), Air Alaska attempted to excuse its failure to deliver an aircraft to Wuhan under a lease by relying on the lease's force majeure clause. However, the court pointed out that the clause excused performance for disasters such as explosion, sabotage, flood and other events resulting in destruction of the aircraft. The court held that a dispute between the parties did not constitute an event specifically listed in, or even one like those listed in, the force majeure clause. Accordingly, the court ruled that the force majeure clause did not excuse Air Alaska's failure to perform.
In the absence of a specific 'force majeure' clause, the Borrower may seek to rely on the doctrine of frustration to escape contractual obligations in a common law jurisdiction like Nigeria. Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform, 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. In the Nigerian case of Attorney General, Cross River State Vs Attorney General of the Federation, 19 the Respondent pleaded that it was unable to perform the contract due to intermittent strike action embarked upon by its factory workers and on appeal, the court held that the strike action did not amount to frustration.
It is important to state that a contract is not deemed frustrated merely because its execution becomes more difficult or more expensive than either party originally anticipated or that it has to be carried out in a manner not envisaged at the time of negotiation of the contract. This was the decision of the court in the case of Â Revenue Mobilization, Allocation & Fiscal Commission Vs Units Environmental Sciences Ltd. 20
Government Policy Measures
The Central Bank of Nigeria in a bid to cushion the impact of the COVID-19 pandemic came up with helpful policy measures21 relating to the status of unpaid loans. By the said policy, all CBN intervention facilities were granted a yearlong moratorium extension, 22 interest rates on all applicable CBN intervention facilities were reduced from 9% to 5%,23 and there was announced the availability of credit facilities to SMEs and entities that have been strongly affected by the virus to the tune of 50 billion naira. The policy also opened up the CBN intervention facilities to pharmaceutical companies intending to expand/open their drug manufacturing plants in Nigeria as well to Hospital and Health care practitioners who intend to expand/build the Health facilities to first class centers. All Deposit Money Banks (commercial banks) were granted leave to consider temporary and time-limited restructuring of the tenor and loan terms for businesses and households mostly affected by the outbreak of the COVID-19 particularly oil & gas, agriculture and manufacturing businesses. 24
In essence, this respite does not mandate commercial banks to grant interest concessions or restructure loan terms but allows them to consider overall restructure of their existing loan contracts as per tenor and loan terms due to the pandemic whilst maintaining the Bank's financial strength and the overall financial stability of the system. It therefore appears that in Nigeria, one may not be successful in an argument to avoid liability as a debtor to a commercial bank where such argument is based on the CBN policy measures on Banks restructuring facilities.
In addition to the above, the Federal Government of Nigeria granted a repayment moratorium of three months for all governmental loan funding facilities including all loans issued out through the Bank of Industry, Bank of Agriculture and the Nigeria Export Import Bank. 25 Financial institutions were directed to discuss with international and multilateral development partners, and negotiate similar concessions for the borrowers in a bid to address current liquidity constraints. 26 . Similarly, the Government of the United Kingdom came up with a Coronavirus Business Interruption Loan Scheme (CBILS) for SMEs 27 which involves large facilities to the tune of 5 million pounds to aid SMEs to meet up with their financial obligations and liabilities. The CIBLS also provides a partial guarantee of up to 80% against outstanding facility balances. In India, the Reserve Bank of India (RBI)'s announcement on March 27, 2020 of 'Covid-19 – Regulatory Package' (Regulatory Package) has provided much-needed succor to liquidity-starved borrowers. 28 The RBI Regulatory Package grants the following significant reliefs:
- Moratorium of three months on payment of all installments falling due between March 1, 2020 and May 31, 2020, in respect of all term loans (Moratorium)
- Restraint on degradation of asset classification of the loan accounts availing the benefit of Moratorium (Asset Classification)
Recent decisions of the High Court of Bombay (Bombay HC) and the High Court of Delhi (Delhi HC) touch upon the impact of the Regulatory Package with regard to borrowing transactions. 29 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. 30
In a 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, the Court granted interim injunction restraining lenders action of enforcement of pledge of shares upon occurrence of a payment default by the borrower under the lending documents and observed that present Covid-19 situation/lockdown has badly affected the market leading to fall in stock prices of the pledged shares and therefore allowing enforcement of pledge of such shares at their plummeted prices (due to the prevailing Covid-19 outbreak) will cause loss to the borrower and may put the borrower in commercially perilous position. 31 The aforesaid judgment by the Bombay HC was challenged by way of a special leave petition in the Supreme Court (SC). The apex court has observed in its order dated April 17, 2020 that the interim nature of the order is not likely to be interfered with under Article 136 of the Constitution and has accordingly dismissed the special leave petition. 32
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. With regards to short term business loans that ought to have been repaid within the period when lockdown was imposed by the Nigerian Government, but could not be repaid, a debtor may structure his arguments against drastic recovery actions of the Creditor in line with the fact that he/she has not committed a 'willful' default and the situation was beyond his/her 'reasonable' control. The argument that the contract has been frustrated or that a force majeure event occurred that made the fulfillment of the debtor's obligation impossible is for the debtor to make but at the end, it would behoove on the judge to decide where the pendulum tilts.
These are undoubtedly bleak times for parties in financing arrangements and payment defaults are inevitable soon as a result of business disruptions caused by the pandemic. There is no doubt that upon full resumption of the courts 33 there would be a floodgate of debt recovery actions with debtors citing force majeure or frustration as a basis for a relief . These defaults would prompt applications for summary judgment, receivership applications, foreclosure of mortgaged properties, mareva injunction applications and such similar reliefs. However, each case will be determined based on its own facts, contract provisions and the prevailing circumstances of each case.
The writers 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 business rescue for the debtor's business.
1 BBC, 'US oil prices turn negative as demand dries up', https://www.google.com/amp/s/www.bbc.com/news/amp/business-52350082, accessed May 14th, 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 18th May, 2020
3 ILKHA, 'Lebanon announces bankruptcy', https://ilkha.com/english/world/lebanon-announces-bankruptcy-7492, accessed May 14th, 2020.
4(2012) JELR 34945 (CA)
5 See also Olazi Int'l Commercial Company Nig. Ltd V. Ume (2012) LPELR-20855(CA) and NIPOST V. Irbok Nigeria Ltd. (2006) LPELR-7701(CA)
6 It is he who is asserting that money is owed to him who has the duty of proof. It may be incongruous to good practice of law for one party to ask the court to pronounce that he is not owing the other in a transaction they both entered into. The rule is that the burden of proof always rests on the party who asserts the affirmative of the issue not the negative. As was said by Viscount Mangham in Joseph Corporation Ltd. (1942) A.C.154 at 174. See also SBN Plc & Anor. v. Crown Star & Company Ltd. & Anor (2002) LPELR-7164(CA) and .P.S. v. Irbok Nig. Ltd. (2007) WRN (VOL.18) 64 at 80 Lines. 5 -10 (CA)
7(2008) WRN (Vol. 4) 160 at 169 - 170, P. 186; lines 25 - 35 (CA)
8 See also Ishola v. SGB (Nig.) Ltd. (1997) 2 NWLR (Pt. 488) 405; (1997) 2 SCNJ 1, BON v. Akorede (1995) 1 NWLR (Pt. 374) 736, NDIC v. Oranu (2001) 18 NWLR (Pt. 744) 183.
9 See the case of Amede v. U.B.A (2008) 8 NWLR (Pt.1090) 623 at 659, paras. A-C. (CA), Thadant v. N.B.N. Ltd. (1972) 1 SC 105; First Bank of Nigeria v. Karusta-Akporido (1996) 8 NWLR 469) 755.
10 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
11 M. Hargrave, 'Force majeure', https://www.investopedia.com/terms/f/forcemajeure.asp, accessed May 12th, 2020. Also see https://www.icc-austria.org/en/Service/Drafting-import-export-contracts/Force-Majeure.htm, accessed on May 20, 2020
12 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.19/5/2020
13 (2016) LPELR-41308(CA)
14 see also Davies Contractors Vs Fareham NDC (1956) AC 696, Akanmu Vs Olugbode (2001) 13 WRN 132, Diamond Bank Ltd Vs Ugochukwu (2008) 1 NWLR (Pt 1067) 1, Okereke Vs Aba North LGA (2014) LPELR-CA/PH/179/2004.
15 NIPOST V. Irbok Nigeria Ltd. (2006) LPELR-7701(CA)
16 https://www.pinsentmasons.com/out-law/guides/covid-19-force-majeure-clause accessed 19/5/2020
17 Attorney General, Cross River State Vs Attorney General of the Federation (2012) LPELR-SC.250/2009
18 (2012) LPELR-SC.250/2009
19 (2010) LPELR-CA/A/213/09. See also Okereke Vs Aba North LGA supra.
20 FPR/DIR/GEN/CIR/07/049 Circular to deposit money banks and the general public on the CBN policy measures in response to covid-19 outbreak and spillovers, issued on March 16 2020.
21 intervention facilities are to restructure their terms and extend by a year as granted, effective from March 1, 2020
22 Intervention facilities are ordered to reduce interest rates from 9% to 5% on all of their beneficiaries for one year, effective as from March 1, 2020
23 Business Continuity Challenges and Accessing the Covid 19 CBN Intervention Fund, a Webinar organized by PUNUKA Attorneys and Solicitors available at https://us02web.zoom.us/rec/share/ys9JDbTLqjxIUquKsx_cc_ULMrzXT6a80SAY-PRYysou9sA9ULqEb0nil5rO0eU For a more detailed update on the interventions by the Nigerian Government, see Anthony Idigbe, INSOL International- World Bank Group Global Guide chapter contribution on Nigeria available at http://insol-techlibrary.s3.amazonaws.com/31284f28-e387-4a00-839e-65dc0079f60c.pdf?AWSAccessKeyId=AKIAJA2C2IGD2CIW7KIA&Expires=1593021486&Signature=BTiXf1OWhBLjui51cNoKfuADe1I%3D
24 K. Sanni, 'Buhari orders three-month moratorium on TraderMoni, MarketMoni and FarmerMoni loans', https://www.premiumtimesng.com/news/top-news/384807-buhari-orders-three-month-moratorium-on-tradermoni-marketmoni-and-farmermoni-loans.html, accessed May 14th, 2020.
25 R. Okwumbu, 'NEWSCOVID-19: FG grants 3 months moratorium for repayment of all govt funded loans', https://nairametrics.com/2020/03/29/covid-19-fg-grants-3-months-moratorium-for-repayment-of-all-govt-funded-loans/, accessed May 14th, 2020.
26 https://www.clydeco.com/insight/article/covid-19-and-loan-facilities-update-for-corporate-borrowers-during-the-coro accessed on 18th May, 2020
27 HSA Advocates publication, "COVID-19 and its Aftermath, Impact on Financing Transactions" RBI's COVID-19 Regulatory Package.
32 The Chief Justice of Nigeria (CJN) who doubles as Chairman of National Judicial Council (NJC) ordered all the Courts in the country to shut down from Tuesday the 23rd March, 2020. Presently, courts are gradually resuming physical court sitting with stringent health measures and social distancing rules in place.
33 See the cases of Mbas Motel Ltd. v. Wema Bank Plc. (2013) LPELR-20736(CA); Isyaku v. Ugwu (2017) LPELR-43117(CA)
Originally published June 29, 2020.
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