ALP Legal Alert

COVID-19 impact on parties’ contractual obligations to be assessed on a case-to-case basis: Jackson Kabikire Mubangizi v. Housing Finance Bank [2021] UGCommC 19

By ALP Advocate
on
June 25, 2021

High Court holds obiter dictum—in an application for leave to defend a summary suit—that, for purposes of vitiating contractual obligations, the economic impact of COVID-19 shall depend on the provisions of the contract and the unique circumstances of each case.

COVID-19 impact on parties’ contractual obligations to be assessed on a case-to-case basis: Jackson Kabikire Mubangizi v. Housing Finance Bank [2021] UGCommC 19


Brief facts

The Applicant took out a salary loan from the Respondent Bank while he was employed with the Uganda National Bureau of Standards. Subsequently, his employment was terminated but he continued to service the loan from alternative sources of income. However, due to the adverse effects of the COVID-19 pandemic lockdown, the Applicant’s alternative sources were not providing sufficient money and he could no longer service the loan. The Respondent Bank filed a summary suit before the High Court (Commercial Division) under Order 36 of the Civil Procedure Rules for recovery of the loan sum and costs. The Applicant filed an application for unconditional leave to file a defence to the summary suit under Order 36, rules 3 and 6 of the Rules. In reply to the application, the Respondent Bank averred that the loan account was in arrears for 160 days at the time of filing the suit; the Applicant does not disclose whether the defence disputes the whole or part of the claim; the Applicant unequivocally admits to having defaulted on the loan; and the Applicant has no plausible defence to the claim.

The application was heard by the Court on May 26, 2021. The issue to be resolved was whether the Applicant had sufficient grounds to warrant grant of unconditional leave to file a defence to the suit on account that the Respondent Bank had been inconsiderate in calling up the loan without taking into account the adverse impact of COVID-19 on his income flows.

Ruling of the High Court

The Court rendered its ruling on the application on May 27, 2021. The Court considered the Applicant had not denied being indebted to the Respondent Bank, save the reason for his application and need to defend the suit was that his sources of income were affected by the COVID-19 lockdown. The Court noted that while it takes judicial notice of the adverse effects of COVID-19 on businesses, the relationship between the Applicant and Respondent Bank was contractual and it was governed by the loan agreement entered into by the parties. In the Court’s view, as per the loan agreement, a singular incident of failure to pay constituted a default entitling the Bank to automatic termination of the loan agreement. In the end, the Court held the application failed to establish a defence to the suit to entitle the Applicant to be granted leave to defend the suit as required under the civil procedural law. In obiter dictum, the Court implied that before the economic effects of COVID-19 can be relied upon to relieve a party of contractual obligations, regard will be given to provisions of the governing contract and the unique circumstances of each case. In the case before it, the Court felt the COVID-19pandemic “does not provide sufficient ground to vitiate contractual obligations that the parties entered into”.

Approach of other jurisdictions to the impact of COVID-19 on contractual obligations

It is evident from the High Court’s ruling it is the settled position that the facts of each case shall be considered before courts reach a decision as to whether COVID-19indeed adversely affected contractual obligations. It is not a “one size fits all”.

With most countries putting in place COVID-19 prevention measures—in form of lockdowns and restrictions on movement—most economic activities and businesses have taken a hit and this has affected their capability to execute financial obligations in contracts executed prior to the pandemic. From his arguments in the Mubangizi case, the Applicant made aveiled claim that the impact of COVID-19 is a force majeure event that made it difficult for him to perform his loan obligations; and because of this, he sought to be granted leave to file this as a “defence” to the suit. We consider similar decisions in other jurisdictions in which COVID-19 has been raised as defence to the non-performance of contractual obligations on basis of force majeure or otherwise.

A case-to-case assessment of the impact of COVID-19 on contracts is evident in the decisions of courts. Firstly, courts have inquired if the contract or agreement had a force majeure clause. In Kenya Union of Commercial, Food and Allied Workers v. Tusker Mattresses Limited, Cause No 199/2020 [2020] eKLR, the defendant sought to justify its non-performance as a result of force majeure. The Employment and Labour Relations Court held: “Whereas the COVID-19 pandemic was unforeseeable, it is clear that the collective and recognition agreements had no force majeure clause.” A similar approach was taken by Paris Court of Appeals in Electricité de France v.Total Direct Energie & Others (2020) in holding COVID-19 pandemic constituted a force majeure event justifying suspension by Total Direct Energie of a framework agreement (for the purchase of nuclear electricity) as soon as this event occurred. It ruled that the COVID-19 pandemic must be considered a force majeure event, given the broad definition of force majeure provided for in the framework agreement insofar as it clearly provides for suspension of the agreement to take effect upon occurrence of a force majeure event, which "automatically" results in the interruption of the annual electricity sale. The Paris appellate court had upheld the decision of the Paris Commercial Court and, in recognition of COVID-19 as a case of force majeure, the two decisions demonstrate the attention courts give to the wording of contractual force majeure clauses.

Secondly, the courts have inquired if the contract is incapable of performance in light of the obligations of the parties. In Kenya Union of Commercial, Food and Allied Workers case, the Employment Court noted that the contractual clause, that is the subject of performance, is the statutory and contractual clause that the respondent negotiates and consults the claimant if salaries, wages, and other benefits are to change. It held that the respondent has not shown how theCOVID-19 situation made it “difficult for it to negotiate and consult”, and that, in the circumstances, “there is …no unforeseeable circumstance that prevented the respondent from fulfilling the contractual clause to consult and negotiate with the claimant prior to effecting the change by way of reduction of wages or salaries.” In a similar vein, in Federated Airline Staff Association v Air Terminal Services [2020] FJHC 479—in which the respondent issued termination of letters to almost all its employees on account of a 95%reduction in business owing to suspension of international flight services due to the COVID-19—the High Court of Fiji noted that a collective bargaining agreement cannot be frustrated as it undermines the employer’s statutory duty to consult a union in a collective bargaining process. On the other hand, in Moses Kamau & 6 Others v Signature Holdings (EA) Limited, Cause No 191/2020 [2020] eKLR—in which the respondent suspended all contractual benefits save for health cover and sent employees on unpaid leave without salary for an indefinite period—the Kenya Employment Court conceded that since the COVID-19 pandemic measures had resulted in closure of bars and restaurants, it may be possible that performance of contracts have been frustrated since the business was no longer in operation. However, it noted that any variations in employment contracts might be required to comply with the statutory obligations to consult under the Employment Act2007. Whether employment contracts were frustrated and there was breach for variation of contract was reserved for determination on the merits. In Standard Retail Pvt Limited v G.S. Global Corporation & Others, Commercial Arbitration Petition (L) Nos 404-408/2020,the High Court of Bombay refused to issue orders to restrain a bank from negotiating and encashing letters of credit on the premise of COVID-19 pandemic lockdown and for the contracts of sale to be considered as unenforceable owing to frustration. While the court noted that the contracts for supply of steel products were subject to force majeure clause, there was performance of the contracts as goods were already shipped from South Korea and distribution of steel was declared an essential service for which there were no restrictions on movement(additionally, ports, container freight stations, warehouses were likewise essential services and there were no container detentions charges on shipments during lockdown). In the end, the Court held that in light of the contracts being capable of performance, the COVID-19lockdown was “not available to resile from contractual obligations of making payments.”

From the decisions above, the other jurisdictions seem to have one thing in common with the decision of the High Court in Mubangizi case in that the impact of COVID-19 on contractual obligations is to be decided on the unique facts and circumstances of each particular case and the express terms of the contract.

Conclusion

The COVID-19pandemic and mitigating measures imposed by the government have caused significant disruptions to businesses, caused unemployment and an adversely negative impact on people’s finances which cannot be ignored. However, this does not mean that it is a magic wand, waved at will to excuse persons from their contractual obligations. Although in some jurisdictions as discussed above, COVID-19 has in some instances been characterized as a force majeure (as long as there is a provision in the contract to that effect) or frustrating factor, it is clear that its impact on contractual obligations shall be considered on a case-by-case basis.


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Disclaimer

No information contained in this alert should be construed as legal advice from ALP East Africa or ALP Advocates or the individual authors, nor is it intended to be a substitute for legal counsel on any subject matter.

For additional information in relation to this alert, please contact the following:

  • Ann Namara Musinguzi

         Head, Corporate & Commercial Department

        anamara@alp-ea.com

  • Rebecca Muheki

         Associate, Corporate & Commercial Department

         rmuheki@alp-ea.com