1. Introduction
Following the outbreak of coronavirus (“covid19”) in most States in Nigeria, the governments have banned movement and convergence of people with the exception of essential service providers. This directive has crippled business activities in the non-essential sectors. Businesses now face huge economic challenges as a result of the lockdown. Although a lot of companies are exploring alternative options, including remote working, the pressing issue facing most employers today is how to deal with their contractual obligations to their respective workers in the face of the dwindling economic fortunes of their businesses.
PART I explores possible frustration of employment contracts as a result of the lockdown and economic recession or depression vis-à-vis sanctity of contract, what the employers and workers should consider in the event of any unfavourable eventualities. Subsequent
interventions will address procedures for achieving some of the suggested approaches in Part 1.
2. Frustration of Employment Contract
Generally, where a new law or occurrence of any other event makes it impossible for parties to perform their contractual duties, the contract is deemed frustrated and the parties are discharged from further obligations to each other. This is known as discharge by frustration (usually applied where there is no force majeure provision in the contract which clearly allocates risks between the parties on the occurrence of specified events). The events that may frustrate contract include:
(a) subsequent legal changes;
(b) destruction of the subject matter of the contract;
(c) outbreak of war;
(d) government requisition of the subject matter.
The doctrine of frustration has been applied in employment contract cases by the English Courts, mostly in matters involving permanent incapacity of the employees to resume or continue to work.
From the above and the realities of commercial life since covid19, any argument to invoke the doctrine of frustration of employment contract during the pandemic will necessary proceed on two planks: the lock down law and the economic recession or depression.
1.1. The Lockdown Law
On Sunday, 29th March 2020, President Muhammadu Buhari, in a nationwide televised speech, directed the lockdown of Abuja, Lagos and Ogun States for fourteen (14) days starting from Monday, 30th March 2020 in a bid to curb the spread of the covid19. The lock down was extended for another fourteen (14) days on Monday, 13th April 2020. These directives (made pursuant to the Covid-19 Regulations Nos. 1 & 2 of 2020 referred to as the “lockdown law”) also ordered social distancing, prohibition of movement and gathering of people.
The question now is: does the lockdown law constitute frustration which makes performance of contractual obligations impossible? Whilst it is plausible to ground any argument of frustration upon an event which makes contractual obligation permanently impossible of performance, it is however difficult, in our view, to sustain such submission solely on the lockdown law which, by virtue of its length, is temporary.
It should be noted that the existence of a force majeure clause in a contract will negative the plea of frustration as the clause effectively determines who bears what risks under the contract. Such determination, of course, will be rooted in the literal construction of the wordings of the clause, the nature of contract, the sector of business and impact level of the lockdown as well as whether other available options for mitigation (if any, including remote working, government’s palliatives or renegotiation of terms, etc.) have become impossible.
If force majeure is not included in the contract, the next consideration is: whether there are grounds for a successful plea of frustration? Under Nigerian law, it is not every unpalatable situation that can frustrate a contractual obligation. Instructively, the Court of Appeal (per Nwodo, JCA) in Revenue Mobilization, Allocation & Fiscal Commission v. Units Environment Sciences Limited, held that
“The frustrated expectation or intentions of the appellant to the contract do not necessarily lead to the frustration of that contract.”
And at page 418 paragraph E, his lordship stated further that
“It is trite that a contract is not frustrated merely because its execution becomes more difficult or more expensive than either party originally anticipated and has to be carried out in a manner not envisaged at the time of its negotiation.”
In our view, where an employer’s business has been halted for few months by the lockdown law, a plea of frustration may not avail the relationship of the employer and workers under some indefinite employment contracts. However, different considerations should apply to contracts for a fixed term if time is of the essence and performance is impossible because both the commencement and terminal dates have been precluded, by the lockdown, from taking effect.
1.2. Economic Recession or Depression
An obvious consequence of the covid19 is the looming economic recession (i.e. economic decline for at least 6 months) or depression (i.e. a more severe economic decline that lasts for several years). Whether economic recession or depression is sufficient ground for employers to frustrate a binding contract is an arguable question of facts to be decided by the court.
In our view, economic recession or depression alone may not suffice as proof of a company’s inability to meet its contractual obligations to its employees.
So, how does the Court of law reconcile economic recession and sanctity of contract?
In Orient bank (Nig.) Plc v. Bilante International Limited , (though not an employment case), it was held that “courts of law, not being business organization, lack the capacity to speculate future business successes” (or failures).
Admittedly, apart from the specific facts listed in Section 122(2) of the Evidence Act 2011, of which the Nigerian courts must take judicial notice and, therefore, require no further proof; the court has also taken judicial notice of notorious facts, such as economic recession or depression, though mostly in award of damages.
But, the court has always insisted on special proof of a company’s inability to meet its contractual obligations notwithstanding any obvious economic recession or depression. For instance, in Livestock Feeds Plc v. Igbino Farms Ltd. the Court held that:
“The audited statement of account of a company is the best way of showing the financial position of the company at any given time. Although there is no doubt that there is economic depression in the country, it is only a properly audited account or a full disclosure that would convincingly show how that has affected the ability of a company to repay an outstanding loan.”
It is submitted that economic recession or depression per se does not frustrate employment contract. Fluctuation in business fortunes is a natural incidence of commerce. So, a temporary downturn in profit should not be a ground to release a party from its solemn undertaking. Especially, if such release runs contrary to statutory provisions, such as redundancy schemes designed by the Labour Act to protect workers in such circumstances.
Howsoever the above is viewed, the question of whether a temporary decline in profit will discharge an employer from its contractual obligations is, in our view, open to disagreement. The answer to the foregoing is very important for many reasons, particularly as a yardstick for further determination of the propriety of the employer’s decision or action towards the employees (e.g. declaration of redundancy or termination by notice or compulsory retirement, leave without pay, etc.).
3. What Should the Employers Consider?
It should be mentioned that there is no one solution fits all approach to addressing emerging employment issues from the current pandemic. Whilst we strongly advise against hasty termination of employment, it is nevertheless imperative for employers and workers to seek an employment lawyer’s advice on the suitable approach to each employment contract.
However, the following options may be considered by the employers:
i. Declaration of redundancy based on the employment contract (if redundancy is provided), otherwise in compliance with Section 20 of the Labour Act; Please note that it is unlawful to advise or force a worker to resign ; or
ii. Mutually agreed reduction in worker’s salary (in writing) signed by both parties. Note that the law frowns against unilateral reduction or deduction of worker’s salaries ; or
iii. Mutually agreed leave of absence for workers without pay (or reduced pay) documented and signed by both parties. The law prohibits non-payment of salaries on ground that the employers are unable to provide work.
In Kafaru v. Reliance Telecom. Ltd. where the company placed its worker on an indefinite compulsory leave without pay from 1st December 2011, the court ordered the company to pay the worker’s salary up till the judgment date, 29th January 2015 (over 3 years salaries!).
4. What Should the Workers Consider?
The available options to any aggrieved workers are limited to strike, picketing and litigation or arbitration. However, legal action should be preferred. The reliefs workers can seek in court or arbitration will depend on the type of action or decision of the company about which the employee is aggrieved.
4.1. Wrongful Termination of Employment or Unfair Dismissal
The relief for wrongful termination or unfair dismissal is mainly in damages. This is without prejudice to the worker’s right to additional claim for any accrued benefits or entitlements. Please note that the amount of damages realizable is at the discretion of the court, to be decided based on pleaded facts, evidence and whether the termination or dismissal carries a negative tag on the employee which may prevent him from securing another employment in the future.
4.2. Non-Payment or Unilateral Reduction of Salaries & Pensions
Failure to pay agreed salaries/pensions entitles the affected workers to sue for recovery of outstanding salaries and damages at the National Industrial Court. Unpaid salaries and pensions are debts owed to the workers. Salaries are recoverable not later than six years from the due date, after which the right is lost. However, there is no time bar against recovery of pension.
Also, an aggrieved worker may apply to the Federal High Court for an order to wind up the company on ground of its inability to pay its debts. For a company to be wound up on the foregoing ground, the following ingredients must be present:
(a) there must be a debt. If the alleged debt is in dispute, the court will refuse to wind up the company. .
(b) the debt must be due;
(c) a formal demand must have been made (i.e. written) to the company by the creditor, not his agent or solicitors; and
(d) the company is unable to pay the debt.
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About KORIAT & CO.
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