Currency devaluation: A sine qua non to frustration of contracts?
On November 25, 2014, after an extensive meeting, the Monetary Policy Committee (MPC) of the CBN announced the devaluation of the country’s currency by N13.00 so that the Naira would now exchange to the dollar at N168. With this announcement, Brent crude immediately dropped by 4% to $74/bbl. – according to an Energy report monitored. Indeed, today, the price has further dropped to $69/bbl. It is expected to continue to drop lower in the coming weeks.
The question many have asked is what effect this devaluation portends for the Energy Sector and the various existing contractual arrangements particularly the facility agreements with banks. Indeed, it would be correct to assume that these events would activate a change in the dynamics of the existing oil import financing contracts between oil importers and many Nigerian Banks. In other words, parties may have to revisit the Agreements for the purpose of determining the viability of the current commercial terms in light of these recent developments. Effectively, parties would have to determine whether a combination of these events would lead to the impracticability or impossibility of the commercial terms of the existing Agreements such that obligations may be avoided under the contract.
At common law, for the defense of “impossibility” to be raised, performance must not merely be difficult or unexpectedly costly for one party, there must be no way for it to actually be accomplished. However, it is now recognized that “impossibility” under this doctrine can also exist when the contemplated performance can be done but only at an excessive and unreasonable cost, i.e., commercial impracticability.-Taylor v Caldwell [1863] HYPERLINK “http://www.bailii.org/ew/cases/EWHC/QB/1863/J1.html” EWHC QB J1.
In the United States, a thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost. Indeed, when the issue of impossibility of performance is raised, the court is asked to construe a condition of performance based on at least three reasonably definable steps. First, a contingency (something unexpected) must have occurred. Second, the risk of the unexpected occurrence must not have been allocated either by Agreement or by custom. Finally, occurrence of the contingency must have rendered performance commercially impracticable- Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966).
Consequently, the question with respect to these Facility Agreements would therefore not be whether there has been a radical change in the circumstances, but whether there has been a radical change in the obligation or the actual effect of the promises of the parties in light of these developments. In other words, Nigerian courts may have to determine whether the continued performance of the debtor’s obligation has become fundamentally different in a commercial sense. These are some of the concerns players in the Energy Sector and commercial banks must start considering and addressing ahead of its occurrence as cases of default may become inevitable and how these are dealt with is important.
There is no better time for commercial Banks and relevant parties to revisit the commercial terms to ensure that they remain achievable and enforceable in spite of these events.
Tolulope Aderemi