‘Where it Falls’: Ghana’s Informal Economy in a Pandemic

Ayeduase and Kotei are not old Kumasi towns. Few houses there are like the one near the Kotei lorry station. The single-storey home with front steps, high pillars, staircases on the sides, narrow wood windows, and wide verandas that defined middle-class Kumasi within a thriving colonial cash-crop economy. Most of the houses in this area are relatively new. The sprawling settlement has expanded over two decades as a residential area for a growing university population at the Kwame Nkrumah University of Science and Technology, located at the outskirts of Kumasi with about seventeen thousand off-campus residents. 

 A three-kilometer road links the two areas and serves as the central nerve of the fledgling township. The area has a booming rental market, public transport, private ride-hailing services, laundry services, pubs, food vendors, pharmacies, farmer’s markets, supermarkets, salons, mobile money services, and convenience stores that line up along the open drains. And, during rush hours, drivers, hawkers, and pedestrians yell and honk to get ahead of each other in heavy traffic. 

Kito started Grooves Café on the Kotei end of the Ayeduase-Kotei road in January 2020 after two years of preparation. “I became interested in pub culture when I visited the U.K.,” he says, “whenI came back, I was determined to start something similar.” Grooves Café is about area of a basketball court. The interior furnishing is a hodge-podge of bar stools, leather sofas, and tables made of recycled bitumen containers. The decor is rustic with wood panels and dim multicolored lights, creating a cozy sanctuary off the bustle on the main street. Within three months, Grooves Café was weaving itself into the nightlife of the off-campus university community.

In March, a twist of fate came when Ghana recorded the first coronavirus case. The tremendous early start stalled and led to stagnation while the virus rampaged through the country, steadily ratcheting up infections, hospitalizations, and deaths. A slew of restrictions on gatherings and services like pubs, churches, and public transport immediately followed a month of lockdown, and by August of 2020, Kito had only been in business for two months out of eight. “It is not the year I hoped for,” a crestfallen Kito told us in September of 2020, “we were doing very well, but now things are difficult.” Businesses like Kito’s and their workers in the informal economy bore the brunt of the pandemic and its associated restrictions due to their weak structural position in a rough informal economy without regulation or enforcement of statutory protections. 

According to the International Labour Organization (ILO) the informal economy has persisted in the face of projections that it will disappear. Three reasons account for that: first, the absence of rules; second, where laws exist, but enforcement does not; third, where rules exist, but compliance is inconvenient, burdensome, or excessively costly.

A 2014 study by Friedrich Ebert Stiftung (FES) revealed that despite mandatory requirements of written contracts in Ghana’s Labour Act, 70% of employment contracts in the informal economy are verbal. Further, only 29% of employers provide social security for their employees. These statistics reveal both the lack of enforcement by regulators and the prohibitive costs and inconveniences that prevent self-regulation on the part of actors in the informal economy. Martha Chen, Public Policy Scholar at Harvard University, wrote about the informal economy; “on average, earnings are low, and risks are high,” and employees there have no protections “to deal with the economic risks and uncertainty they face.”

         The pandemic and the resulting lockdowns, border closures, and restrictions on a range of activities disrupted pre-existing legal obligations in ways that none of the actors could anticipate. That is true from employment contracts to tenancies and leases as well. Such unexpected disruptions, known in law as Force Majeure—unanticipated events which make the performance of contractual obligations radically different, if not impossible, lead to losses in economic activities. A Force Majeure clause in a contract frees a party from a contractual obligation because their inability to perform was caused by circumstances beyond their control, like a pandemic, war, or an act of the state. But, and as is apparent, it is scarce in the informal economy because written contracts are not the standard mode of transacting business. But in a common law country like Ghana, the Doctrine of Frustration, the common law iteration of Force Majeure—codified into statute—could provide a solution in the absence of private Force Majeure clauses in contracts. 

Yet, one difficulty with the frustration doctrine is that it requires a legal suit. And, as a general proposition, formal legal rules are not the primary rules of engagement in Ghana’s large and diverse informal sector. As a result, cases to enforce statutory protections within small and medium scale businesses hardly go to court. In the absence of regulation, the sector has evolved its own extralegal (activities that are not necessarily sanctioned or regulated by law, as distinguished from illegal activities) and makeshift norms, which allocate benefits and costs to different actors. Some of these extralegal arrangements undermine the goal of formal legislation and further burden weaker parties. A January 2020 report by WIEGO revealed that a staggering 89% of employment in Ghana is informal. Lying outside the reach of formal frameworks, crude market imperatives in the informal economy ensure that weaker parties are passive about their rights or stronger parties can get away with violations.

Several aspects of the informal economy practically fall outside the reach of formal statutory frameworks like the Labour Act’s protections for employees—written contracts, rules on termination, social security, and clear conditions of service. It is even more fraught when the employment relationship is upset by unforeseen circumstances like restrictions on work owing to a pandemic. Here, we found that extralegal solutions mimic legal responses like layoffs, furloughs, and pay cuts, among others. But in the absence of regulatory oversight to ensure that there are contractual agreements, employees neither enjoy the certainty nor the protection embedded in statutory law for them. A lot of them rely on employers for survival. The Labour Research and Policy Institute has estimated about 500,000 job losses directly linked to the pandemic in Ghana—100,000 in the formal sector and 400,000 in the informal economy.

As the pandemic evolved, the bustling off-campus settlements gradually became ghost towns. The ensuing disruption put an abrupt and indefinite end to tenancies, leases, and employment (especially gig workers—DJs, waitresses, music bands, drivers, etc.). The inequality and vulnerabilities also became apparent. By their advantageous position, landlords with student and business tenants who had already extracted years of advance in disregard of a statutory cap on rent advances beyond six months proceeded to wait out the pandemic without any concessions to their tenants. There were no moratoriums or rent freezes, and student tenants and lessees like Kito who had lost time had to count their losses.  

In a well-regulated market, the government could have ordered freezes or moratoriums on rents and enforced statutory protections or effected new ones. Weaker parties would be confident to utilize legal action to enforce their rights in court. At common law, a lease agreement could be frustrated where events occur, making it impossible for the lessee to use the premises for the intended purpose. Lawmakers have progressively evolved the Doctrine of Frustration for unforeseen disruptions like a global pandemic. Still, there is a discrepancy between what the legislature has enacted and what prevails in the market. 

They may be taken for granted, but what now seems fair and logical about supervening events disrupting contractual obligations took a long time to arrive. English law did not recognize any special rules or remedies for parties to a contract unraveled by external intervention until the 1860’s in cases like Taylor v Caldwell and the coronation cases of the early 20th century. The court found for the first time that an agreement to rent a music hall destroyed by fire shortly after the parties agreed was frustrated because the hall’s existence was essential to the contract. Nonetheless, the prevailing view that where a contract is frustrated by supervening events, the “loss lies where it falls” was not completely abandoned; see Chandler v Webster [1904] 1 KB 493. 

During World War II, the last truly global Force Majeure event, as the world came to a standstill the English court had an opportunity to pronounce on the Doctrine of Frustration more definitively. In July of 1939, an English company contracted with a Polish company to supply them with machinery worth £4800. The Polish company made a down payment of £1000, and delivery was expected within three to four months. But before delivery could be made, World War II broke out, and the delivery period agreed upon elapsed. The Polish company sued to recover the £1000 paid in the famous Fibrosa Case. The court held that the contract was frustrated (ineffective) because the war was an indefinite interruption in the ability of the English company to deliver. It further allowed the company to recover the down payment because it had gotten nothing in return for the payment. By basing its decision on the Polish company getting nothing in return, the court also meant that the only time they would hold a contract as frustrated is when there is a “total failure of consideration”—where one party got nothing in the exchange of promises.  

But if the English took centuries to arrive at a substantive Doctrine of Frustration, Ghana inherited and implemented a more expansive doctrine from the onset. In the Contracts Act of Ghana, 1960 (Act 25), the legislature expressly rejected the narrow English application of the Doctrine of Frustration in Fibrosa, favoring a broader and arguably fairer approach. It provided in sections 1 to 3 that in Ghana, frustration discharges contractual parties from all future obligations in a contract. In addition, one party may withhold monies payable to the other after a frustrating event. Also, suppose one party to a contract has already paid money to another, and after the frustrating event, the other party cannot deliver on the contract. In that case, the Ghanaian position allows recovery of the monies paid except that the court may make deductions for reasonable expenses made by the other party. But, then again, in the informal economy, where landlords wield disproportionate bargaining power and extract up to three years’ advance rent payments, withholding due payment is not an option for most lessees and tenants. For their part, employees in the informal economy cannot insist on statutory protections for employment either because they are dispensable in an economy with a high unemployment rate.

The Contracts Act, the Labour Act, and the Rents Act underpin a formal economic institution designed to reduce transaction costs, enforce property rights, and maximize surpluses in order to expand economic growth. Within that framework there is textual protection for vulnerable groups in economic transactions that aim that a loss flowing from unperformed contracts where neither party is at fault do not necessarily “lie where it falls.” But the extralegal norms in the informal economy upset this rationale. The gap between regulation and enforcement ensures norms continue to favour stronger contractual parties, paternalize legal relations, and pass costs down to weaker parties in the informal economy. 

A lot is required to make the informal economy responsive to legislative frameworks. Many of the protections contained in statutory law seek to protect people who are largely unaware of them and lack the power or resources to enforce them. In the absence of regulatory oversight, the statutes have no real impact on those who need them. That is why, against the backdrop of a remarkable legal framework aiming to protect vulnerable classes, in places like Ayeduase and Kotei and all over the country’s large informal economy, the losses from the Covid 19 pandemic continue to lie where it falls—on the backs of vulnerable and weaker parties in contractual relations. 

NB: Parts of this article are due to work done by the authors for the International Law Section of the American Bar Association in 2020. All Rights Reserved

About Authors 

Victor Nsoh Azure is a researcher in Law and Public Policy. 

Lex: Lead Ambassador 2018

Yaa Boatemaa Ohene-Bonsu practices Corporate and Commercial Law in Accra, Ghana.

Lex: Lead Ambassador 2019