On the 5th of March 2020, the National Institute for Communicable Diseases confirmed that South Africa’s first suspected case of COVID-19 had tested positive. The impact of this highly contagious virus has forced the world to find a new normal as we navigate our lives around containing its spread as much as possible. How does this affect existing agreements and performance under these agreements?
Force Majeur in South African Common Law
In the context of South African common law any occurrence beyond the control of parties, to an agreement, which makes the performance of contractual obligations impossible after the conclusion of a contract (that does not have a so-called force majeure clause) is dealt with in accordance with the principle of supervening impossibility.
As a general rule, if a situation arises, without any act or fault of either of the parties to the agreement, which renders the performance of a contractual obligation by one of the parties impossible, the party is excused from the failure to perform. However, a party seeking to rely on this principle must show that the performance is objectively impossible and not just difficult, burdensome or economically onerous.
Hedging against the limitations of common law
Due to the limiting nature of the common law position, many agreements today include a “force majeure” clause which is included in an effort to protect against the potential risk of an occurrence, through no fault or act of either of the parties, which may render the performance of contractual obligations impossible.
The force majeur clause usually sets out the following:
- what would constitute a force majeure by providing a list of such events;
- a catch all phrase on what would constitute a force majeure (discussed below);
- a requirement that a party seeking to rely on the force majeure clause must provide the other party to the agreement with a notice before invoking the force majeure clause for purposes of not fulfilling their contractual obligations; and
- a period after which the agreement may be terminated by either of the parties without liability to the other for any loss suffered if the force majeure continues beyond that period.
If an agreement includes such a force majeure clause, the parties will have to rely on the specific provisions of the agreement and, if an agreement does not include such a clause, the parties will have to rely on the common law principle of supervening impossibility.
COVID-19 and Contractual Obligations
Due to the recent outbreak and spread of COVID-19 world-wide and the precautions put in place by relevant stakeholders in an effort to minimize the spread of the virus, parties to agreements in South Africa are finding themselves in a position where the performance of their contractual obligations are now either arguably impossible or onerous to fulfil.
Whether you are a party that is seeking to rely on the force majeure clause or the party that anticipates that a force majeure clause will be relied upon, your first starting point is to carefully review the provisions of your agreement.
A party seeking to rely on a force majeure clause that is included in an agreement, must first examine whether the clause caters for the occurrence of a circumstance such as the results flowing from the spread of COVID-19. This is important as many force majeure provisions are either drafted narrowly or widely.
An example of a narrowly drafted force majeure clause is when the provision specifically lists the events which may occur, such as an act of God, a strike, fire or war like operation without making provision for any other event outside of the listed events, which a party may rely on to invoke this clause.
Whilst a widely drafted force majeure clause will normally include, in addition to a list of force majeure events, what is known as “a catch all phrase” such as “any event arising beyond the control of the parties, rendering the performance impossible”. Therefore, a party seeking to rely on a force majeure clause due to COVID-19 must ensure that the provisions of the agreement governing the relationship between the parties are wide enough to include this pandemic.
The impossibility of performance must be objectively impossible and not merely cause an inconvenience in the performance of a party’s obligations. An example of an occurrence which may render an obligation in a contract impossible, is one where the law changes and the performance becomes illegal.
For example, the impact of sudden import restrictions which may make the importing of goods illegal and thus rendering the supply of goods by a party impossible. Therefore, even if an agreement caters for an occurrence such as COVID-19, a party must prove that the result flowing from the existence of the pandemic renders the performance of their obligations impossible, in order to be excused of any liability arising from non-performance. It is the result of the pandemic that may render the performance impossible and not just the mere occurrence of the pandemic.
Suspensive conditions must also be considered
Parties must also be mindful of those agreements they have entered into which are subject to the fulfilment of suspensive conditions (terms in an agreement that must be met after the signing of the agreement in order for the whole agreement to come into effect).
Some of these suspensive conditions include a “material or adverse change” clause. The purpose of a material or adverse change clause is to provide parties with the option to terminate their agreement if there arises a material or adverse change, through no fault or act of their own, during the period provided for the fulfilment of the suspensive conditions.
However, if what constitutes a material or adverse change is not clearly defined in the agreement, the interpretation of a material or adverse change may have limited application depending on the provisions of each agreement. We recommend that any party with such a clause incorporated in their agreement, who is either seeking to rely on the clause to terminate an agreement or is on the receiving end of such a clause, to seek legal advice before taking further steps.
It is worth noting that the principles discussed above are not only applicable to commercial contracts involving multi-national corporations but are also applicable to contracts involving small medium enterprises, especially considering that the current restrictions issued by the South African government have had an impact on all businesses across the country. For example, the prohibition of gatherings of more than 100 people has resulted in the cancellation or postponement of wedding venue bookings, concerts and conferences, etc. Therefore, it is important that parties revisit the terms and conditions of their agreements in this regard, and seek legal advice in order to ascertain, the relief available in such circumstances, if any.
In the event that South Africa experiences a total shutdown, retailers and wholesalers may wish to ascertain whether the terms and conditions of their lease agreements provide for a review of the terms, a rent reduction or the termination of the lease agreements due to the impact of the virus.
Unless an agreement specifically caters for a review of the terms of a lease agreement, reduction in rent amount payable or the termination of the lease agreement in the circumstances of a pandemic, there is no automatic right to review the terms, reduce the rent amount payable or terminate the lease agreement. Therefore, it is important that contract parties first establish their legal position before taking any steps in respect of their agreements.
The law of contract allows parties the freedom to agree and bind themselves to any form of arrangement provided that such arrangement is legal and are at liberty to re-negotiate the provisions of their agreement. COVID-19 is currently affecting every aspect of the global economy and has placed countries in difficult positions.
South African President, Cyril Ramaphosa, made it clear that all citizens must work together, in solidarity and in partnership. Therefore, despite the agreed upon provisions of an agreement which may strictly dictate the contractual relationship amongst parties to an agreement, parties are at liberty and may consider re-negotiating in good faith the existing provisions in light of the effects of the pandemic in an effort to mitigate each parties respective loss.