By Partner Keane Robertson and Candidate Attorney Stefano de Gouveia
By now, it is common knowledge that the world stands united in facing the recently declared pandemic relating to the notorious coronavirus (“COVID-19”). Most important during these unprecedented times is the health of people and secondly, the health of businesses and the economy as a whole.
In this note, we take a closer look at the latter and will consider the potential ramifications that COVID-19 has had and is going to have on commercial contracts going forward.
Force Majeure Clauses
Parties to a contract may include a Force Majeure (“FM”) clause, which regulates the liability of the parties and the effect on the contract when extraordinary events and circumstances beyond the control of one or more parties prevents the performance of contractual obligations arising from that contract.
Generally, drafters try best to refrain from specifying all events constituting FM events in order to avoid the danger of excluding a specific possibility by failing to list same in the FM clause. Accordingly, most contracts will contain “catch-all” wording to ensure the relevant parties are protected adequately. Each case will therefore depend of the wording of the contract entered into by the parties.
While generally the occurrence of a specified FM event results in the suspension or termination of contractual obligations, there are situations where obligations will not be terminated, namely:
- where a party was in mora at the time performance became impossible; and
- where the impossibility of performance was the fault (whether intentionally or negligently) of the defaulting party.
Supervening Impossibility of Performance
While FM clauses can help mitigate liability for non-performance, the reality is that not all contracts have FM clauses. Under South African common law, the failure to include FM clauses can be alleviated by the doctrine of supervening impossibility of performance (the “Doctrine”).
As a general rule, the Doctrine will relieve any party from liability arising from non-performance of a contractual obligation if such impossibility is not reasonably foreseen by the parties at the time they entered into the contract and provided that the affected party did not contribute to non-performance. In most cases, if a party is prevented from performing contractual obligations due to irresistible force (vis major) or an unforeseeable accident (casus fortuitous), then he or she may escape liability.
The requirements for relying on the Doctrine can therefore be reduced to the following:
1 the performance must be objectively impossible; and
2 the impossibility must be unavoidable by a reasonable person.
In addition to affecting the obligation that has become impossible, the Doctrine subsequently affects counter-obligations. In general, the Doctrine also excuses any counter-performance that is reciprocal to the performance that has become impossible. This results in the obligation to return whatever has been performed under the contract so far, which is then duly enforceable by an enrichment action.
It is important to note here that there is an exception to the rule when it comes to the sale and transfer of ownership of goods. A purchaser will not escape liability to pay the full purchase price where the object of the sale was destroyed or damaged by an unforeseen event happening if the contract had already been concluded and the parties had agreed to risk passing at time of conclusion. In saying this, most sale agreement contemplate to the passing of risk only upon transfer of the good in question. Again, the wording of the contract is important.
When it comes to partial or temporary impossibility of performance, the effects depend on the circumstances of each case.
One needs to determine whether performance by the defaulting party is divisible or not. When a divisible obligation becomes partially impossible to perform, then the defaulting party may be released from that specific part of his or her obligation. On the other hand, where an indivisible obligation becomes partially impossible to perform, the non-defaulting party generally has an election as to whether he or she wants to accept the partial performance and subsequently only be obliged to perform a proportionally reduced counter-performance, or to cancel the contract altogether.
Lastly, in relation to temporary impossibility of performance, the general stance taken in this regard is that obligations to be performed are temporarily suspended until such time that the rendering of same is possible. However, should such impossibility continue for extended periods of time and it is no longer reasonable to expect the continuation of a contract, or where the delay results in performance becoming impossible, then there may be little choice but to terminate the contract.
It is widely accepted that the effects of COVID-19 could well constitute an FM event and if there is no such clause in a contract, adequately meet the requirements justifying a defence of supervening impossibility of performance.
It is therefore important for one to consider all possibilities that could render performance under a contract impossible and try to mitigate such risks through comprehensive and clear contractual agreements. Recommended precautionary steps include:
- reviewing contracts and taking cognisance of FM clauses;
- exploring the possibility of amending contracts to include specific FM events so as to legally protect yourself;
- considering how easily one can terminate a contract should there be non-performance due to unforeseen circumstances;
- reviewing insurance policies in order to cover any potential financial loss resulting from non-performance by either party; and
- keeping up to date with all potential ramifications of COVID-19 in respect of any new policies being implemented that may affect performance.