A professional opinion by Stephan Haynes [BCom LLB LLM] – Attorney at Gillan & Veldhuizen Inc
Since the COVID-19 Coronavirus (“Coronavirus”) was declared an international pandemic, it has reached South African shores and resulted in President Cyril Ramaphosa’s announcement of a national state of disaster on 15 March 2020.
The outbreak has caused an unprecedented economic impact on domestic and international trade, commerce and financial markets. A further ripple effect of the control measures taken to minimise the spread is causing a rapid slowdown in economic growth. Notwithstanding, there may be a contractual remedy in the form of Force Majeure for adversely affected businesses to suspend contractual performance during this desperate period.
What do businesses need to consider?
Most businesses and industries are affected by the Coronavirus-related consequences, either directly or indirectly, and should be looking at the specific implications and possible knock-on effects on their operations. In particular, businesses must consider their contractual relationships with others in their supply chain since there exists an increased risk of breach of contract, primarily due to non-performance. Generally, breach of contract is attributed to fault of the business but certain unforeseen circumstances, such as the circumstances caused by the Coronavirus, may render performance virtually impossible due to no fault of the contracting parties.
What is Force Majeure?
Force Majeure means “superior force”, and refers to an unforeseen circumstance that renders contractual performance impossible. When invoked as contractual mechanism it holds the potential to excuse the non-performance of a party during force majeure events and may even justify termination of the contract.
In South African contract law, force majeure it is a contractual mechanism as opposed to an implied right and must therefore be expressly provided for in a contract for it to be effective. While the common law provides remedies in cases of contractual impossibility under the principle of supervening impossibility, its scope and application is very restricted. Fortunately, many commercial contracts make provision for standard force majeure clauses.
For this reason, the requirement for invoking force majeure is a question of what the contract says. Accordingly, the first step for any business that considers invoking or is concerned over the counter party invoking force majeure, is to carefully consider the terms of the contract.
Force Majeure clauses and the Coronavirus
Generally, force majeure clauses contained in commercial contracts will set out the events which constitute force majeure, provide a notice procedure and stipulate the consequences that will take effect when the force majeure materialises. There are two typical approaches to drafting the events that constitute force majeure. The clause may take a flexible approach by declaring any circumstances beyond the control of the parties to be force majeure. However, the preferred approach is to specifically list events that constitute force majeure for purposes of the contract, which may for example include circumstances such as pandemics, quarantine, national disaster, travel restrictions or governmental intervention.
In order to apply a force majeure clause, it is essential to establish whether or not the Coronavirus falls within the ambit of the contract’s force majeure description and to show that the circumstances have rendered performance impossible. It is possible for the consequences of Coronavirus to qualify as a force majeure event, even if the contract does not provide for a disease-related event – for example, the government’s reaction to impose a travel ban may lead to impossibility. Notably, in most cases, performance must be rendered impossible since traditional force majeure clauses do not accommodate mere economic hardship, which is inevitable during this time.
Before force majeure can be invoked it is important to consider the notice provisions of the contract and to ensure strict compliance. Each clause may vary but given the severity of the implications most contracts will require proper notice, failing which the remedy may be declared procedurally unfair. Similarly, it is common for commercial contracts to include mitigation clauses as pre-requisite for invoking force majeure remedies. It is imperative for parties to comply with the mitigation requirements, as failure to do so may not only undermine the ability to rely on force majeure but may invite a claim for damages by the counter party.
Remedies in the case Force Majeure
The purpose of a force majeure clause is to provide remedies to contracting parties whose performance is adversely affected by unforeseen circumstances which are not attributed to fault of their own. Accordingly, it provides remedies such as suspension of contractual obligations for the duration of the force majeure and may even provide for termination of the contract in circumstances where the force majeure is extended over a prolonged period. Also called a “performance holiday”, this remedy is intended to afford the parties an opportunity to recover from the effects of force majeure, which would under normal circumstances constitute breach of contract. Importantly, these remedies are contractually provided for and must be assessed on a case-by-case basis dependent on wording of each respective clause.
What is the legal position if your contract does not provide for Force Majeure?
Given that force majeure is a contractual mechanism, its application is limited to circumstances that are contractually provided for. However, the South African common law provides for a similar remedy to that of force majeure in the form of the principle of supervening impossibility. This principle operates automatically by law and does not require a contractual inclusion as prerequisite.
In terms of the principle of supervening impossibility, a contracting party’s right to perform is extinguished upon performance becoming objectively impossible due to unforeseen and unavoidable circumstances which are not attributed to any fault of the parties. The courts follow a strict approach to the objective impossibility and requires the event to have been unforeseen by a reasonable person. Further requirements include the contract to have been concluded before the unforeseen event and that the party seeking the remedy was not in default at the time of the unforeseen event.
Whilst it appears to provide contracting parties with a similar remedy, its scope is limited to that of contractual force majeure and parties must discharge a stricter burden of proof. Importantly, there exists a heavy burden on a party alleging supervening impossibility, which may be especially difficult in cases which allege Coronavirus-related impossibility. In the premises, it is advised to consult an attorney before initiating any proceedings based on the common law principle of supervening impossibility.
What steps must businesses take to mitigate the commercial risks of Coronavirus?
- Establish which existing contracts may be adversely affected by the consequences of the Coronavirus, including aspects such as disruptions, delays, suspension and termination of agreements.
- Conduct periodical risk assessments in light of developments regarding the outbreak and establish an action plan to mitigate non-compliance with existing obligations.
- Engage with contracting parties over reciprocal contractual obligations and ensure that written record exists of any variations, alternate arrangements or compliance holidays.
- Engage with stakeholders, especially clients and customers, to manage their expectations during the possible force majeure period.
- Seek legal counsel in decisions involving all notices and non-performance risks and review existing contracts to advise on the prospect of initiating Force Majeure proceedings.