COVID-19 AND THE NATIONAL LOCKDOWN: THE EFFECT ON YOUR CONTRACTS
Updated: May 21, 2020
In light of the recent outbreak of the COVID-19 virus and the announcement of the State of Disaster and 21 (twenty-one)-day national lockdown in the Republic of South Africa, many persons and businesses are unable to perform their obligations in terms of various contracts currently in force.
On the other hand, it is evident that businesses are also using the principle known as ‘force majeure’ to try and escape their liability to perform their contractual obligations.
The lockdown will have an effect on the ability of businesses to perform, but one should be aware of the application and consequences of the reliance on this force majeure principle.
2. What is Force Majeure?
Force majeure is a contractual concept dealing with supervening impossibility of performance. This may be used as a defence, or protective measure where an ‘act of God’, insurable peril or circumstances outside of the party’s control renders performance of a contract impossible.
This principle may be inserted into a written agreement by a force majeure or vis majorclause. This will usually specify that the contract may not be terminated or that the party which is unable to perform shall not be liable for such non-performance or of breach of contract where performance is rendered impossible by an event or circumstances out of the party’s control.
This is not a principle that may be applied when performance is merely inconvenient or difficult. Many businesses may make the mistake of relying on force majeure where unforeseen circumstances make it difficult or inconvenient to perform. It is important to know your contractual rights and obligations under force majeure and to be able to distinguish between absolute impossibility and probable impossibility.
It is common that an ‘act of State’ may constitute a force majeure event. However, it is important to remember that the requirements of force majeure must still be met, as this ‘act of State’ will not have an overarching reach to all transactions in the territory, but will only apply to those contracts where personal performance actually becomes impossible as a direct result of the act of State and will be limited to the time period which the force majeure event subsists.
3. When does common law Force Majeure become applicable?
Where a contract does not expressly cover the aspect of force majeure or vis major events, one may look at the common law principles for protection from liability or enforcement of contractual rights.
There are 5 main elements that trigger the application of the common law force majeure, namely:
a. The impossibility must be objectively impossible;
b. It must be absolute as opposed to probable;
c. It must be absolute as opposed to relative;
d. It must not be the fault of either party;
e. It must be unavoidable.
Impossibility would be relative (as opposed to absolute) where performance may be generally possible, but it is impossible for the specific party to perform (i.e. injury). This is not considered absolute and will not extinguish liability from performance on the basis offorce majeure.
Impossibility applies to ‘personal performance’. Payment in terms of a contract would not constitute personal performance. If one is not able to use the other party’s services due to an event which may be considered force majeure, this does not excuse those payments which might be inconvenient, financially undesirable or difficult. The inability to make payment would have to be a direct result of the force majeure event (i.e. Bank accounts frozen, internet shutdown, Banks closing etc.) and would have to be objectively impossible.
It is important to note that the impossibility to perform must be directly linked and caused by the force majeure event (i.e. Lockdown, employees unable to work etc.). If your contract contains a force majeure or vis major clause, these common law principles will not apply, and you will have to be guided by the contract, as set out below in paragraph 4.
4. When does your Force Majeure clause become applicable?
If there is a clause in your contract which regulates the application of force majeure, you will have to abide by the clause, and interpret the clause in respect of the contract as a whole, the intention of the parties and the relationship between them.
A good force majeure clause shall:
a. define what constitutes a force majeure event;
b. stipulate in what circumstances the parties shall not be liable;
c. stipulate that the contract may not be terminated for non-performance due to
d. stipulate whether the other party must continue to perform in such an event if
performance possible; and
e. the time period for which the clause may apply to non-performance.
It is important to note that should a party be unable to perform, and a force majeure clause regulates such an event, the core principles of force majeure does not fall away. Performance must still be considered to be absolutely and objectively impossible, not due to the fault of any party and to be directly caused by the force majeure event.
This clause cannot be used as a ‘cancellation for convenience’ clause where a force majeureevent may be taking place – such as an act of State. The event must still objectively and directly render performance impossible.
5. COVID-19 and the National Lockdown
The national lockdown has affected many businesses financially and has rendered any performance due which cannot be carried out remotely to be impossible. All personal / physical services which cannot be provided remotely have been stopped and most businesses have been forced to close for the lockdown period. One should be alive to the fact that this does have an impact on the running of businesses, their financials, and their ability to perform.
However, one cannot blindly use the reason of COVID-19 or the national lockdown as a force majeure event to try and suspend or get out of performing, where performance is merely inconvenient, financially undesirable or difficult. Particular mention is made to obligations which consist solely of payment to a party.
The national lockdown does not render payment/s impossible. This can still be done remotely, and the Banks remain open. One can understand that this may be inconvenient and undesirable, as businesses may not be receiving the services they are paying for, however force majeure is not a valid defence here, as it is a strict application of unavoidable impossibility of performance.
If your performance is not objectively impossible, it is advised that you continue to perform in terms of your contract and mitigate any difficulties as far as may be possible. It must be kept in mind that the false or incorrect reliance on force majeure may result in a breach or repudiation of your contract. If the other party’s performance is not objectively impossible, and they have provided you with a notice relying on force majeure, it is important to know and enforce your rights in respect of your contract.
Instead of falsely relying on force majeure to suspend performance in terms of a contract where performance is not actually objectively impossible, it is recommended that the parties engage in meaningful negotiations to benefit both parties during this time. This could be a reduction in payment, or suspension of services and payment with an extension of such time period added to the contract duration.
Should you be successful in re-negotiating the terms of your contract during this time, remember to limit such amendment to the time period of the national lockdown, and ensure the amendment is reduced to writing and signed by both parties.
It is important for all parties to act in good faith and understand that force majeure is a strictly applied principle and is not an all-encompassing justification to avoid contractual liability and the consequences may be severe if relied on incorrectly.
Should you require any legal assistance or advice during this period, please do not hesitate to contact firstname.lastname@example.org.