Client Alert: COVID-19 and its effect on contractual obligations.

A discussion on force majeure and supervening impossibility of performance.

It is a fundamental principle in South African law that contracts entered into freely and voluntarily are binding and enforceable between the parties to the contract. However, a party to a contract may be excused from a failure to perform if the contract contains a force majeure clause that regulates the effect of the happening of defined or contemplated force majeure events, or if the performance in terms of the contract is otherwise rendered impossible because of unforeseen and unavoidable circumstances, occurrences or events.  As a result of the onset of the COVID-19 virus in South Africa, President Ramaphosa declared a national state of disaster in terms of Section 27 of the Disaster Management Act 57 of 2002, and on the 23rd of March 2020, a national lockdown was ordered for a period of 21 days as a measure to slow the spread of the virus. This, and other measures implemented by Government, will likely affect parties’ abilities to perform their contractual obligations. Depending on each contract and the nature of performance required, parties may be able to rely on a force majeure clause in their contract, or the common law principle of ‘supervening impossibility’, in order to escape liability for a failure to perform.

Force Majeure Clauses in Contracts

Because of the limited application of the supervening impossibility principle (discussed below), it is common for contracts in South Africa to contain a force majeure clause. If relying on such a clause, parties must carefully consider whether the onset of the Covid-19 virus or the national lockdown is a force majeure event as defined or contemplated in the clause, and what affect the triggering of the clause will have on the parties obligations to perform. Often, a force majeure clause provides for suspension of a party’s obligation to perform (rather than extinguishing the obligation and discharging the contract altogether). A force majeure clause may be triggered if phrases like “epidemic or pandemic”, “disease or illness” and possibly “acts by government” appear in the clause. Parties should also consider whether the force majeure clause in their contract contains a ‘catch-all’ phrase in which a pandemic may be captured. Such phrases will often refer to events arising after the conclusion of the contract, which render performance impossible, and which are beyond the control of the parties. Although force majeure clauses are often ‘standard’ (not necessarily tailored for the parties’ contract) they may still provide a relieving safeguard. Parties can also consider whether there is a ‘Hardship’ or a ‘Material Adverse Change’ clause that may be triggered by the national lockdown or other unexpected occurrences (for example: fluctuations in the value of the Rand and a ratings downgrade by Moody’s).

The Principle of Supervening Impossibility

If a contract does not contain a force majeure clause, the principle of supervening impossibility in terms of the common law may still be invoked. Parties should be aware that in order to rely on the supervening impossibility principle, the performance of their obligation must be rendered objectively impossible, and not simply difficult or financially onerous. [1]

Objective impossibility includes situations where performance is rendered physically impossible by the supervening event, and when performance is physically possible, but would be so difficult that it could not, in any circumstances, be reasonably expected. Supervening illegality is also recognized as supervening impossibility. Supervening illegality occurs when performance, although factually possible, becomes prohibited by a public authority. Travel prohibitions often have the effect of rendering performance illegal where travel or transportation is necessary for that performance. Parties must carefully consider whether the onset of the Covid-19 virus, or the national lockdown, renders their performance objectively impossible (for example: disruptions in workflows will not necessarily excuse a lessee from payment in terms of a lease agreement, because payment is still objectively possible).

If performance have become objectively impossible, the ‘general rule’ is that the contract is discharged and both parties’ obligations are extinguished.[2] However, the general rule is not applied without qualification. Courts are required to ‘look to the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility invoked by the defendant’ [3] in order to determine whether the contract should be discharged. Where the cause of impossibility was foreseen or was reasonably foreseeable by the parties, the general rule will not be applied.[4] Furthermore, the rule will not ‘avail a defendant if the impossibility is self-created; nor will it avail the defendant if the impossibility is due to his or her fault’.[5] That the onset of the Covid-19 virus, and the national lockdown, was not self-created , nor was  it foreseeable (until very recently), is favorable to a party wishing to invoke the supervening impossibility principle. Although the ‘general rule’ that the contract is discharged  will usually apply if performance has become objectively impossible, parties should  consider whether, in their particular circumstances there are considerations (particularly relating to foreseeability and fault) that may deter a court from the strict application of the rule.

Considerations of Public Policy

It is also important to point out that considerations of public policy play a role in the South African law of contract.[6] In the context of supervening illegality, it is uncertain whether and in what circumstances a contract may be discharged on the grounds of public policy alone (i.e even where there are terms in the contract that regulate the effect of supervening illegality),[7] Considering the significant shifts’ in government policy occurring as a result of the Covid-19 virus, practitioners should be cognisant that considerations of public policy may have increasing relevance.

Conclusion

The Covid-19 virus and the national lockdown and other measures implemented by Government may have left parties unsure whether they will be able to perform their contractual obligations. Parties should carefully consider whether they may rely on a force majeure clause in their contract. In the absence of a force majeure clause, parties may rely on the supervening impossibility principle if performance has become objectively impossible or illegal. Measures implemented by government are various and wide ranging so parties should consider carefully which measures will be relevant to their particular business or industry. Parties can otherwise renegotiate or vary their contract in good faith in light of changed circumstances. If entering into new contracts, parties should be advised to ensure that a force majeure clause that properly regulates the effect of a pandemic or epidemic is included in their contracts in order for the parties to know what the onset of a pandemic will mean for their contractual obligations. 

By Patrick Gilfillan (Associate) and Nick Wright (Candidate Attorney)

[1] Nuclear Fuels Corporation of SA v Orda AG [1997] 1 All SA 1 (A) page 13.
[2] Peter, Flamman and Co vs Kokstad Municipality 1919 AD page 437.
[3 ]Hersman v Shapiro & Co 1926 TPD page 373.
[4] Nuclear Fuels Corporation of SA v Orda AG [1997] 1 All SA 1 (A) page 13.
[5] Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal 2008 (4) SA 111 (SCA) paragraph 28.
[6] Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) page 349.
[7] Nuclear Fuels Corporation of SA v Orda AG [1997] 1 All SA 1 (A) page 34.