During this time the concept of force majeure and the common law principle of supervening impossibility has become a serious concern for parties to commercial contracts, such as supply agreements and commercial leases, who are seeking solutions to escape or postpone contractual obligations due to the gross economic downturn and financial crisis experienced as a result of the lockdown.
Unfortunately, some companies, especially large corporations, have made misuse of the current COVID-19 pandemic and the remedies available in terms of the concept of force majeure, to the detriment of smaller companies and businesses who might not survive the lockdown.
Parties to commercial contracts should be aware of the practical application of force majeure and supervening impossibility to ensure that these remedies are applied appropriately and to their advantage.
Force majeure clause
Many commercial contracts contain force majeure clauses which might suspend the obligations of the parties to the contract for the duration of the force majeure event.
These clauses generally provide that if a party is unable to perform in terms of its contractual obligations due to events or circumstances which were not foreseen or reasonably foreseeable, and not caused by the party’s fault, the party will be excused from performing its contractual obligations for the duration of the circumstances which make performance impossible.
It must be determined whether a particular force majeure event, or so-called ‘act of God’, falls within the scope of a force majeure clause, whether specifically listed or implied in the broader scope of force majeure.
It is generally accepted that COVID-19 is an act of God and that it should qualify as a force majeure under contract law. A supplier which is not classified as an essential service during the lockdown period, and is therefore prohibited and prevented from performing its obligations under a contract, would be able to escape such contractual obligations under the force majeure clause. However, the application of force majeure will largely depend on the surrounding circumstances.
In order to suspend contractual obligations, the performance under a contract must become impossible due to the force majeure event, which must not have been within the reasonable control of the entity, or reasonably avoidable by the entity. This entails that the impossibility of performance must not be the result of the direct or indirect negligence, wilful conduct or default of a party to the contract.
The principle of supervening impossibility in South African law
What happens if your contract, concluded under the South African legal dispensation, does not have a force majeure clause?
In such circumstances one would need to resort to South African Common Law for guidance. In terms of the Common Law, the principle of supervening impossibility may be applied, if the following requirements are met:
1. The performance under a contract must be objectively impossible
Performance under a contract can become subjectively or objectively impossible.
Subjective impossibility, caused by inconvenience, or cost, does not affect the obligations under a contract. If a party fails to perform, the party will be liable for breach of contract. However, if the performance is objectively and absolutely impossible the obligation to perform and the corresponding right to counter performance will be extinguished.
Therefore, performance must be impossible to the extent that no person would be able to deliver performance and performance must not merely be inconvenient or expensive.
It is accepted that impossibility can refer to physical impossibility or circumstances where performance is physically possible, but cannot reasonably be expected.
Usually objective impossibility is caused by unforeseeable events outside of the control of any person, such as natural disasters, or pandemics such as COVID-19. It is accepted that if either party to the contract contributed to the impossibility, it will amount to breach of contract which does not fall under supervening impossibility.
2. The impossibility must be unavoidable by the reasonable person
Furthermore, obligations are extinguished because the events are unavoidable by any person and completely out of the control of the parties.
In addition, it is argued that the supervening impossibility must not have been reasonably foreseeable at the conclusion of the contract. Therefore, any contract concluded after the announcement of the COVID-19 outbreak would not be protected under the principle of supervening impossibility.
Generally, supervening impossibility extinguishes the contractual obligations and excuses the party from performance. If the performance of contractual obligations become temporarily impossible, the obligations may be suspended until a party is able to perform once more. If the impossibility endures for a prolonged period the creditor is entitled to terminate the contract.
The nature of contractual obligations is predominantly bilateral. It is accepted that a supervening impossibility which extinguishes the contractual obligations of one party, also excuses the other party to the contract from counter-performance, unless the creditor carries the risk of impossibility in terms of the contract.
In circumstances where counter-performance is already delivered, such performance can generally be reclaimed under enrichment actions.
In the instance of partial impossibility of a divisible obligation, the debtor may be released from performance of its obligations which have become impossible. If the performance is however indivisible, the creditor can decide to accept the partial performance in exchange for proportional counter performance, or can decide to escape the contract as a whole.
International commercial contracts
Many commercial contracts are concluded beyond national borders, which necessitates consideration of the jurisdiction and system of law within which the contract functions.
International contracts which include force majeure clauses will entitle parties to invoke these provisions to excuse or suspend contractual obligations.
It becomes more complicated if international contracts do not include a force majeure clause as it necessitates the determination of the jurisdiction and applicable law within which the contract functions and the corresponding remedies available to parties.
Most civil and common law jurisdiction recognise the principle of force majeure either in legislation or in contract law, but the law applicable will ultimately determine the rights of the parties.
Generally, international commercial contracts determine the jurisdiction and system of law applicable to the contract in a ‘jurisdiction clause’.
For many businesses survival depends on their ability to place a hold on or postpone their contractual obligations until they are able to resume business activities. Parties who are unable to rely on force majeure or supervening impossibility should consider engaging in negotiations for payment holidays for the duration of the COVID-19 pandemic.
Contact us for any enquiries in this regard.
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