Member Article

Background

Other than hand sanitizer manufacturers, private hospitals and the like which stand to profit from the coronavirus (COVID-19) disaster unfolding, the vast majority of South African companies fall into two groups: those that are hemorrhaging but will ultimately survive, and those who will not. Into which of these two categories a business falls will very much depend on whether it can, due to COVID-19, legally avoid settling some of its ongoing expenses until its erstwhile levels of income recover post-COVID-19and whether its debtors can, due to COVID-19, legally avoid paying ongoing liabilities to it due to the crisis.

It is therefore crucial that businesses understand the effects of COVID-19 on the validity of their ongoing contractual liabilities to and by others. As companies scramble to understand the contractual consequences offorcemajeureor so-called “acts of God”, this article helps to offer some insight and practical advice on what can be a complex area of our law. Many businesses will haveforce majeureclauses stuck away in the nether parts of their agreements that they never read. Because natural disasters are relatively rare in South Africa, and we live in peaceful times, many do not spend much time on these clauses when negotiating agreements. Moreover, many agreements do not even contain those clauses and the common law principles will apply.

The law on force majeure and supervening impossibility of performance

The basic rule of South African law is that contracting parties will be held to their promises. However, our law makes an exception to this and will not consider a party to be in breach of an agreement if a recognised case of “supervening impossibility of performance” occurs. For a situation to amount to supervening impossibility of performance sufficient to terminate or, if applicable, suspend a contract, it must meet two requirements:

• The performance must be objectively impossible:
  • this entails that the impossibility that must be such that no one can tender the agreed performance. It is therefore not enough if it is impossible for only the particular contracting party to perform, nor is it sufficient in South African law if performance has merely become difficult or expensive. Whether performance has become objectively impossible is determined with reference to a standard of society (“’n verkeersmaatstaf”), which includes instances of actual physical impossibility and also instances where performance remains physically possible but cannot reasonably be expected to be rendered. A contractual party may be able to argue that, in the circumstances, requiring to perform would be so difficult that it would not be reasonable in the circumstances. The courts will not easily accept this, however, performance could also be considered objectively impossible even if it is physically possible where it is, for example, unlawful; and
    
    
• Impossibility must be unavoidable by a reasonable person:
  • in this regard, it is often said that the impossibility must be the result of a force majeure or an “act of God”. This requirement implies that the impossibility must not be due to the fault of one of the parties. It must be due to an event that was objectively beyond that party's control. The mere fact that the disaster was foreseeable does not mean that the supervening impossibility of performance could not have arisen. The event may still be unavoidable by the reasonable person. It is safe to say that the effects of a pandemic such as the COVID-19 have been so unforeseeable and unavoidable and not anyone's fault, that they would, without any doubt, fall within the definition of an “act of God” or force majeure.
    
    

Supervening impossibility of performance affects not only the obligation that has become impossible but also any counter-obligations. Supervening impossibility of performance ordinarily terminates the obligation and therefore excuses the debtor from performing. The debtor may, however, agree to carry the risk of supervening impossibility by express or tacit agreement. Accordingly, every agreement needs to be carefully construed to determine whether this is the case. A court will always consider the nature of the contract, the relationship between the parties, all the circumstances of the case, and the nature of the impossibility involved.

Supervening impossibility of an obligation also generally excuses a creditor from rendering a counter-performance that is reciprocal to the performance that has become impossible. Extinction of the obligations then results in an obligation to return whatever was performed under the contract, which in turn is enforceable by an enrichment action.

The effect of partial or temporary impossibility of performance depends on the circumstances of the case. Where a divisible obligation becomes partially impossible to perform, the debtor will be released from those parts of the obligation that have become impossible to perform. Where an indivisible obligation becomes partially impossible, the creditor generally has an election whether to accept partial performance in return for a proportionally reduced counter-performance, or whether to escape from the contract.

If performance has become temporarily impossible, the general rule is that the obligation to perform is suspended until the impossibility disappears. However, if the impossibility continues for such a period of time that is not reasonable to expect the creditor to continue with the contract, the creditor will have a choice whether to terminate the contract.

Some practical examples:

• If a private educational institution is required to close by virtue of the president's recent proclamation, can a customer refuse to pay for so long as the school is closed, or even cancel the agreement if the college remains closed for a sustained period? Clearly, the COVID-19 is an “act of God” and so the first requirement is met. Furthermore, it is objectively impossible for the school to perform its obligation to provide services as it is precluded by law from opening. The school, despite not being able to provide the services, wouldnothowever be liable for breach of contract to the student. Both the student's obligation to pay and the school's obligation to render education is suspended until the school is permitted to open. However, if COVID-19 continues for such a period of time that it is not reasonable for the student to continue with the contract, the student will have a choice whether to terminate the contract without paying any further fees.
• Assume the example of a restaurant at a busy shopping mall. Assume the restaurant is suffering a massive decline of custom and has virtually no customers. The owner wishes to suspend the lease with the mall until its customers return. Once again, the requirement of an “act of God” is met as it is clear that, but for COVID-19, the customers would not have decreased. Moreover, it could well be said that it is objectively impossible to run a restaurant at the mall either because the legal requirement of 100 person gatherings is breached or that in the circumstances no person could do so due to the entire society self-isolating. A key question will be whether, on a proper interpretation of the lease agreement, it was a term of the agreement that the tenant would operate the restaurant. If so, it could well be argued that the landlord cannot comply with its obligation to deliver premises allowing the tenant to do so. However, sometimes lease agreements exclude the obligation on the landlord to guarantee that the premises will be fit for the use referred to in the agreement. So much will depend in this example on a proper interpretation of the contract.
• Assume a beneficiator of platinum ore did not want to take delivery of and pay for a consignment of platinum as the demand for beneficiated products had collapsed because of the COVID-19-induced recession. Would that beneficiator be entitled to cancel the supply agreement? There is clearly no factual impossibility or legal impossibility present as it would be objectively possible for the beneficiator to pay. Nor would it be illegal. Nor could it be said that the performance has become so difficult that it is clearly unreasonable to expect the beneficiator to perform. Therefore, despite the economic hardship on the beneficiator, he or she would be obliged to perform.
• What about the supplier of the platinum in the above example if it was unable to perform due to its employees wishing to self-isolate and protect themselves? Could it cancel its obligation to supply? It is interesting to note that in Wuhan, many companies cancelled their obligations to supply based on COVID-19force majeure. Clearly, the inability of the supplier is not due to his or her fault and is due to an event that was objectively beyond his or her control. Nor was such an event foreseeable or foreseen. Usually, an inability of one's labour force to supply a product would be something that is subjectively impossible rather than objectively. However, in light of the global and widespread nature of COVID-19, a strong argument could be made that the impossibility to supply is objective as no labour force is available anywhere, and not merely an economically difficult one to undertake. Based on this, one could well argue that the supplier in these circumstances is not in breach of contract for failure to supply.
• Assume an organiser of conferences is obliged, in terms of the president's 100 person limit proclamation, to cancel a conference, could it retain amounts already paid by delegates? Clearly, there is an “act of God” causing it to be objectively impossible for the conference organiser to proceed with the conference. The effect would be that the contract between the conference organiser and the delegates would be void due to supervening impossibility of performance. A delegate would require to rely on an enrichment action and not a breach of contract to reclaim the money paid. Provided that the organiser had not flitted the money away, this claim would remain open to the delegate.
  
  

In conclusion

Contractual law is always dependent on the background facts to the contract and the terms of the contract itself. This is accentuated in the complex realm of supervening impossibility of performance andforce majeure. This area is going to become crucial for businesses as they try to survive the COVID-19, and legal advice should be sought to navigate through this complex area.

Jason Valkin, Executive Corporate Commercial, [email protected], +27 82 785 6857

No information provided herein may in any way be construed as legal advice from ENSafrica and/or any of its personnel. Professional advice must be sought from ENSafrica before any action is taken based on the information provided herein, and consent must be obtained from ENSafrica before the information provided herein is reproduced in any way. ENSafrica disclaims any responsibility for positions taken without due consultation and/or information reproduced without due consent, and no person shall have any claim of any nature whatsoever arising out of, or in connection with, the information provided herein against ENSafrica and/or any of its personnel. Any values, such as currency (and their indicators), and/or dates provided herein are indicative and for information purposes only, and ENSafrica does not warrant the correctness, completeness or accuracy of the information provided herein in any way.

COVID-19, also known as the Coronavirus, is an infectious disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) that was declared a pandemic by the World Health Organization on 11 March 2020. The disease has since been reported in over 190 countries.