Don’t be too sure about force majeure

Covid-19 is spreading, and mass hysteria and panic buying are causing irreparable damage to the global economy. Companies worldwide are distributing notices to staff cancelling international travel, conferences and in-person meetings, implementing business continuity plans and giving detailed instructions on how to limit their employees’ chances of catching the virus.

President Cyril Ramaphosa has announced a state of disaster and instituted a rapid effective response system, including closing schools, prohibiting gatherings of more than 100 people and instituting a travel ban on foreigners from high-risk areas.

A pressing concern for many businesses — investors, borrowers, suppliers, service providers or contractors — is whether they have appropriate contractual rights to protect them during this period, particularly in relation to force majeure — an an exceptional and unforeseeable event that prevents a party from fulfilling its contractual obligations.

It is likely that businesses will start to receive (if they have not already) force majeure notices from their suppliers, contractors and service providers, especially if these entities are located in the Covid-19 “hotspots” such as China, Italy or Iran.

If any of these organisations are successful at invoking force majeure it will suspend their obligations under their contract for as long as the event persists. Although this seems entirely reasonable in relation to the affected party, it may leave the other party in an untenable situation.

For instance, in a project finance transaction, while to a contractor it may be beneficial under its construction agreements to invoke force majeure, the employer (as borrower) may not be as successful under its loan agreements, as the failure to make repayment of its loan does not constitute force majeure and is not typically catered for in such contracts.

If you are a distributor of goods, such as medical supplies, textiles or equipment, your supplier may be able to successfully invoke a force majeure provision under the supply contract, but you may not be as successful under your distribution contract.

Whether Covid-19 affects existing contracts depends largely on the specific wording of the contract and the parameters of the definition of force majeure. It is unusual to have a closed list of force majeure events and there is often “catch-all” language to include events not specifically listed but that fulfill the broader criteria of the definition. Fortunately for some contracting entities, their force majeure clauses may include specific references to “epidemic” and “pandemic”. However, others will need to look at the broader references to “plagues”, “natural disasters” and “natural events” to determine whether Covid-19 falls within one of these listed items.

Typically a party must prove that the force majeure event was not within its reasonable control; could not have reasonably been avoided or overcome; and is not (directly or indirectly) a result of the negligence, wilful conduct or default of the affected party. There must usually be a link between the force majeure event and the failure to perform.

While on the face of it a contractor would appear to be able to rely on a force majeure clause to excuse its performance under the contract as a result of Covid-19 prevention, it is not always that clear cut. The unaffected party may need to assess whether the affected party took reasonable measures to avoid Covid-19 transmission in its workplace. Did the contractor voluntarily close its business? Could the contractor have subcontracted the works? Is it actually impossible for the contractor or service provider to fulfill its obligations under the contract?

While a party may be excused from its performance under the contract while the force majeure continues, there is usually an obligation to use all commercially reasonable efforts to alleviate and mitigate the cause and effect of the force majeure event and resume performance of its obligations once it is able to do so. However, if the stoppage continues for an extended period, there is sometimes a right to terminate the contract by either party.

Not all contracts have force majeure clauses and in these cases, under SA law an affected party would have to rely on the doctrine of supervening impossibility. As a general rule this will relieve a contracting party of liability for nonperformance if such impossibility is not reasonably foreseen by the parties at the time they entered into the contract (despite it being within the bounds of human foresight) and provided that the affected party did not contribute to the circumstances giving rise to the impossibility of performance.

Contracting parties affected by Covid-19 may, therefore, in certain circumstances seek to rely on the doctrine of supervening impossibility if the SA law-governed contract is silent on force majeure. The party could rely on the doctrine on the basis that Covid-19 is an occurrence a contracting party could not have reasonably foreseen at the time of entering into the contract prior to its outbreak.

The party wishing to invoke supervening impossibility has the onus of proving that the performance is objectively impossible and that the impossibility cannot be avoided by a reasonable person. Although the doctrine offers a measure of relief in law, the inclusion of a well-drafted force majeure clause in a contract may be more beneficial to the contracting parties as it provides them with more certainty and clarity.

ALTHOUGH THIS SEEMS ENTIRELY REASONABLE TO THE AFFECTED PARTY, IT MAY LEAVE OTHERS IN AN UNTENABLE SITUATION.

Kay is a partner, and Van der Merwe a senior associate, in the finance and projects team at Fasken Law Firm.