A question on the minds of most currently is to what extent parties to a contract can be held liable to perform their obligations in the face of COVID-19 and the restrictions which come with it.
The first case of COVID-19 in South Africa was reported on 5 March 2020. On 23 March 2020, President Cyril Ramaphosa declared that South Africa was to be placed in lock-down, to commence at 23h59 on 26 March 2020 and end at 23h59 on 16 April 2020. Regulations were thereafter issued on 25 March 2020 in terms of section 27(2) of the Disaster Management Act No. 57 of 2002 to regulate the lock-down period (“Lock-down Regulations”). Suffice to say, very few parties to contracts could have contemplated the pandemic and the subsequent lock-down and accordingly the effects of the Lock-down Regulations will almost certainly not have been specifically provided for in commercial agreements.
Most contracts, however, do provide for the parties’ rights and obligations where the performance of a contract by one of the parties (or both) is rendered impossible by some or other unforeseen event which is outside of a party’s control, for example, an earthquake or a fire. These events are known as events of force majeure, vis major or casus fortuitous. Where contracts do not specifically regulate the rights and obligations of the parties as a result of a force majeure event, the common law will apply.
The principles of force majeure have been addressed in South African case law. The locus classicus case in South Africa is the case of Peters, Flamman & Co v Kokstad Municipality 1919 AD 427. In that case, a German company signed a twenty-year contract with the Municipality to operate its street lamps. Ten years into the agreement, as a result of World War 1 breaking out, and Germany being declared an enemy state by the South African Government, the Government enacted war-time regulations, resulting in the German company being forced into liquidation. Notwithstanding, the Municipality attempted to sue the German company for breach of contract. In deciding whether the German company was indeed in breach of the contract for failure of performance, Solomon JA stated that the authorities in law are clear that “if a person is prevented from performing his contract by vis major (force majeure) or casus fortuitus…he is discharged from liability”. In other words, where an unforeseen event makes it impossible to perform, a party is no longer bound to perform, and both parties may be excused from the contract.
The force majeure event must render the performance objectively impossible. This much was made clear in the recent decision of Glencore Grain Africa (Pty) Ltd v Du Plessis NO 2007 JOC 210423 (O). In other words, the impossibility of performance cannot be particular to the specific party wishing to resile (for example, if a force majeure event only results in a loss of profits and accordingly an inability to make payment due to commercial reasons, this will not excuse a party from its obligations in terms of a contract).
Performance will also not be considered to be “objectively impossible” where performance is merely difficult or burdensome. However, in Unibank Savings & Loans v ABSA Bank 2000 (4) SA 191 (W) the court importantly decided that absolute impossibility is not required – a party will be excused from performing where, for example, it has become illegal to perform (i.e. where regulations prohibiting performance have, since initial conclusion of the contract, been promulgated).
The force majeure event must also not have been foreseen or reasonably foreseeable. Notably, in Wilson v Smith 1956 (1) SA 393 (W) the court held a party cannot rely on force majeure where it had, or could reasonably have been expected to have, prior to conclusion of the contract, foreseen the possibility of the event but failed to regulate the happening of such force majeure event in their agreement.
Whether a certain event qualifies as a force majeure and whether such event excuses a party from performance of its obligations in a contract, will be determined by a court on a case-by-case basis. The list of qualifying events is not a closed one and acts of state authority (i.e. promulgating regulations forcing businesses to close) have, in the past, been considered force majeure events.
Caution must, however, be noted that “if a party has expressly contracted to do a lawful act come what may – if in other words, he has taken upon himself the risk of such a supervening cause – he is liable if it occurs because by the very hypothesis he has contracted to be liable” (Horlock v Beal (1916, 1 A.C. 525 as quoted by Solomon, JA in Peters, Flamman & Co v Kokstad Municipality). It is therefore important to scrutinise the particular agreement carefully, specifically clauses dealing with limitations on liability, indemnities and force majeure.
In the South African COVID-19 context, parties may, depending on the circumstances and the provisions of their agreement, rely on the Lock-down Regulations as force majeure events in arguing that their performance in a contract has become objectively impossible. This may manifest itself in various ways i.e. it has become objectively impossible to manufacture and deliver non-essential goods and / or render non-essential services.
The Lock-down Regulations will be considered a force majeure event but whether such event excuses the parties from performing in terms of their agreement will need to be considered. Where the Lock-down Regulations make it illegal to perform an obligation in a contract, this act of state authority will almost certainly excuse a party from performing in terms of a contract. Where this causes a party to be unable to perform, the other party will likewise be excused from performing the reciprocal obligation, subject to the terms of the agreement.
We would strongly suggest that legal advice is sought where there is any doubt that you are entitled to suspend your performance in terms of a contract as a result of the Lock-down Regulations.
Chris Immelman
Candidate Attorney
Hayes Inc