We are only a few days in the lockdown due to the Covid-19 pandemic and the economic repercussions are tangible. If you have entered into a contract there might be one of two remedies at your disposal.
What is force majeure?
This is a concept that is often inserted in contracts that refers to the subsequent unforeseeable impossibility that is outside the reasonable control of any of the contracting parties.
When can a contracting party rely on force majeure?
Firstly the contract should contain a force majeure clause, this clause is not read in by law. Contracts such as loan agreements often do not contain such a clause.
Furthermore, there must be a direct link between the non-performance and the virus. Could the contracting party have done something from his/her side to mitigate the virus?
One will need to make sure that the Covid-19 virus and the subsequent lockdown falls within the ambit of the specific clause. The clause might define certain events that will qualify as a force majeure. If the clause for instance only mentions wars, strikes, rebellion and natural disasters, it may be difficult to rely on this clause. If your clause, however, mentions “diseases”, “government orders”, “viruses”, “epidemic” or “pandemic” it may be easier to rely on such a clause.
If you are a distributor of goods you might successfully rely on the force majeure in relation to your supply contract, but you might be unsuccessful in terms of the distribution contract.
What is the effect of the force majeure clause?
Without a force majeure clause, the effect of impossibility to perform may terminate a contract. The effect of the clause is to suspend the working of the contract until performance becomes possible again. Although the working of the contract is suspended, both parties need to mitigate further damages or losses in the contract. Both parties’ rights and obligations will proceed as normal after the force majeure event has subsided.
It is important to keep in mind that although the virus may qualify as a force majeure event, this does not automatically make performance impossible. It might be more expensive or more onerous for the affected party to perform, this does not mean performance is impossible. An example of impossible performance may be an event with more than 100 guests, this is made impossible since it is prohibited by the government.
What if my contract does not contain a force majeure clause?
In this case, the common law will prevail, this concept is referred to as “supervening impossibility” or “frustration of contract”. The party wanting to rely on the fact that his/her performance is impossible due to the virus will need to prove that the Covid-19 virus was unforeseeable at the time of contract conclusion. Keeping in mind that if the contract was entered into after February 2020, this might be difficult to prove, because other countries around the world have, at that time, already gone to extreme measures to limit the spread of the virus. Furthermore, it must be proved that the affected party did not contribute to the virus, by worsening that situation, for instance, knowingly allowing employees that have tested positive to continue working.
Succeeding with impossibility of performance
Should the affected party succeed, both parties’ duty and responsibility to perform in terms of the contract, will be extinguished and the contract will terminate.
Each circumstance is measured on its own merit and needs to be treated as such. One has to consider each of these very carefully and we advise that you contact a legal professional to assist you in this matter.
Disclaimer: The material contained in this document is provided for general information purposes only and does not constitute legal or other professional advice. We accept no responsibility for any loss or damage which may arise from reliance on information contained in this article.