COVID-19 Can I Be Excused From Performing My Contractual Obligations?
Updated: Jul 30, 2020
The World’s Unprecedented Force Majeure
In view of most of world economies now living in lockdown, with access only to essential supplies and medical care, the insuperable effect of COVID – 19, is visible in the empty streets and closed shops around the world. The world literally slowed down. Commerce and international business, as we know it is now restricted by harsh measures and extreme disaster management regulations. This causes harm to economies, but it is necessary to contain the spread of the coronavirus, classified as a global pandemic.
Many business and individuals are now contemplating their fate on how to perform in terms of their contractual obligations, and for the very first time COVID -19, has forced us, to consider our Force Majeure clauses. But how does one approach this uncertainty? What about my simple agreement that do not have such a clause? What is Force Majeure?
The significance of a Force Majeure clause within the purview of a global pandemic is that Force Majeuremay present parties to an contract with a lawful excuse not to perform their contractual obligations thereby allowing parties to re-adjust their obligations. LEGAL FRAMEWORK In South Africa, our common law position in terms of Force Majeure, is trite and is applied in very much the same way, as it would be applied internationally. In the light of such a global disaster, it is reassuring to know that our Courts will not, broadly interpret Force Majeure clauses so as to excuse the performance of contractual obligations. To the contrary, our Courts have always interpreted contracts by giving effect the substance of the contract and not the form, meaning that our courts will look at the specific circumstances, under which performance had to be affected. If there is one fact, to be learned from this pandemic, it is that there is no exhaustive list of situations which might constitute a state of Force Majeure for your contractual relationships.
Force Majeure or Vis Major in the wider sense is, uncontrollable circumstances, that is truly unpredictable, unpreventable not due to the fault any of the parties to an agreement.
Examples of such circumstances may include war and serious natural disasters such as hurricanes and earthquakes and acts of government, such as interventionist actions taken in response to a worldwide health crisis.
Simply put, it is a very old legal principle that can be applied under special circumstances to lawfully excuse you or your company from performing your contractual obligations if correctly applied. When wrongly applied to your relationships, it could lead to unnecessary legal disputes.
A Force Majeure-Clause is a contractual clause, ordinarily included in most written agreements, that contains specific terms for the occurrence of unforeseen eventualities and circumstances beyond the contemplation of the parties before or during the performing of their obligations in terms of any agreement. These clauses received very little attention before the pandemic, but has become most relevant in recent times.
Roman law that is applied to this day dictates that parties are simply excused from performing their contractual obligations, in any event, where it may be proven that performance in terms of a contract is objectively impossible without the fault of the parties. In effect, the ordinary consequences of breaching your obligations, such as damages claims are suspended by the operation of the common law.
This common law principle is implied in all contractual relationships, but the application thereof may be unreasonable harsh on the parties. In the normal course, the application of the harsh common law principle, often resulting in a mere termination of the relationship between the parties, this is ameliorated by the inclusion of a tailored Force Majeure– Clause in your agreements, regulating the contractual relationship due to such unforeseen circumstances. It has therefore become custom for parties to rather stipulate for Force Majeure by including a specific clause that either limits circumstances that the parties consider to be Force Majeure, and or to suspend the obligations of the parties for a specific time period with an agreed procedure for terminating the obligations to perform contractual obligations. This provides a certain measure of flexibility to economic subjects to continue their participation in their economy and international trade.
Most importantly, the mere existence of disaster or pandemic does not entitle one to be excused, in the present circumstances, the nature and effect of the lockdown regulations on the ability to perform his/her obligation, is paramount in the application of Force Majeure.
Simply put, the “Lock down” regulations must have the effect that performance is made objectively impossible and not merely more onerous. This is often not so easy to establish and apply to the unique circumstances of each matter.
National courts and international tribunals are hesitant to grant such a relief to a contracting party and it is therefore cautiously applied as courts also applies the omnipresent principle of, pacta sunt servanda. This legal principle is also implied into and equally applied to all agreements. It means that contracts should have binding effects on those parties that have agreed to be bound by its terms and that they should honour their obligations in support of the public policy and for the sake of enforcing and facilitating, sound commerce within an economy.
The Force Majeure principle is also well known and enforced in International contractual relationships. Many countries influenced by Roman law and French law based on the Code Civil, precipitated the principle into their modern, Law of Obligations.
According to Schaefer, a leading legal author on international business law, international clauses of Force Majeure must be tailor made for every situation, and party involved.
The International Chamber of Commerce’s, standard Force Majeure clause below, is a clear example, of such a clause that may be invoked under the present circumstances pertaining to Covid -19.
Global and local content requirements which restrict commerce and movement of people in non – essential and unnecessary sectors of the economy, falls foursquare within the ambit and working of this clause.
“A party to a contract is bound to perform its contractual duties even, if events, have rendered performance more onerous than could reasonably have been anticipated. A party to a contract is bound to perform its contractual duties even if, events have rendered performance more onerous than could reasonably have been anticipated at the time of the conclusion of the contract.”
Notwithstanding paragraph 1 of this Clause, where a party to a contract proves that:
the continued performance of its contractual duties has become excessively onerous due to an event, beyond its reasonable control which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract; and that
it could not reasonably have avoided or overcome the event or its consequences, the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms which reasonably allow for the consequences of the event.
Where paragraph 2 of this Clause applies, but where alternative contractual terms which reasonably allow for the consequences of the event are not agreed by the other party to the contract as provided in that paragraph, the party invoking this Clause is entitled to termination of the contract.”
Briefly, the following trite legal principles can be utilised and applied to evaluate whether a party can potentially rely on Force Majeure in order to be excused from performing their contractual obligations.
The objective test applied worldwide is that;
A Force Majeure event, is an objective event or situation which is:
- Unforeseeable, (at the time of entering into the contract);
- unavoidable in terms of occurrence or impact; and - impossible to overcome.
It is clear that where, a state of global disaster is present, Force Majeure, will mutually prohibit both parties to perform on their respective contractual obligation and there would be a natural enforcement of the clause and no legal enforcement are required.
The battle between Vis Major or Force Majeure and pacta sunt servanda, has not changed much since the eruption of Vesuvius on Pompei. What seems to be more important is not the eruption, but the effect thereof on parties to fulfil their obligations. We can only hope that Covid – 19, does not take years to cool off, in the same way, lava does.
In seeking confirmation whether you or your company may successfully rely on Force Majeure and thereby be excused from performing their contractual obligations or to resile therefrom, alternatively, whether you be on the receiving end of an incorrect attempt to rely on Force Majeure, we recommend that you consult your preferred legal practitioner for advice in order to avoid unnecessary disputes in difficult times.
Article and Research by:
Mr. Jean Graeme Polson (Partner) - email@example.com
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Mr. Rorisang Mojapele (Candidate Attorney)