By Tanya Waksman
Does coronavirus (COVID-19) have any effect on the rights and/or obligations of parties in contractual relationships under South African law? Tanya Waksman, of legal advisory firm, Eversheds Sutherland, considers this question in this month’s SmartProcurement.
A force majeure (or vis major) event is an unforeseen and superior force, event or circumstance which is beyond the control of the contracting parties and which renders contractual performance impossible.
Where an agreement does not contain a force majeure clause, the legal principle of supervening impossibility becomes applicable. In such instances (unlike an express force majeure provision which contains the guidelines of application), the party who is unable to perform, owing to the supervening event, must objectively prove that:
– As a result of the event, contractual performance is impossible (not merely difficult or more costly); and
– The event was unforeseen and the consequences of non-performance unavoidable.
Where an agreement does contain a force majeure clause, it will be constructed to protect the parties to a contract by:
(i) Limiting the affected party’s liability for non-performance, if a force majeure event occurs; and/or
(ii) Suspending performance of both parties’ obligations (without penalties) until such time as performance can continue; and/or
(iii) Allowing an agreement to be terminated, without penalty, where performance cannot resume.
Consequently, the force majeure provision suspends the ordinary consequences of breach of contract.
Is COVID-19 a force majeure event?
In 2014, ArcelorMittal applied a force majeure event in relation to its iron ore mining operations in Liberia, West Africa, owing to an outbreak of the Ebola virus, which resulted in the evacuation of thousands of its employees at its iron ore mines, causing an absolute cessation of mining operations.
In the context of South Africa, President Cyril Ramaphosa declared a “national state of disaster” as a result of COVID-19, in an address to the nation on 15 March 2020. This becomes a landmark date, as the application of a force majeure clause will be assessed (in most cases) based on the impossibility of performance, as a result of COVID-19 and/or the effects of the President’s declaration on performance, after that date.
As such, a contracting party can only invoke a force majeure clause if the consequences of the declaration, and/or the spread of the virus, renders contractual performance impossible.
As at the date of this opinion [published 26 March 2020], even though the President has imposed many prohibitions, he has not, as yet, imposed a complete lockdown in South Africa. Furthermore, the infection levels in South Africa are not yet such that the greater work force has been infected or affected, rendering them unable to work. As a result, unless the prohibitions imposed by the President, or the lockdowns imposed in other jurisdictions (for example, the lockdown in China may have caused a block in the supply chain), have rendered contractual performance impossible, contracting parties would not yet be able to rely on a force majeure clause (or the principle of supervening impossibility in cases where no such clause is included in their contract).
That being said, in the event that the President imposes a complete lockdown (meaning that everyone must remain at home), or if the infection levels in South Africa increase such that the greater work force is infected or affected, and as a result contractual performance is rendered impossible, contracting parties would then be able to rely on a force majeure clause (or the principle of supervening impossibility in cases where no such clause is included in their contract).
[Editor’s note: President Cyril Ramaphosa imposed a complete lockdown from 26 March for a period of five weeks. This rendered the work force unable to work and caused blocks in the supply chain. A risk-adjusted approach, consisting of different levels of lockdown is currently in force in South Africa, allowing certain industries and sectors to resume operation.]
The precise application, and effect, of a force majeure clause (or the principle of supervening impossibility) will depend on the circumstances and the specific wording of the clause, and its interpretation under the relevant governing law of the contract.