COVID-19 as an ‘event of force majeure’ in commercial agreements has been saved
COVID-19 as an ‘event of force majeure’ in commercial agreements
By Sibongile Solombela, Director: Legal and Mia Heymann, Assistant Manager: Legal, Deloitte Africa Tax & Legal
There is no doubt that the disruptions to the global supply chain brought about by the COVID-19 pandemic will be felt progressively more over the coming months. As a result, business owners and business leaders are concerned about the implications of the inability of their enterprises to provide goods and services to customers, and/or the inability of their suppliers to meet their contractual obligations to supply the inputs required to trade.
In South Africa, the following significant events that have occurred over the last few weeks are likely to severely affect local supply chain dynamics:
- 15 March 2020, President Cyril Ramaphosa declared a national state of disaster in terms of the Disaster Management Act, 57 of 2002 (the DMA)
- 17 March 2020, the regulations to the DMA, which mobilised state resources and sought to curtail gatherings of more than 100 persons in an effort to combat the spread of COVID-19, were published (the Regulations)
- 25 March 2020, the Regulations were amended to provide for the restriction of movement of persons as well as non-essential goods and services from 23h59 on Thursday, 26 March 2020 to 23h59 on Thursday, 16 April 2020 (Lockdown)
In light of these extraordinary events, as the ability of businesses to continue contracting in accordance with the terms of their contracts is constrained, suppliers will be looking to their commercial agreements for available avenues for relief from their performance obligations. On the other hand, their customers will be assessing their rights to enforce these performance obligations under the same agreements.
A party whose ability to perform obligations under a commercial agreement is negatively impacted by the regulations and lockdown may look to trigger a force majeure clause in the agreement in order to avoid being in breach of contract.
Force majeure clauses typically provide for a temporary suspension of the parties’ respective contractual obligations upon the occurrence of a specifically defined event or set of events that prevent a party from performing its obligations. The other party to the agreement is usually prohibited, for the duration of the force majeure event, from instituting a damages claim as a result of the first party’s non-performance. It should be noted that force majeure clauses often stipulate that the force majeure event will not operate to suspend the obligation of a party to make a payment if it becomes due and payable under the agreement.
A force majeure clause does not automatically apply to a given set of circumstances that prevent performance. And it is only in instances where the event preventing performance is specifically defined in the contract as constituting a force majeure event that a party, to a commercial agreement, may rely on the event to excuse its failure perform its contractual obligations. Our recommendation is that any business looking to invoke the provisions of a force majeure clause in an agreement should carefully analyse the wording in their agreements to be certain that such circumstances fall within the contractual definition of force majeure.
Events that are typically defined as constituting force majeure events in commercial agreements are an act of God, fire, flood, riot, strikes, national restrictions, any court order, and any requirements of any governmental authority or other circumstances that are not within the reasonable control of a party.
Force majeure clauses often include an obligation on the party whose performance is affected to provide advance written notice to the other party to the agreement of the possible occurrence of a force majeure event. These clauses also often allow for termination of the agreement without damages or the renegotiation of the agreement in instances where the force majeure event endures in excess of a specific time period.
Under South African law, where an agreement is silent on the issue of force majeure or where the event preventing performance is not catered for in the definition of force majeure in the agreement, the common law will apply. In such circumstances, the common law concepts of supervening impossibility of performance or undue hardship may be relied upon by a party in the face of a claim for specific performance in terms of an agreement provided certain factual circumstances are present. In such cases, a legal analysis of the relevant agreement and the facts will have to be undertaken to establish whether the terms of the agreement are enforceable notwithstanding a counterparty’s inability to perform its obligations.
As the stability of the supply chain is integral to effective scenario-planning and the development of business continuity plans, we encourage businesses to pay particular attention to the potential impact of force majeure declarations by their suppliers as well as the extent of relief that their own declarations of force majeure may provide during the current period of uncertainty.
It is critically important that businesses work to maintain the relationships between themselves as well as their suppliers and customers as we navigate the turbulence brought about by the COVID-19 pandemic, as once COVID-19 is behind us, these businesses will have to work together to rebuild their supply chain ecosystems.
President Cyril Ramaphosa announced tax relief measures, which will apply to certain employers during the next few months, in response to the coronavirus