With Covid-19 declared a global pandemic, the potential impact on a party’s ability to perform in terms of a contract is far-reaching, write Michael Straeuli, Damian Wright & Dominic Harris, Dispute Resolution Specialists at Webber Wentzel.
Uncontrollable variables arising from Covid-19, may prevent many parties from meeting their contractual obligations – leaving many open to significant litigation risk in the future. Here are some of the key issues related to contracts at this time – focusing on force majeure clauses and the accompanying common law doctrine of supervening impossibility.
What is force majeure?
Whilst it is correct to associate force majeure to natural disasters, the concept covers a wide range of events including wars, insurrection, sabotage, and public riots. Force majeure is a contractual concept, and these clauses exist to protect a party to a contract from an event beyond the control of that party, which subsequently prevents the party from performing its obligations in terms of an agreement.
The safeguarding principle of force majeure is that a party who defaults on their obligations through no fault of their own should not be held liable for that default. A party that successfully invokes force majeure will be released from their contractual obligations, either temporarily or permanently, and will escape any liability that may arise in respect of the “default”.
The principle of freedom of contract enables parties to agree to have certain events specifically regarded (or not) as force majeure events under the contract. Accordingly it is essential to: consider the specific wording of the specific force majeure clause to determine whether a qualifying event has occurred; and establish a link (referred to as “causation”) between the event in question and the actual or potential non-performance of the contract.
Force Majeure and Covid-19
The first step is to consider is the wording of the force majeure clause in the specific contract. In the case of Covid-19, the relevant clause may cover pandemics, but it may also cover, for example, government interference, national crises, or emergency measures. A comprehensive force majeure clause may list a variety of events or circumstances, affording a party greater scope to invoke force majeure.
The second step is to establish the facts. Force majeure is only available if the prescribed event has taken place and has caused (or is about to cause) the default in question. This is why it is critical to establish the chain of causation at the earliest opportunity.
Third, a party seeking to rely on a force majeure clause will most likely be required to give timeous notice to the other party of the actual or anticipated non-performance in the manner specified in the contract. Failing to provide proper notice in line with the terms of the clause, could have prejudicial results.
Finally, even if the event in question satisfies all the above requirements, a force majeure clause can list various exclusions – such as economic downturns. It’s important to be mindful of any exclusion that could result in the event not constituting force majeure in terms of the contract.
What arguments are there against a party declaring force majeure?
To be successful in using force majeure, performance in terms of the agreement must genuinely be impossible. The discharge of a party’s obligations would not be justified where the event in question simply makes the agreement uneconomical for the party. Similarly, self-created impossibility would not discharge the party from their obligations in terms of the agreement. Additionally, our courts have held that actual foresight, or the reasonable foreseeability, of the event that causes impossibility, may have the effect of ruling out, or indicating tacit acceptance of, the risk of impossibility.
What if I don’t have a force majeure clause in my contract?
Where no force majeure clause exists in the contract, or the parties do not necessarily have a formal written contract, the common law would assist a party, in a similar fashion as a force majeure clause. This protection comes in the form of a legal concept known as supervening impossibility. In this regard, the court has determined that if a party is prevented from performing his/her contract by irresistible force [vis major] or unforeseeable accident [casus fortuitous] it is discharged from liability. Between them, vis major and casus fortuitous include any event that is unforeseeable with reasonable foresight, and unavoidable with reasonable care.
If successful, a party will be discharged from further performance, while the other party’s corresponding right to claim further performance is extinguished.
Practically speaking, where a contract contains a force majeure clause, the question of supervening impossibility would not be raised, and a party would be well-advised to rely on contractual rights.