Earlier this month, the World Health Organisation characterised COVID-19 as a pandemic. As people are urged globally to resort to self-distancing due to the COVID-19 pandemic, so are investors distancing themselves and their cash from an already ailing South African economy.
Globally, we are noticing the cancelation of gatherings and conferences, sporting events, disruptions in the supply and demand chains, interruptions to continuous operations and economists fearing that the effects on the global economy will be more intense than the effects of the 2008-2009 global financial crisis.
Many of our clients are asking what their contractual obligations are and what remedies exists if a contracting party fails to perform its contractual obligations in this trying time. Complex and interrelated questions are being asked regarding breach of contract, vis major or force majeure, termination clauses and claims for damages.
Below are our thoughts on some of the most prominent questions clients are asking us. Be reminded that the below merely constitutes an opinion on traditional clauses and contracts. Each situation must be assessed on its own terms and merits and parties are reminded to seek legal advice.
What will happen if I can’t perform in terms of an agreement and adhere to my obligations on time during lockdown?
The strict lockdown measures implemented by our government may result in the non-performance of contractual obligations. The lockdown measures will restrict and regulate the movement of persons and goods. As such, service providers and delivery of goods will be restricted. Should a manufacturer not be able to deliver a contracted minimum quantity of goods due to transport and logistics being limited (as a result of the lockdown), the manufacturer will be in breach of his contractual obligations.
In the event of a breach of agreement (by the defaulting party), the aggrieved party can elect to invoke the provisions of the ‘Breach Clause’ (provided your agreement contains a Breach Clause).
Most agreements contain a standard clause which relates to the breach of the agreement by either party. Traditionally the Breach Clause lays out the remedies available to the aggrieved party. The actual content of breach clauses vary, although the majority will specify that the aggrieved party will firstly be obliged to inform you of your non-performance or breach, and then provide you with a reasonable time (or such time provided for in the breach clause) to remedy the breach.
Should you continue to fail to perform and remain in breach of your obligations per the agreement without lawful grounds, the breach clause traditionally provides certain remedies that can be enforced by the aggrieved party and which may include the right to:
- Cancel the agreement and claim damages; or
- Enforce the terms of the agreement (including specific performance and payment terms).
Be reminded that your failure to perform or to rectify a breach may indicate to the aggrieved party a deliberate and unequivocal intention to no longer be bound by the contract, hence the aggrieved party may elect to cancel the agreement (thereby accepting the repudiation) and claim damages, unless you have lawful grounds for non-performance.
What would constitute ‘lawful grounds’ for non-performance?
The most common to all agreements may be the ‘force majeure’ clause or the common law principle of ‘supervening impossibility’.
One of the most searched words on the internet lately is ”Force Majeure” or ”Vis Major”. The aforementioned terms are used interchangeably in agreements. Force Majeure denotes the occurrence of circumstances or events that are beyond the control of the parties (or at least the non-performing party) and which makes performance under an agreement impossible.
Most modern agreements contain a ‘force majeure’ clause. A ‘force majeure’ clause essentially allows a contracting party, invoking the force majeure provisions, to suspend its obligations under the agreement for so long as the force majeure event persists. Whether the lockdown due to COVID-19 will constitute a ‘force majeure’ event, will depend on the wording of your agreement.
A properly drafted ‘force majeure’ clause will clearly define the events or occurrences that can or may constitute a ‘force majeure event’ and specifically include the words ”pandemic” or ”epidemic” or ”acts of God” or ”natural disaster”, all of which may include COVID-19 and the lockdown as an event of force majeure.
Traditionally, to invoke ‘force majeure’ as a ground for non-performance, a contracting party must have reference to the specific wording of the agreement and prove that the event or occurrence preventing performance:
- must not be within such party’s reasonable control;
- cannot have been avoided or mitigated in any reasonable manner; and
- is not as result of such a party’s own doing or fault or wilful conduct or default.
What if your agreement does not contain a ‘force majeure’ clause or is so poorly drafted that an event or occurrence cannot be determined from the wording of the agreement? In such a situation, a non-performing party can invoke its rights in terms of the common law principle of ‘supervening impossibility’.
The principle in our common law is that in a situation, that was caused or which arises without any act or fault of either of the parties to the agreement, and same renders the performance of a contractual obligation impossible, a party may be excused from the failure to perform.
The non-performing party must objectively prove that performance is impossible due to the event or occurrence (not within the defaulting party’s control). Our courts have placed a high standard on parties claiming ‘supervening impossibility’ and stipulated that in the event where a party can continue performing its obligations, albeit with economic hardship and increased costs, it will unlikely be able to prove supervening impossibility.
Another clause in agreements that may be invoked as a ground for non-performance is a ”Material Adverse Effect’ clause (or so-called MAE Clauses). MAE Clauses are typically for a merger and / or acquisition agreement, sale of business with earn-outs or finance and security documents. A MAE clause will generally be a detailed clause, the content of which have specifically been negotiated and agreed upon between the parties, hence, reference should be had to the specific wording of the MAE Clause.
Commonly, a MAE clause will be in the form of a warranty or guarantee, with reference to specific events or occurrences, guaranteed or warranted not to occur. Should the specific event or occurrence be realised, it will constitute a breach of the warranty or guarantee under the MAE clause.
What is the effect of relying on such lawful grounds for non-performance?
Usually, the desired relief sought by a party claiming a lawful ground for non-performance (albeit invoking the ‘force majeure’ clause or the MAE clause or proving ‘supervening impossibility or any other lawful ground), would, to be excused from performing its contractual obligations without damages being payable.
Properly drafted ‘force majeure’ clauses may provide for a suspension or extension of time for such obligations to be suspended (often dealing with the cost implications thereof as well). A ‘force majeure’ clause or properly drafted agreement may also include an obligation on the parties to meet and discuss the effect and potential mitigation of the prohibiting event or occurrence, to mitigate damages.
However, the effects are more interrelated when a ‘force majeure’ clause is successfully invoked by a manufacturer in terms of its supply agreement, but the wholesaler is forced to continue performing its obligations in terms of a distribution agreement. Businesses involved in upstream and downstream agreements, must carefully consider the implications of ‘force majeure’ clauses and other lawful grounds being claimed for non-performance.
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This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)