Can your company be held liable for breaching a contract because of Covid-19?_1

The continued spread of the global coronavirus epidemic and its impact on business activities has raised questions of whether companies could find themselves on the wrong side of the law when it comes to performance in term of their contractual obligations. Experts say in the case of Covid-19, the relevant clause in a contract may cover pandemics, but it may also cover, for example, government interference, national crises, or emergency measures and a list of others covered in a comprehensive contract. “Uncontrollable variables arising from Covid-19, may prevent many parties from meeting their contractual obligations – leaving many open to...
The continued spread of the global coronavirus epidemic and its impact on business activities has raised questions of whether companies could find themselves on the wrong side of the law when it comes to performance in term of their contractual obligations.

Experts say in the case of Covid-19, the relevant clause in a contract may cover pandemics, but it may also cover, for example, government interference, national crises, or emergency measures and a list of others covered in a comprehensive contract.

“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,” say experts from Webber Wentzel attorneys.

In a joint article, the dispute resolution specialists at Webber Wentzel law firm – Damian Wright, Dominic Harris and Michael Straeuli, highlighted what companies needed to do to prevent themselves from falling into the trap of non-compliance with contract law. They advised about the need to observe the force majeure clauses and the accompanying common law doctrine of supervening impossibility where no contract existed.

“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,” they said.

“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’,” they wrote.

But the devil is in the details, as the lawyers pointed out. As parties to a contract agree to have certain events specifically regarded (or not) as force majeure events under the contract, they must consider specific wording of the specific force majeure clause. This would assist 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.

The party must establish the facts considering that force majeure was only available if the prescribed event has taken place and has caused (or is about to cause) the default.

“This is why it is critical to establish the chain of causation at the earliest opportunity. Further, as a third step the party must give timeous notice to the other party of the actual anticipated non-performance as stated in the contract, otherwise failing to provide proper notice in line with the terms of the clause, could have prejudicial results.

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,” they said.

To be successful in using force majeure, performance in terms of the agreement must genuinely be impossible.  “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.”

In cases where there were no obligations in terms of force majeure or no formal written contract existed, the common law applied and the legal concept known as supervening impossibility would come in.

“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,” they said.

ericn@citizen.co.za

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