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Bulletin | Covid-19

Force Majeure in light of Covid-19

Fasken
Reading Time 5 minute read
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Covid-19 is spreading, and the mass hysteria and panic buying, are causing irreparable damage to the global economy. Currently, the only people resting easy at night are the manufacturers and distributors of hand sanitizer and face masks. Companies worldwide are distributing notices to their employees cancelling international travel, conferences, in person meetings, implementing their business continuity plans and giving detailed instructions on how to limit their employees’ chances of catching the virus. However, the biggest concern for many businesses, whether they be investors, borrowers, suppliers, service providers or contractors – is whether or not they have appropriate contractual rights to protect them during this period.

It is likely that businesses will start to receive (if they have not already) force majeure notices from their suppliers, contractors and service providers, especially if such entities are located in the Covid-19 “hotspots” such as China, Italy and Iran. The China Council for the Promotion of International Trade has issued numerous force majeure certificates to businesses in China affected by the Covid-19 outbreak.

If any of these downstream entities are successful at invoking force majeure it will suspend their obligations under their contract for so long as the force majeure event persists. Although this seems entirely reasonable in relation to the affected party, this may leave the counter-party in an untenable situation. For instance, in a project finance transaction, whilst it may be beneficial to a contractor under its construction agreements, the employer (as borrower) may not be as successful under its loan agreements, as the failure to make repayment of its loan is not usually a force majeure. Similarly, if you are a distributor of goods (such as medical supplies, textiles or equipment), your supplier may be able to successfully invoke a force majeure provision under the supply contract, but you may not be as successful under your distribution contract.

Whether the Covid-19 virus affects existing contracts depends largely on the specific wording of the contract and the parameters of the definition of force majeure. It is unusual to have a closed list of force majeure events and there is often “catch-all” language to include events not specifically listed, but that fulfil the broader criteria of the definition. Fortunately for some contracting entities, their force majeure clauses may include specific references to “epidemic” and “pandemic”. However, for others, they will need to look at the more broad references to “plagues”, “natural disasters” and “natural events” to determine whether or not the Covid-19 virus falls within one of these listed items.

Typically a party must prove that the force majeure event was (i) not within its reasonable control; (ii) could not have reasonably been avoided or overcome; and (iii) is not (directly or indirectly) as a result of the negligence, wilful conduct or default of the affected party. There must usually be a link between the force majeure event and the failure to perform. Whilst on the face of it, it appears that a contractor would be able to rely on a force majeure clause to excuse its performance under the contract as a result of the Covid-19 virus; it is not always that clear cut. For instance, the co-contracting entity may need to assess whether or not the affected party took reasonable measures to avoid Covid-19 in its workplace. Did the contractor voluntary close its business? Could the contractor have sub-contracted the works? Is it actually impossible for the contractor or service provider to fulfil its obligations under the contract?

Whilst a party may be excused from its performance under the contract while the force majeure continues, there is usually an obligation on the affected party to use all commercially reasonable efforts to alleviate and mitigate the cause and effect of the force majeure event and resume performance of its obligations once it is able to do so. However, if the force majeure event continues for an extended period of time, there is sometimes a right to terminate the contract by either party.

Not all contracts have force majeure clauses and in such instances, under South African law, an affected party would look to rely on the doctrine of supervening impossibility. As a general rule, supervening impossibility will relieve a contracting party of liability for non-performance if such impossibility is not reasonably foreseen by the parties at the time they entered into the contract (despite it being within the bounds of human foresight) and provided that the affected party did not contribute to the circumstances giving rise to the impossibility of performance.

Contracting parties affected by the Covid-19 virus may therefore, in certain circumstances, seek to rely on the doctrine of supervening impossibility if the South African law governed contract is silent on force majeure, on the basis that the Covid-19 virus is an occurrence that a contracting party could not have reasonably foreseen at the time of entering into the contract prior to its outbreak. The party wishing to invoke supervening impossibility has the onus of proving that the performance is objectively impossible and that the impossibility cannot be avoided by a reasonable person. Although the doctrine of supervening impossibility offers a measure of relief in law, the inclusion of a well drafted force majeure clause in a contract may be more beneficial to the contracting parties as it provides them with more certainty and clarity.

Contracting parties have most likely started assessing the impact of the Covid-19 virus on their agreements, as well as any available and reasonable mitigation options to minimise the impact. The resulting impact of Covid-19 globally is unknown at this stage and as such, the importance of these provisions will only become increasingly more prominent over the next few weeks and months.

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