COVID-19 as an ‘event of force majeure’ in commercial agreements

There is no doubt that the disruptions to the global supply chain brought about by the COVID-19 pandemic are still felt almost a year after the declaration of a national state of disaster by President Cyril Ramaphosa, in terms of the Disaster Management Act, 57 of 2002 (the DMA). As a result, business owners and business leaders remain 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 light of the extraordinary events that occurred in this last year, as the ability of businesses to continue contracting in accordance with the terms of their contracts is constrained, suppliers are looking to their commercial agreements for available avenues for relief from their performance obligations. On the other hand, their customers are 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 ever-changing regulations issued in terms of the DMA (the Regulations) 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. 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 periods 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.