The worldwide outbreak of the Coronavirus, known as the Covid-19, has and will continue to have drastic and long-lasting effects on the world as we know it with much of the damage yet to be determined.
Amongst these effects will be the many legal implications, including the impact upon parties that are suddenly unable to perform their contractual obligations due to no fault on their part. How this will be dealt with would ultimately be determined by the parties to the contract themselves and, more importantly, the provisions of the contract.
In particular, the “force majeure” clause could prove to be the guiding provision in dealing with such situations and it is important to understand the meaning and application of this now crucial contractual provision.
What is a “force majeure” clause?
A force majeure clause is essentially a provision in a contract that provides for the situation where a party to the contract is not able to fulfil their contractual obligations flowing from the contract due to an unforeseeable circumstance or event that is beyond their control.
Often the clause lists the specific events to which it would apply, such as acts of God or natural disasters, but, more often than not, the clause does not have a limited list of force majeure events. It is more common for the clause to be open-ended so as to include events not specifically listed.
In the current Covid-19 environment some contracting parties are fortunate enough to have clearly specified a pandemic to constitute a force majeure event, but where this is not the case the parties would need to apply the general test for an event to be considered as force majeure.
What is the test for force majeure?
The party who wishes to claim force majeure essentially needs to prove that their non-performance or inability to perform is a direct result of the force majeure event, which event was:
- Unforeseeable when concluding the contract;
- Beyond the party’s control; and
- Impossible to avoid or overcome.
What is the effect of invoking force majeure?
A party who successfully claims force majeure is effectively excused from performing their obligations under the contract for the duration of the force majeure. However, such party would usually still be expected to take reasonable steps to mitigate the effect of the force majeure event and further to resume its obligations as soon as possible.
Some contracts specify a certain limited period to apply to force majeure provisions and may even allow for termination of the contract after the expiration of such period.
What if there is no force majeure clause?
Not all contracts have a force majeure provision. In such instances, the parties to the contract may rely on the common law doctrine of supervening impossibility which, in summary, excuses a contracting party from failing to perform under a contract where the impossibility to do so was not reasonably foreseen when entering the contract and, further, was not caused or contributed to by the said party.
Where to start?
A good place to start is to assess your existing contracts to ascertain any concerns as to inability to perform and whether or not there is a force majeure provision and the terms thereof. It is always best to pre-empt the situation with upfront communication with the contracting parties to agree on a reasonable approach to be implemented.
For any future contracts, make sure that you have considered the positions of all parties under the existing Covid-19 conditions and ensure that you provide for a force majeure clause that is workable and reasonable in the current environment.
For any assistance with the above you are welcome to contact Sandy Scholtz at Goldberg & de Villiers Inc. at firstname.lastname@example.org.