Force Majeure is a term used to describe an occurrence - by the will of God, a natural effect, or even man-made - which is beyond the control of an ordinary person, and which is generally unforeseeable, says the writer. (iStock)
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Any person contemplating Force Majeure is urged to take proper legal advice and to deliberate the ramifications of placing reliance on a Force Majeure event before resorting to it, writes Luqmaan Hassan.
South Africa’s nationwide lockdown which commenced on the 26th of March 2020 has forced many businesses to temporarily shut its doors.
Many creditors nevertheless still loom seeking payment for goods delivered just before the lockdown because the 30-day payment term is at an end, or for payment of the monthly rental for equipment leased in terms of an agreement concluded a year ago notwithstanding the fact that the equipment is useless if it cannot be used to generate an income.
Without an income, many businesses will not be able to meet all their obligations and may be inclined to invoke the legal doctrine of “force majeure” in the hope that it will absolve them of their obligations in terms of a particular contract for the period of the lockdown, and possibly beyond.
The application of force majeure is; however, not straightforward, and those seeking to employ it in their contractual dealings with others should understand the legal framework within which it applies, and what provisions to look for and evaluate in their contracts.
Force Majeure is a term used to describe an occurrence - by the will of God, a natural effect, or even man-made - which is beyond the control of an ordinary person, and which is generally unforeseeable.
Force Majeure may be relevant in a contractual relationship between two or more parties, and there are usually three ways in which it can manifest: the first of these would be where a contract contains a force majeure clause which releases parties form contractual obligations in certain circumstances.
The second is circumstances in which the contract specifically excludes force majeure and holds parties to their contractual obligations notwithstanding the existence of a force majeure event.
The third is a situation in which the contract is totally silent on force majeure, in which case the common law will apply.
Instances where the contract releases parties from obligations during a force majeure
A Force Majeure clause essentially functions to free parties to a contract from liability or from their obligations to the other contracting party when a Force Majeure event occurs.
Although each contract is different, contracts generally recognise force majeure events to include strikes, lock-outs, shortage of labour, civil commotion, riots, war, threat of or preparation of war, fire, explosion, sabotage, storms, floods, earthquakes, fog, subsidence, power outage, telecommunications and internet failure beyond the control of the parties, natural disasters or acts of God.
A contract may even extend the definition to include other unforeseeable events with a phrase which reads to the effect: “or any other contingency beyond the control of the Parties which endures for a significant period of time”.
A Force Majeure clause may also impose a procedure to follow should a Force Majeure event occur, and/or a mechanism for deferred performance.
If such a procedure exists, it must be followed.
Every business contemplating raising Force Majeure to avoid liability must understand the breadth of the clause (i.e. whether it covers or contemplates the event in question), what procedures are prescribed in the clause, and whether an obligation is extinguished temporarily or permanently.
Instances where the contract excludes force majeure events, and compels performance
It is important to remember that parties to a contract can also exclude Force Majeure. Parties may seek to limit risks associated with Force Majeure events by excluding the effects of force majeure and the adjunct doctrine of supervening impossibility.
This is achieved by including in the contract a term whereby one party warrants performance to the other party notwithstanding any occurrence of a Force Majeure event.
In such an instance, the party who warrants performance will be bound by the warranty and liable for damages for breach of the warranty, regardless of the impossibility of performance.
Hence, once ought to be certain that their contract of sale or agreement of lease of equipment does not obligate performance despite the existence of a Force Majeure event.
Supervening impossibility
In the absence of a written contract, the common law principles surrounding supervening impossibility are applicable.
Supervening Impossibility is when circumstances not anticipated at the time of concluding a contract come to be after a contract has been concluded, and the supervening circumstances make it impossible for a party to perform in terms of the contract.
If a potential Force Majeure event has made it difficult for a party to perform or the impossibility relates to an inability unique to that contracting party, it is regarded as a subjective impossibility. Subjective impossibility will generally not relieve parties from performing.
If, on the other hand, an obligation is objectively and absolutely impossible to perform, then the Force Majeure event would extinguish the obligation to perform and, importantly, the corresponding right.
Objective impossibility is however determined on a case-by-case basis, taking into consideration all relevant facts. It is conceivable that it extends to circumstances where performance is physically possible but reasonably not expected.
Generally, a generic obligation cannot become absolutely impossible because the subject of performance (the genus) is not destructible.
For example, Company A may have ordered a television from Company B before the lockdown on the expectation that the television would be delivered in a few days.
Due to the lockdown, the television could not be delivered during the lockdown period, but it can be delivered after the lockdown.
In such an instance, the obligations of each party to perform may be delayed but not necessarily extinguished forever.
In addition to the impossibility having to be objective and absolute, the party seeking to rely on the Force Majeure event will have to demonstrate that a reasonable person would not be able to avoid the impossibility, and that the event was not due to any fault of such party.
Where an occurrence beyond a party’s control, such as the Covid-19 lockdown, is deemed a Force Majeure event in terms of contract or in common law under the doctrine of supervening impossibility, a party’s obligation or liability is extinguished.
However, in turn, the counter-obligation is also extinguished.
In other words, the right to receive the corresponding performance is lost.
As a further consequence, due to the principle of restitution, any corresponding performance which has already been performed prior to or despite the Force Majeure event can be reclaimed by the other party, in terms of a condictio ob causum finitam, which is a remedy based on the principle of unjust enrichment to secure the return of property or performance in circumstances where the performance was made under a valid causa but the causa later was removed.
In summary, in any assessment of what action to take vis-a-vis creditors or debtors in the light of the lockdown and the upcoming months, one must ask oneself: i) whether the lockdown has objectively made it impossible or reasonably impractical to perform; ii) if it is impossible to perform, is that impossibility temporary or permanent; iii) what is my corresponding right? It may be to receive goods, or services, or occupation of property. And do I require that corresponding right to be fulfilled for my future interests, or has it already been performed? ; and iv) are there any other avenues to consider prior to relying on Force Majeure vis-a-vis my contract (i.e. do I have insurance which covers me against losses suffered in the given circumstances?).
Any person contemplating Force Majeure is urged to take proper legal advice and to deliberate the ramifications of placing reliance on a Force Majeure event before resorting to it, and if reliance is to be placed on the Force Majeure event to ensure that all prescribed procedures are complied with to give effect to it.
Any hasty, uninformed conduct can have perilous consequences, including lengthy and expensive legal proceedings, which can be avoided by seeking proper guidance from your legal advisor.
- Luqmaan Hassan, BA LLB LLM Commercial and Business Law (University of the Witwatersrand) and Partner at RHK Attorneys