Interpreting contracts: Determining if COVID-19 is covered by force majeure

May 1st, 2020

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In this month’s issue, De Rebus features two articles pertaining to COVID-19 and the force majeure clause in contracts, including the interpretation thereof.

COVID-19, a viral pathogen, has swept through the globe threatening various economies and challenging several governments. After the pandemic dawned on South Africa (SA), President Cyril Ramaphosa announced a National State of Disaster on 15 March 2020 and then a national lockdown beginning midnight on 26 March 2020. As a result, schools, churches and businesses have closed down, until further notice. Imminent from the spread of the financial contagion and the uncertainty surrounding the pandemic, these closures will challenge several contractual rights and obligations. Commercial enterprises will seek to rely on the enforcement of force majeure clauses to relieve their performance of certain obligations resulting from the COVID-19 outbreak.

Force majeure clauses

The term force majeure is of French origin and refers to an event or occurrence, which renders contractual performance impossible. The term force majeure is synonymous with vis maior or casus fortuitus.

Force majeure clauses are often found in commercial contracts. These clauses allow a contracting party to escape the normal consequences of non-performance or late performance of contractual obligations because of an unavoidable and unforeseeable event. Force majeure may include acts of God, acts of government, natural disasters, epidemics, pandemics and even war and terrorism. The invocation of a force majeure clause will suspend a party’s obligation to fulfil their performance for the duration of which the force majeure event occurs.

COVID-19 and force majeure clauses

Owing to the global pandemic and the lockdown status of various countries, such as SA, several commercial enterprises are bearing the brunt of force majeure clauses being enforced by contracting parties.

The case of Bischofberger v Vaneyk [1981] 4 All SA 54 (W) stated that the general rule in South African law is that if contractual performance becomes impossible at no fault of the debtor, the contractual performance will be extinguished. However, this general rule is not absolute and consideration will still be given to the particular contract between the parties, the nature of the contract, relationship of the parties, circumstances of the case, as well as the nature of the impossibility.

The possibility of parties relying on the COVID-19 outbreak and implications thereof, namely to suspend their contractual obligations, will also depend on the interpretation of the contract concerned.

A force majeure clause may include a closed list of specific events or cover a broad criteria of events, in that, having a catch-all provision to include those unusual events not specifically listed.

Specific events listed in a contract may include war and terrorism, natural disasters, acts of government, pandemics and/or epidemics. If the term pandemic and/or epidemic is expressly incorporated in the force majeure clause of a contract, any delay or failure to perform resulting from COVID-19 may excuse the contracting party from their liability.

Moreover, the term ‘act of government’ in a force majeure clause could be applied where the government has closed its borders, imposed quarantine or isolation, banned or restricted travel and/or announced a lockdown.

However, where the term ‘epidemic’ or ‘pandemic’ is not expressly listed, parties will have to interpret the contract to determine whether the parties intended for COVID-19 to be covered by the force majeure clause. This involves considering whether the list of events agreed to was intended to be exhaustive or non-exhaustive and in so considering, whether the pandemic is to be included in any broad catch-all provision.

Sometimes, a contract may list specific events and then following from this list, incorporate a term such as ‘or any other causes beyond the control of the party’. Dependent on the words used, such a clause could be interpreted extensively as opposed to being restricted to the scope of events similar to those expressly listed.

In the unique circumstances that SA and the world finds itself in, courts will most probably be cognisant of the impact thereof and be accommodating in interpreting clauses when faced with a contractual dispute on this basis. However, parties will still need to show that their failure to, or delay in performance, transcended their control and could not have been avoided or even mitigated.

However, not all contracts have force majeure clauses. In such a circumstance, the common law principle of supervening impossibility of performance will apply. As explained in Dale Hutchison and Chris-James Pretorius (eds) in The Law of Contract in South Africa 2ed (Oxford University Press 2012), this principle requires a party to prove that its contractual performance is objectively impossible, that is, it would be impossible for any person in its position to perform and that the occurrence or event relied on was neither foreseen nor foreseeable at the time of entering into the contract.

To avoid unnecessary disputes, it is recommended that parties are advised to include a sufficiently detailed force majeure clause to regulate certain occurrences should a force majeure event occur. In times such as these, force majeure clauses should be carefully drafted, considered and reviewed so the clause can be successfully enforced. The lack of such, a clause in a contract or the vagueness thereof may result in further damages at the expense of an unforeseeable event that fell beyond the scope of a contracting party’s control.

Sherianne Pillay LLM (Commercial and Business Law) (Wits) is a candidate legal practitioner at Hinrichsen Attorneys in Johannesburg.

This article was first published in De Rebus in 2020 (May) DR 10.

COVID-19 (coronavirus) has spread rapidly around the globe. The effects of the coronavirus are slowly unravelling and will eventually take a toll on the global gross domestic product (GDP). Bloomberg Economics estimates a total of US$ 2,7 trillion loss in output as the most extreme result. To put it differently, this equals the entire GDP of the United Kingdom (Tom Orlik, Jamie Rush, Maeva Cousin and Jinshan HongCoronavirus Could Cost the Global Economy $2.7 Trillion. Here’s How’, accessed 6-4-2020).

BusinessInsider US states that a group of Australian experts estimate, as a best case scenario, the coronavirus could result in a US$ 2,4 trillion loss in global GDP (Rosie Perper ‘As the coronavirus spreads, one study predicts that even the best-case scenario is millions dead’, accessed 6-4-2002).

In an effort to curb the spread, countless countries have recently placed quarantine restrictions and some have even gone as far as to restrict local movement. This begs the question as to what implications this may have on the non-performance of contractual duties due to the coronavirus.

Parties may be able to rely on the doctrine of force majeure. Force majeure alludes to conditions outside the control of the parties that are meant to deal with, among others, acts of God, government orders, changes in law and war. Contracting parties usually agree to a non-exhaustive list of events under a force majeure clause. If a civil law framework is the underlying basis for a contract, which grants force majeure remedies, regardless if they are written into the contract, they may also be the subject of the claim (‘Coronavirus Outbreak: Global Guide to Force Majeure and International Commercial Contracts’, accessed 6-4-2020).

Under common law, force majeure provisions are generally interpreted by focusing on the actual language used in a contract, so each case is based on its own merits. An objective test is used in order to determine if the event in question constitutes force majeure. This test is found either in relevant law or it is written in the contract.

If parties to a contract did not include force majeure provisions in their contract, they may be able to rely on the doctrine of supervening impossibility. A contracting party would not be held liable for non-performance if that performance becomes objectively impossible. Under South African common law, this position was outlined in Unibank Savings and Loans Ltd (formerly Community Bank) v Absa Bank Ltd 2000 (4) SA 191 (W) at 198, where it was stated that should performance of a contract become impossible as a result of unforeseen events – that are not caused by the parties themselves – then parties are excused from contractual performance. The court went on to say that the impossibility must not be relative or subjective, but rather absolute or objective. 

Parties may rely on force majeure if the performance becomes impossible due to vis maior, an irresistible force, or casus fortuitus, an unforeseeable accident. According to Francois du Bois (ed)  in Wille’s Principles of South African Law 9ed ((Cape Town: Juta 2007) at 850) casus fortuitus is defined as ‘a species of vis maior which imports something exceptional and unforeseen and which human foresight cannot be expected to anticipate, or, if it can be foreseen, it cannot be avoided by the exercise of reasonable care or caution.’ These clauses are generally discernible from hardship clauses.

If the force majeure clause stipulates that a force majeure event must ‘prevent’ performance, the non-performing party must generally show that its performance has become legally or physically impossible and not merely more difficult or more expensive (, (op cit)). This was evident in Hersman v Shapiro & Co 1926 TPD 367.

In this case, the defendant entered into a contract, under which he had to deliver a certain quantity and quality of corn to the applicant. At the time of delivery, there was no corn available in the surrounding area and the defendant relied on supervening impossibility to discharge his liability. The defendant had not looked outside the surrounding area for corn and, because he had not, it was not an absolute objective impossibility. The defendant’s contractual performance only became more difficult and expensive and under the principle of supervening impossibility, the court held that this did not discharge his contractual obligation. The court held that impossibility arising from vis maior or casus fortuitus will not always excuse performance and added requirements that should be met on a case-by-case basis.

This position was further confirmed by the Supreme Court of Appeal (SCA) in MV Snow Crystal Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal 2008 (4) SA 111 (SCA).

The SCA quoted Stratford J from the Herman case at 28:

‘As a general rule impossibility of performance brought about by vis maior or casus fortuitus will excuse performance of a contract. But it will not always do so. In each case it is necessary to “look to the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility invoked by the defendant, to see whether the general rule ought, in the particular circumstances of the case, to be applied.” The rule will not avail a defendant if the impossibility is self-created; nor will it avail the defendant if the impossibility is due to his or her fault.’

According to Andrew Hutchison (‘The doctrine of frustration: A solution to the problem of changed circumstances in South African contract law?’ (2010) 127.1 SALJ 84), the Hersman case implies that there is a rigorous standard for determining impossibility; the impossibility must be absolute. This was also seen in Peters, Flamman & Co v Kokstad Municipality 1919 AD 427. Further, both parties must act without any fault and the event must be regarded as being unforeseen and unavoidable. The court in the Peters, Flamman & Co case went further to state that ultimately, the consequence of this doctrine is that the contract becomes void ab initio. Hutchison states that should a claim based on supervening impossibility succeed, any performance made before it was instituted may be claimed back under the doctrine of unjustified enrichment.

In determining whether or not a force majeure clause makes provision for the coronavirus, wording such as ‘pandemic’ or ‘epidemic’ may be relevant in this regard. If governments have placed restrictions that could affect supply or logistics, parties need to ensure that they have taken all measures reasonably possible, even if there is an added expense. This is to ensure that the impossibility is absolute, keeping in line with the Hersman case.

Ultimately, whether a party may succeed in a claim of force majeure or supervening impossibility will be met on a case-by-case basis as the principles of contractual interpretation will be used to analyse the wording of their contracts. Public policy and equity considerations may also be contributing factors when instituting a claim.

Byron Titmas LLB (UFS) LLM (Commercial Law) (UCT) is an Associate Director of Studies at EF Kids & Teens in Hangzhou, China.

This article was first published in De Rebus in 2020 (May) DR 11.

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