30 March 2020 by , , and Corporate & Commercial and Dispute Resolution Alert

An “Act of God” that is now an “Act of State”

In a previous alert, we recognised that the COVID-19 virus might already have triggered some contractual clauses relating to force majeure, but we were still speculating about whether it would do so under our common law. Then came the unprecedented announcement by President Cyril Ramaphosa – that the country would go into lockdown at 23:59h on Thursday, 26 March and it will not be business as usual.

In the days leading up to the lockdown, the Government had steadily been releasing notices setting out exactly what the lockdown will entail. Given the enormous effort required to logistically enforce this lockdown, it is not surprising that a list of all anticipated regulations is not yet readily available. We do know that most businesses have closed their doors, unless services can be provided remotely, with the exception of supermarkets, pharmacies and certain essential services. The likely consequence of the lockdown is that a large majority of South Africans will not be able to perform certain contractual obligations, the most applicable example being paying monthly rental or keeping businesses open during business hours, previously agreed to.

Impossibility regulated by the common law

Parties should ideally regulate the consequences of a force majeure with a specific clause in a contract, since the South African common law is quite rigid in enforcing long-term contracts in the absence of such a force majeure clause. However, in the well renowned case of Peters, Flamman & Co v Kokstad Municipality 1919 AD 427, the Supreme Court of Appeal held that legislation making performance illegal will constitute a force majeure. This means that if, as a result of the lockdown, it is illegal for a party to perform an obligation, they cannot be held liable for non-performance. The obligations under the contract are consequently discharged and neither party will be required to perform. The converse is true for the innocent party. A bondholder would during this period not be able, for instance, to foreclose on a bond if the debtor, due to impossibility of performance, caused by the force majeure, is unable to perform, i.e. pay its bond repayments.

Impossibility regulated in the contract itself

If parties had made provision for the consequences of a force majeure contractually, the consequences stipulated in the contract will take precedence over those in the common law. This means that if the contract sets out rules regarding notices, timelines and events constituting a force majeure, then the parties must abide by that and cannot rely on the common law. It is, thus, vital that parties make sure that they follow the steps laid out in the contract and seek legal guidance in the instance where there is uncertainty relating to a specific clause. The court in Contracts and Design Ltd v Victor Green Publications Ltd 1980 (B) No, 80 (CA) also pointed out that every effort must be made to perform the contract, before any party can rely on the force majeure clause therein.

One foot in, one foot out – the effect of partial impossibility

It may well be that there are contracts in which certain obligations can still be performed. If these obligations are divisible from the rest of the contract, then those will remain whilst the rest of the contract is discharged. A practical example of this would be where a book distributor is required to deliver an electronic copy, as well as a physical copy of a book, on a certain date falling within the lockdown period. In this case, it would still be possible to deliver an electronic copy of the book, although delivery of a physical copy will not be possible due to the force majeure. If the one obligation is divisible from the other, performance may still be due.

The court in Bob’s Shoe Centre v Heneways Freight Services (Pty) Ltd [1995] 1 All SA 693 (A) conceded that determining whether an obligation in a contract is divisible from the rest is not an easy task and that “There are no hard and fast rules to determine whether a performance is divisible or indivisible”. The court considered the following factors:

a) the intention of the parties;

b) the nature of the performance;

c) whether the contract made provision for separate performances; and

d) whether the contract would’ve been entered into if only the divisible part could be performed.

It will be prudent to seek legal advice if it seems as though a substantial portion of a contract is still performable, even if the contract as a whole is not.

Conclusion

In light of the present uncertain circumstances, it is strongly recommended that parties do not use force majeure as a way to benefit themselves at the expense of their counterparty. Renegotiate contracts where possible, perform as far as possible and grant the necessary indulgences where the alternative of cancellation will have adverse effects on small businesses or struggling industries.  We have also seen the Government putting certain regulations in place to assist parties in re-negotiating contracts or placing certain contractual provisions on hold in an effort to avoid businesses closing permanently as a result of the lockdown.

One such regulation is the COVID-19 Block Exemption for the Retail Property Sector, 2020 (published in the Government Gazette No 43134), which exempts certain agreements from provisions relating to restrictive horizontal and vertical practices in the Competition Act. In essence, this means information that could ordinarily not be shared between retailers, may now be shared for the purpose of alleviating the economic effects of the lockdown. More such regulations are expected to be published in due course.

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