Commercial Law

Can parties to contracts rely on a Force Majeure clause due to Covid-19 despite the relaxation of restrictions and lifting of the National State of Disaster?

The Covid-19 pandemic has caused some great disruptions to the global economy to which most African countries are still recovering from the effects thereof. Like most countries, South Africa in March 2020 declared a National State of Disaster through the Disaster Management Act 57 of 2002 which applied lockdown restrictions on the movement of citizens to contain the spread of the corona virus.

As a result, it became greatly impossible for business owners and world leaders alike to supply goods and services to consumers, and for their suppliers to meet their contractual obligations to supply the required products to trade. The Force Majeure became heavily relied upon by parties to contacts in pursuit for available avenues for relief from their performance obligations.

With the State of Disaster lifted, does Force Majeure still apply?

In an address to the Nation by the President on 04 April 2022, the President terminated the National State of Disaster which allowed citizens to resume with almost all economic activities. The question that then arises is whether parties to contracts are able to still rely on a Force Majeure clause due to Covid-19 despite the relaxation of restrictions and lifting of the National State of Disaster?

Force Majeure is a French term that literally means “greater force.” It refers to an unforeseeable event or circumstance which is physically impossible to render the performance of that party’s obligations under the contract. A Force Majeure clause contains a non-exhaustive list of events which the parties deem impossible such as war, riots, earthquakes, hurricanes, imposition of sanctions, lightning, pandemics, strikes, a change in law.

Common law doctrine of supervening impossibility

Where a Force Majeure clause does not exist in the contract, the common law doctrine of supervening impossibility may apply. Supervening impossibility occurs when performance of contractual obligations become objectively impossible and an unforeseeable and unavoidable event, which are not the fault of any party to the contract. In the Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal (250/07) [2008], the court said that the following is necessary when taking into account supervening impossibility :

  • the nature of the contract;
  • the relationship of the parties;
  • the circumstances of the case; and
  • the nature of the impossibility.

Upon the declaration of the National State of Disaster in 2020, court were inundated with matters seeking relief through a Force Majeure clause or through the supervening impossibility. However, a Force Majeure clause does not automatically apply to a given set of circumstances that prevent performance. Glencore Grain Africa (Pty) Ltd v Du Plessis NO & Others (2007) JOL 21043 (O), the court listed the following instances relating to Force Majeure or impossibility, namely:

  • The impossibility must be objectively impossible;
  • It must be absolute as opposed to probable;
  • It must be absolute as opposed to relative;
  • The impossibility must be unavoidable by a reasonable person;
  • It must not be the fault of either party; and
  • The mere fact that a disaster or event was foreseeable, does not necessarily mean that it ought to have been foreseeable or that it is avoidable by a reasonable person.

Businesses need to be cautious using the Force Majeure clause or supervening impossibility

Businesses need to be very careful when relying on a Force Majeure clause or supervening impossibility as a route to escape their contractual obligations. These legal principles do not provide a simple exit from a contract – and should a court find that a party was not justified in exiting a contract prematurely, the other contracting party could be entitled to an award of specific performance or damages. The consequences an improper reliance on Force Majeure clause or supervening impossibility can be costly and could lead to a cost order against such a party.

The aforesaid position is crisply illustrated in the judgment of Nedbank Limited v Wesley Groenewald Familie Trust and others [2021] JOL 50593 (FB), Here, the parties entered into a loan agreement. The Defendants breached the terms of the loan agreement when they failed to pay the monthly instalments and fell in arrears. Their defence was that the declaration of a state of disaster resultant from the Covid-19 pandemic and the consequent restrictions on economic activity made it impossible for the First Defendant to perform in terms of the loan agreement. The Covid-19 pandemic and the restrictions that resulting from it constituted a supervening impossibility.

The court held that :

”The law does not regard mere personal incapability to perform as constituting impossibility. In the present circumstances there was a change in financial strength and commercial circumstances which caused compliance with the contractual obligations to be difficult, expensive or unaffordable, but this did not constitute impossibility. The Defendants had income, the application of which they chose not to disclose to this Court.

 The Covid-19 pandemic and its crippling effect on the economy and businesses in general must be recognised when considering matters where it caused persons to default on their obligations. Not doing so would undermine the severe effect the pandemic had and continues to have. It would, however, be untenable that persons in default with a means of avoiding or minimising their failure to honour their obligations be allowed to use the pandemic as a shield to deprive creditors of what  they are rightfully entitled to. I find that the restrictions brought about by the pandemic did not constitute a supervening impossibility in the present circumstances.”

In the past two years, parties whose ability to perform obligations under a commercial agreement were negatively impacted by the regulations and lockdown. Changes to the law rendered some performances to be illegal. However, as a result of the upliftment of the National State of Disaster, courts have become observant on the shielding action of parties as a way to avoid their obligations. All Covid-19 related legislation has been lifted thus there should, at this point, be minimal reliance on Covid-19 as a Force Majeure.

The question of whether parties can rely on Covid-19 for their failure to carry out their obligations post the Disaster Management Act remains unanswered, and the legal position remains untested. Ultimately the onus will rest on our courts to provide guidelines and to set much-needed precedent on whether such a shield is acceptable.