On the eve of 23 March 2020, President Cyril Ramaphosa declared a nationwide shut-down for a period of twenty-one days.
During this uncertain time, the burning question is whether people will be forced to adhere to contractual obligations.
What is clear is that COVID-19 has, thus far, and even prior to the declared shut-down, caused a significant and destructive disruption to (and in some cases, halted entirely) global supply chains and business activities, resulting in an inability on many parties to fulfil contractual obligations, to which they are bound. The declared shut-down only compounds this issue.
For example, what happens when orders for products are placed but the business cannot deliver the products to customers because its supply chain has been broken? What happens when a marketing event, to market the product is cancelled, but the event manager insists on payment for the venue and food?
Cue: force majeure clauses in an agreement.
Essentially, this type of clause is defined as an unforeseeable circumstance that prevents someone from fulfilling a contractual obligation and is intended to protect a business entity/individual from “Acts of God” which would include wars, riots, hurricanes, floods, epidemics, and natural disasters.
The requirements to prove the occurrence of a force majeure event are as follows:-
- The event was not within the company’s reasonable control;
- The event could not have reasonably been avoided or overcome;
- The event is not a result of the negligence, wilful conduct or default of the affected party; and
- There is a link between the force majeure event and the failure to perform.
In the grave circumstances we currently find ourselves in, whether COVID-19 and a declared shut-down will have an effect on agreements and contractual obligations will largely depend on the specific wording of the contract and the definition of force majeure events.
In some agreements, force majeure clauses would need to cover termination and/or temporary suspension of the contractual obligations on the basis that a state of disaster/emergency has been declared. However, due to the entirely unpredictable ‘God-like’ nature of the clause and the protection envisaged thereby, it would be unusual to have a ‘closed’ list of force majeure events and rather, a generic and ‘open-ended’ protection should be afforded.
An example is the following: “While the company will use every endeavour to execute orders in accordance with the terms and conditions thereof, it will not be responsible for any delays or non-deliveries due to circumstances over which it has no direct control”. But then again, bear in mind that if the force majeure clause is too open-ended, it might be all the more difficult to prove its occurrence in order to evoke it.
Ultimately, a widespread pandemic caused by the transmission of an infectious disease such as in the case of COVID-19 would generally speaking, qualify as an act of God sufficient to invoke force majeure protection.
It is our advice that all business entities and individuals should ensure that agreements contain force majeure clauses and one must ensure that the clause is as open-ended as possible so that it includes protection for pandemics, epidemics, and government actions (such as nationwide shut-downs).
For more information contact https://swvginc.co.za/