RSM South Africa

Coronavirus, contracts and force majeure

The Coronavirus is having a significant impact on the global economy as it increasingly disrupts production, supply chains and travel. With that in mind, organisations should consider any potential legal risks and how to protect themselves against them.

Recently the World Health Organisation (WHO) announced that the outbreak of the coronavirus is now characterised as a pandemic. A pandemic is a worldwide spread of a new disease which is simply out of control. Since this announcement was made by WHO, companies are now aware that it could be more difficult for parties to perform their obligations under many types of contracts. In these circumstances, Force Majeure claims may arise causing disruption and, as a consequence, many businesses are closing, supply chains are disrupted, ports and borders are closing and travel restrictions are being applied.

WHAT IS FORCE MAJUERE?

Under international contract law, a Force Majeure clause in a contract seeks to eliminate liability for natural and unavoidable disasters that interrupt the expected course of events and restrict parties from fulfilling contractual obligations. Force Majeure clauses are often included in commercial contracts to avoid certain circumstances arising that prevent the fulfilment of contractual obligations. These clauses operate to delay or absolve one or both parties to a contract of all or part performance of their obligations on the occurrence of certain events which are outside their control.

These may include:

  • Acts of God
  • Natural Disasters
  • Epidemics or Pandemics
  • War

THE TEST FOR FORCE MAJEURE

There must be a fundamental link between the Force Majeure event and the failure to perform the contractual obligation. In other words, the affected party must be able to clearly establish that the Force Majeure event is the cause for the non-performance of the contractual obligation. A Force Majeure event is an objective event or situation which is:

  • Unforeseeable at the time of entering into the contract;
  • Inevitable in terms of occurrence or impact; and
  • Impossible to overcome.

In order to invoke a Force Majeure event, one must look at the specific wording of the clause in the contract. The definition of Force Majeure is generally broad but some clauses can be specific in nature. Furthermore, some Force Majeure provisions commonly contain a notice requirement, preventing relief if the relevant notice is not given during the necessary time period stipulated in the contract. Such provisions are generally enforceable, and so complying fully with all notice requirements will be important for parties seeking to declare Force Majeure. Force Majeure provisions commonly require the affected party to show that it has taken all reasonable actions to avoid or prevent the event and its effects.

THE IMPACT OF INVOKING FORCE MAJEURE

  • Suspension of contractual obligations
  • Non-liability
  • Extensions in regard to fulfilling contractual obligations
  • Obligation to mitigate losses
  • Contract termination

HOW BUSINESSES CAN PREPARE

Parties to a contract should inspect their existing contracts as to whether they include the Force Majeure clause and to determine if the particular clause in the contract includes a pandemic as part of the stipulated definition of Force Majeure. If so, a careful assessment of the facts, the contractual provisions and the legal principles around Force Majeure would be required, including any notice periods stipulated in such clause. If not, going forward, it is suggested that parties include “pandemic” as a Force Majeure event and include provisions which deal with the effects of invoking Force Majeure. Lastly parties need to be mindful of acting in good faith and adherence to reasonable commercial standards of fair dealing – particularly in times of exceptional circumstances such as those in which the world currently finds itself.

Liz Pinnock

Director: Head Group Legal


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