Coronavirus a force majeure?

Coronavirus a force majeure?

In this article, we explore the implications that the Coronavirus (COVID-19) has on the rights and obligations of parties in contractual relationships, under South African law.

A force majeure (or vis major) is defined as an unforeseen and superior force, event or circumstance, which is beyond the control of the contracting parties, and which renders contractual performance impossible.

In an agreement where there is no expressed force majeure clause, the legal principle of supervening impossibility becomes applicable. In such instances, the party which is unable to perform due to the supervening event must objectively prove that following:

• That the impossibility of performance is objectively impossible.
• That the impossibility of performance is absolute as opposed to probable, in other words, if it relates to something that can in general be done, but the one party seeking to escape liability cannot personally perform it, such party remains liable in contract.
• That the impossibility of performance is must be unavoidable by a reasonable person.
• That the impossibility of performance is not the fault of either party.
• That 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.

In an agreement that does include a force majeure clause, it will be constructed to protect the parties to a contract by:

• limiting the affected party’s liability for non-performance, if a force majeure event occurs; and/or
• suspending performance of both party’s obligations (without penalties) until such time as performance can continue; and/or
• allowing an agreement to be terminated, without penalty, where performance cannot resume. Consequently, the force majeure provision suspends the ordinary consequences of breach of contract.

It is certain that the courts will be clogged for years with cases arguing the limits of force majeure. Judges will be called on to separate the opportunists from genuine cases of force majeure.

In most cases, companies will be able to plead force majeure as a justifiable reason for being unable to perform on a contract. The China Council for the Promotion of International Trade announced on January 30 that it would issue force majeure certificates, which will assist in legitimising any claims for contract non-performance due to force majeure.

Loan agreements from Banks

Banks are at a massive risk of reputational damage should they start pursuing customers through the courts for arrears brought about as a result of Covid-19. Currently, before granting an eviction order, judges are required to consider all the borrower’s circumstances – including loss of income due to the Covid-19 crisis. As such any bank seeking an eviction against a homeowner will likely get short shrift from the courts.

Banks are already coming under pressure for their “underwhelming” response to the Covid lockdown compared to the response in other countries.

To date, Standard Bank’s response appears to be the most generous as they have offered short-term payment holidays for students and small businesses in good standing. Other banks have taken more of a “call us if you’re in trouble” approach, while governments elsewhere have made more decisive moves to protect borrowers.

Calls for more decisive intervention by banks

Political parties and trade unions in South Africa are calling for much more decisive intervention from the banks than the lukewarm response to the coronavirus crisis thus far.

Several groups including National African Congress of Trade Unions (Nactu) and Lungelo Lethu Human Rights have called for a total freeze on legal action related to debt recovery, particularly mortgage and car payments. 

Cosatu has called for across-the-board rather than piecemeal loan deferments.

The DA has suggested a four-month loan repayment holiday.

The EFF has proposed a payment holiday for a whole range of personal debts.

According to the American economist Michael Hudson, the massive debts accumulated over the last two decades can never be repaid and must be written off, as was done repeatedly in history. Hudson believes that this would be the stimulus needed for an unprecedented economic recovery.

At the moment, that may be an unlikely scenario but in the long term it seems inevitable as the economic wreckage caused by the coronavirus pandemic and decades of living on unsustainable debt becomes more apparent.