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The effect of force majeure on contracts amid Covid-19

Certain clauses allow for the suspension of contractual obligations, while in common law such calls terminate agreements: Michael Straeuli, Webber Wentzel.

NOMPU SIZIBA: As a result of the 21-day national lockdown, which has meant businesses considered non-essential having to shut down for the period, and the country’s borders being closed, among other measures, some might have seen a number of headlines in business media talking about firms declaring “force majeure”. A number of our resident mining companies have had to do so, including the likes of Sibanye Stillwater. But the forced lockdown will no doubt have affected other sectors.

Well, to educate us on what force majeure is, and what its implications are, I’m joined on the line by Michael Straeuli, a partner at Webber Wenzel.

Thanks very much, Michael, for joining us. What does force majeure mean?

MICHAEL STRAEULI: Force majeure is a concept that comes from the French, meaning superior strength. It’s come into our law as a way of regulating the affairs and the contracts between parties, where events such as acts of God – which are wars, insurrections, flood, fire and so on – arise, and a party is prevented from performing under the contract through no fault of its own.

NOMPU SIZIBA: So, just because a company declares force majeure, does it necessarily mean that the counterparty will just have to swallow it, and won’t have any legal recourse on the contract?

MICHAEL STRAEULI: What the position is, is that once the party calls on force majeure, its obligations are suspended. However, the counterparty’s obligations are similarly suspended. And so both parties are effectively released from their obligations under the contract.

If a party has made partial performance under the agreement, for example, a traveller has paid a deposit for a trip – ignoring for the moment insurance aspects – and a force majeure event occurs, the traveller would be entitled to claim payment of that deposit as a result of the force majeure. The company that has been paid the deposit would otherwise be unduly or unjustifiably enriched.

NOMPU SIZIBA: So, in terms of force majeure, is it advised that notice should be given that, hey, something is happening that we believe may result in us not being able to deliver as planned? Is that considered a must in order to put the other party on notice, or does it really depend on the circumstances?

MICHAEL STRAEULI: Almost all force majeure notice provisions contain the requirements that, as soon as a party becomes aware of an instance that would prevent its performing as it usually would, it must notify the other party. Often there are time periods in which this should happen – between 24 and 48 hours. That can be understandable, because calling on a force majeure is quite drastic. It basically releases the party from their contractual position and they cannot perform. So, when a party is anticipating performance, for example delivery of something, they need to be warned of that as soon as possible. So these clauses often require notification as soon as possible and, where that isn’t complied with, it can in fact be to the detriment of the party seeking to enforce the call on the force majeure.

NOMPU SIZIBA: So, in the drafting of contracts, are force majeure scenarios  outlined? Do you have to outline them, or is it just a broad caveat of unforeseen incidences?

MICHAEL STRAEULI: A lot of the contracts that we’ve seen come across our desk – I think they were drafted with something like Covid-19 in mind – often were just boilerplate clauses that list, as I say, things like wars, insurrection, flood, fire. And then they have catch-all or similar circumstances.

Where we have seen clauses that are slightly more specific is in the mining industry, where presumably something like this has occurred before, and they phrase it for the specific circumstances where they would require performance to continue, regardless of something that would otherwise potentially be a force majeure event.

NOMPU SIZIBA: So in the South African context – you touched on the mining sector – we know that there are a number of miners who’ve come out to declare force majeure. Anglo American Platinum is a separate issue, because that was before the Covid-19 situation. But what other sectors have you heard about where declarations of force majeure have been made?

MICHAEL STRAEULI: The sectors which have been deemed non-essential by the President and his ministers, and a lot of those, and in the retail sectors we’ve seen that. We’ve seen it in the entertainment industry, for example in cinema. We’ve seen it in tourism. It depends, really, on who’s trying to save some money, I guess, or ensure that their obligations don’t continue because they are prevented by this irresistible force of the Covid-19 and the lockdown that’s been declared.

NOMPU SIZIBA: If we look at the instances of mining companies here in South Africa declaring force majeure, and not being able to deliver in the month of March, once operations and exports normalise will they then be under an obligation to try and compensate for the deliveries that they were not able to make in March, or is the obligation completely expunged, as you said earlier?

MICHAEL STRAEULI: The obligation is completely expunged, and it again depends on the force majeure clause. Certain clauses allow for the suspension, so to speak, where, under the common law, once one calls a force majeure, that terminates the agreement.

The thinking behind that is obviously the party that’s relying on that shouldn’t have the benefit of the contract still remaining in place, and the non-invoking party having to sit idly by while it cannot receive performance.

In the context of mining companies, which you raise, their obligations would be expunged for that period. However, what we’ve seen is, people trying to come to commercial arrangements, trying to see what can be done to lessen the impact. And I think that’s the sort of approach that’s necessary for South Africa to come through this.

NOMPU SIZIBA: Thank you, Michael, for your time this evening.

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