When the virus crisis is over, the legal battles begin

Could individuals plead force majeure if they cannot pay their debts?
Any bank seeking to evict a homeowner will likely get short shrift from the courts as judges are required to consider all circumstances – including loss of income due to Covid-19 – before granting an order. Image: Shutterstock

While the Covid-19 outbreak carves a vein of destruction across the planet, companies worldwide are reviewing millions of contracts to assess whether they can plead force majeure – or an inability to perform due to the pandemic.

It’s a dead certainty 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 – those who had already defaulted on contract obligations which had nothing to do with the virus – 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.

The burden is on the party claiming force majeure to prove that the coronavirus falls within the contract wording and that non-performance was a result of the outbreak.

“It must also show there were no alternative means for performing its obligations and that it has taken all reasonable steps,” writes Liz Pinnock, head of legal at audit, tax and consulting firm RSM, in a recent article on force majeure.

Companies will be seeking to be excused from liability for non-performance, which in most cases will mean renegotiating the terms of the contract by, for example, extending timelines for delivery.

‘Impossibility’ needs to be proven

In a recent article, Justine Krige of Cliffe Dekker Hofmeyr says SA law does not excuse the performance of a contract in all cases of force majeure. “There are certain conditions that must be fulfilled in order for a force majeure to trigger the type of impossibility that extinguishes a party’s contractual obligations.”

She says these are:

  1. The impossibility must be objectively impossible.
  2. It must be absolute as opposed to probable.
  3. It must be absolute as opposed to relative (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).
  4. The impossibility must be unavoidable by a reasonable person.
  5. It must not be the fault of either party.
  6. 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.

While companies have highly-paid lawyers to protect their interests, individuals do not. When they apply for a bank loan, they sign an agreement drafted by the bank and heavily skewed in the bank’s favour. In such cases, debtors falling behind on their mortgage and car payments will be unable to plead force majeure, says consumer lawyer Leonard Benjamin.

Two sides to every contract

“Default [by a debtor] is purely a factual issue. Even a deceased person would be in default if their bank froze the account out of which payments were being made on being notified of the death. It’s not a question of blameworthiness. The main thing about a loan is that the lender will have performed fully by advancing the money so it falls only on the consumer to honour their side of the contract by repaying the loan.

“If, in an agreement between companies, the obligations under the agreement are reciprocal, one party’s performance is conditional on the other’s,” adds Benjamin. “A force majeure clause simply excuses the supplier’s performance but it will also prevent it from claiming that the consumer perform.

“A loan is different, as the bank would already have performed in full by advancing the funds.”

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

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

Standard Bank’s response appears to be the most generous so far, offering short-term payment holidays for students and small businesses in good standing. The response from the other banks has been more of a “call us if you’re in trouble” approach, while governments elsewhere have made more decisive moves to protect borrowers.

Read: Rate cut not enough

The US has placed a freeze on foreclosures and evictions, while several other countries have announced or are planning to introduce debt repayment holidays for consumers in distress. The UK has announced a three-month payment holiday, and European banks are being pushed to offer similar forebearance.

Calls for decisive intervention

In SA, political parties and trade unions are calling for much more decisive intervention from the banks than the lukewarm response to the crisis so far.

National African Congress of Trade Unions (Nactu) and Lungelo Lethu Human Rights are among a growing number of groups calling for a total freeze on legal action related to debt recovery, particularly mortgage and car payments.

Cosatu wants across-the-board rather than piecemeal loan deferments.

The DA wants a four-month loan repayment holiday.

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

Nactu says government should invoke emergency powers to jail anyone pursuing legal action against mortgage borrowers and car owners until the economic crisis has stabilised, on the grounds that the country is facing an existential crisis.

US economist Michael Hudson says the massive debts accumulated over the last two decades can never be repaid and must be written off, as was done repeatedly in history. This would be the stimulus needed for an unprecedented economic recovery, he says.

Read: Forgive them their debts

That may be an unlikely scenario right now, but seems inevitable in the longer run as the economic wreckage caused by the virus and decades of living on unsustainable debt becomes more apparent.

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I challenge Moneyweb to “call” a bank. Firstly none of them have set up any hot line and will rely on their existing channels which is a call center. Without degrading the job of call center agents, unless it is scripted they do not and will not have the authority to assist anyone in distress, it will need to be passed up the chain. It is my experience that without either “credit or legal”, two departements the banks love to deflect to, getting involved they will not be able to help you. There is NO leeway in a bank for people to make decisions (rightfully so I might add) except at very very senior level. Without government intervention the banks will not act on their own accord. It is very very easy for the government to assist any bank as the financial crisis of 2008 demonstrated. The banks however are the only ones that can really assist the country practically.

I suppose a counter view would be:
Person / Company A – takes out huge loans to live very comfortably (with loaned money)
Person / Company B – operates on cash – no loans.
Why should A get the benefit/help at the cost of shareholders / taxpayers / customers if B gets no benefit?

Oh to be a Lawyer and liquidator for the next few years…

I hear the insurers were quick to send out letters that this does not trigger business interruption insurance…

Something that disappoints and makes one wonder is the number of businesses seeking relief. This is a 12 workday interruption. Are there so many chancers or are there so many businesses that sail that close to the wind that they literally have no reserve capacity?

How do these companies pay dividends or buy back shares? Both would require the directors to assess solvency and liquidity before using funds. This should include considering long tail events.

One outcome of this might be that loan covenants addressing Debt Service Cover Ratios and minimum cash holdings or reserves will become much tighter in the future.

Prediction Engine : look to large scale repricing of share option schemes in the near future…

Think alot of companies were on the way over the waterfall before this virus pulled into town…. Perfect excuse to save a failed company

Very ignorant comment. Most sme’s and smme’s are always just a month or two away from failure. With government paying suppliers on their own time line, increasing pressure on consumers and ever increasing cost of doing business its a miracle if a small business can survive. Now take away the most profitable time for many businesses between 25th and 5th over month end and you have a disaster. Suppliers, employees, landlords, m’palities, etc all want their money now, but without month end trade there is no cash flow. Come April month end the same happens, but April had no trade…..BANG.

RiaanN:

I have been there – not pay yourself so can pay staff and suppliers, but then when things work out the business is still run lean, avoid debt whenever feasible, build up a few months of reserves for just in case. What I see out there tells me many consumers spend to live up to the advertisements about what they should have the right to and many businesses spend stupidly the first chance there is some cash. stupidly includes anything from flashy accommodations to fat dividends to stupid acquisitions to share buybacks that try and disguise offensive share option schemes for the executives. They all try and copy Apple, but fail to kop that Apple generates over 35% return on capital and they are only doing 8%

Not all, but many.

Very interesting an relevant article – thanks Ciaran

Again, like most common sensed people know, incurring debt is like stepping into dog poo. You will be limping until your foot is clean.

Scumdog millionaires! Lawyers will be the only financial winners coming out of this crisis! Perched upon their trees waiting for the carcases to feist on.

“When the virus crisis is over….WW3 could begin!”

There’s BIGGER concerns globally in my opinion. There’s increasing calls globally (search the web) for “China to pay” for Covid-19 reparations from various groups. D Trump even referred to it as the “China virus” or “Wuhan virus” putting a label to a disease that knows no borders, passports, or ethnics.

When/if this Covid-19 causes untold numbers of US deaths, the US (with sympathy from most countries of the world) to lay blame squarely on China (e.g. sanctions) or worse….since the US fears a rising Eastern empire to challenge US global influence….this COULD be considered a golden opportunity by the US’s military leaders to find reason to do a nuclear 1st strike against China, with the aim of wiping it off the table/set back development. (The bigger China grows, the stronger it will get militarily…so the time to do nuclear strike may be SOON….and the loss of life “caused by China” of Covid-19 could be the trigger of blame.) And China won’t accept any responsibility.

If I as a South African (once upon a time in SA Army Mil Intelligence Corps) thinks about that, I think US military leadership know it all along already, and is already in planning. And knowing Trump…..

Read below:

https://thediplomat.com/2020/02/us-adds-low-yield-nuclear-weapon-to-its-submarine-arsenal/

https://www.theguardian.com/world/2020/jan/29/us-submarine-trident-nuclear-warhead-patrols-atlantic-ocean

(read all related articles if you’re interested)

During the past Cold War, a nuclear war would’ve meant a “mutually assured destruction” event. Both US, Russia & other nations realise that. Russia has developed small “low yield” tactical nuclear weapons…which they can (try to) use on a European land battle…hopefully without escalating both sides to full all-out nuclear destruction.

(It’s like two warring parties…e.g. gangs…that each possess full-auto machine guns, knowing if one side starts firing on the other gang, both sides will obliterate each other. So they rather do knife/bladed weapon skirmishes, without escalation into oblivion.)

What this means is that now the CHANCE OF HAVING A FIGHT, is way BIGGER… The chance we’ll see the first ever use of small nuclear weapons, is growing.

Now the US done the same, low yielding nuclear missiles that can be used in a “tactical” land battle, without bringing the larger doomsday weapons on to cities.

Many of you may be aware of China militarisation of Spratley & other South China Sea islands, in their attempt to de facto claim these international waters as Chinese territory.

These smaller nuclear missiles from US “boomer” (as they are known) subs, we’ll likely be used as one of the most effective ‘tactical’ weapons to sweep clean Chinese naval bases without a struggle (!)

Fear the day when you hear rumours that most US Ballistic Missile Subs have silently left their bases into the dark ocean….

(…I fear the legal battles are the least of the world’s problems)

Easy tiger.

I think there’s some tinfoil that needs to be made into a hat somewhere for you.

Ha ha! Michael!

You are WAAAAYYY behind the actual planning – and thinking – reality for Armageddon.

Firstly, the notion of “Mutual Destruction” is largely a Western belief.

This is NOT the prevailing view in Chinese and Russian military planning! At all.

Militarily, the East has good reason to encourage the West to continue to believe in this mutual destruction narrative.

Because the false conclusion is that neither party will survive. And importantly, there is nothing that can be done to survive this anyway. And so then, nothing is done to prepare the nation for survival and recovery in the aftermath of a nuclear holocaust.

We’ll certainly, NOTHING much is being done in the West. Preparation won’t help, and is therefore a total waste of time and money.

That’s the thinking in the West.

And China et al are only too happy to encourage this complacent thinking, because it ultimately leads to the defeat (and demise) of their enemies.

Because they, in sharp contrast, are STEADILY and ACTIVELY preparing for survival.

For over TWENTY YEARS, China has had a program of constructing deep military-grade tunnels. These are both for the protection of military equipment AND the civilian population.

The existence of these tunnels is a bit of an open secret amongst China watchers. Nobody in the West knows the full extent. In 2011,it was reported to be of the order of >3000 MILES. Google Prof Phillip Karber of Georgetown University, USA, for detail. He was previously a Soviet Strategist at the Pentagon reporting to Henry Kissinger. In short, no fool.

Anyway, the USA has NO credible Civil Defence structures or planning to survive a nuclear strike.

The only documented underground sites are NORAD and a few hardened missile silos. There are rumours of some secret underground sites (DUMB), but very difficult to keep a secret in USA, and unlikely they are extensive.

The focus on nuclear weapons is misplaced. Germ and Chemical (nerve agents) warfare is much more subtle. And effective. And leaves all the infrastructure of the enemy untouched. And can achieve a protagonist’s objective without a shot being fired, and your opponent being unable to reliably accuse you of aggression.

Sounds a bit like the Corona virus may be a trial run.

The US has been caught with its pants down, while China is already over this, and restarting its economy.

No shots fired. And a clear winner! And that isn’t the Buffoon, Michael.

There are many lessons to learn going forward. Chief among them, that in an overcrowded world pandemics are here to stay. And will get worse.

Hi guys. Appreciate your comment. I hope I’m wrong…only time will tell.
(The US may do some crazy stuff to limit Chinese or eastern or Russian influence….and as China grows, the US may reach a point of losing military supremacy. And now the nuclear weapons has smaller warheads…one can connect the dots). The US will blame someone for Covid-19 for their “biological warfare against the US and the West”…and the more it affects other nations, the more sympathy such nations will give towards the US’ cause.

The US is worried it will lose global influence (which would see Americans getting steadily poorer, compared to other rising global peers….expect the “blame game” to start soon. They still have the military upper hand (for now)…and could use it. That’s how wars start…economics & power. As I say, hope I’m wrong.

There’s actually a LOT of powerful lessons to learn from how the various nations responded to this pandemic.

Basically, the ENTIRE West got caught with their pants down.

The European country that has responded best is Germany.

The one that has responded the worst, is arguably USA!

Due in no small part to a fool for a leader, second-guessing and ignoring first-class advice from very competent officials.

The bigger question is that the complete US democratic system has been exposed as TOTALLY inadequate to deal with the rise of a competitor like China.

The US has a crazy system that separately elects a President, and Congress. Instead of pulling together, they fight each other!

They take a YEAR to elect the president. And then get it wrong by electing a megalomaniac idiot.

Like us and others, they have a Senate overseeing a Congress (or Parliament). The Senate is a useless, outdated institution – an anachronism from medieval England when illiterate commoners really did need some supervision by an educated class (House of Lords).

Contrast this management structure with China, where the Premier is a seriously qualified engineer (not some Gigaba type fool dressing in a pilot’s uniform, and parading himself as in that league).

And the Politburo is able to make sensible, hard decisions, FAST.

And they are ACTIVELY implementing to 50 and 100 year PLANS (a notion completely alien to western thinking).

US vs China has exposed that the US is a superpower in name only now.

US is just a hollow shell of bluster. They can start a war, sure. But capable of finishing it off to their advantage?

Not a snowball’s hope in hell.

Afghanistan has already become the repeat of Vietnam. All those years? All the returning bodybags. What was the achievement? Would have been better if they had just stayed at home!

The days of US supremacy are long gone.

All the innovation is now becoming HOMEGROWN in China ie they are not the stupid, copycat-only nation that the West likes to portray them as (was the same sneering depiction of Japan as a mere “toymaker” after WW2).

The US needs a major electoral overhaul, and complete revisioning of what it needs to be, to succeed in this new China-dominated world.

Going to happen anytime soon?

Unlikely.

I SAY THIS IS Y2K ALL OVER AGAIN,,REMEMBER ME

End of comments.

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