Consequences of force majeure on contracts
by Lucy Phillips. Will an event that affects your performance of a contract constitute a force majeure event? The answer is it depends on the wording of your force majeure clause.Thursday, 21 May 2020
by Lucy Phillips. Will an event that affects your performance of a contract constitute a force majeure event? The answer is it depends on the wording of your force majeure clause.
Meaning of force majeure (vis major) in South Africa’s common law
A force majeure is an act of God or man that is unforeseen and unforeseeable and out of the reasonable control of one or both of the parties to a contract, and which makes it objectively impossible for one or both of the parties to perform their obligations under the contract. If an agreement does not contain a force majeure clause, or if a force majeure clause in a contract does not name the unforeseen event that the parties wish to rely on; then the parties may be able to rely on the common law principle of ‘supervening impossibility of performance’ to suspend their obligations under the contract, provided that it has become objectively impossible for them to perform under the contract as a result of an unforeseeable and unavoidable event.
Force majeure clauses in contracts
The principal objective of a force majeure clause in a contract is to list a number of events that the parties agree would prevent or have an effect on the party’s ability to perform in terms of the contract. The effect of an event that falls within the ambit of the definition of force majeure in the contract is that both parties will be excused from performing; because the impossibility of performance, due to an event beyond the control and foreseeable expectation of the parties, causes their intention of performing its obligations to be extinguished, and frustrates the purpose of their agreement. This is based on the impossibilium nulla obligatio est maxim (nobody has an obligation to do the impossible).
A force majeure clause essentially aims at providing the following protection:
- It halts the parties’ contractual obligations to one another for a period of time.
- It provides protection to a party from being liable for damages for a breach of contract provided that it can be classified within the ambit of the definition of force majeure.
Parties often include time periods during which the contract will be suspended if a force majeure event occurs. This gives any party the right to elect to terminate the agreement unilaterally by way of notice to the other party should the force majeure event continue for longer than the set period. This period will depend on the agreement between the parties and the nature of the obligation, the contractual performance, and the practicality of allowing for such a suspension. As it currently stands, Club Med’s terms and conditions allow for a period of 90 days of a continuing force majeure event before a party to the contract can terminate.
It is important to note that at this stage of the pandemic and as the pandemic develops and continues, there is no doubt that the coronavirus risk is now foreseeable. Parties will find it harder to establish that a force majeure event has occurred should they wish to rely on a force majeure clause for future non-performance of obligations under a contract; as all future impact resulting from this virus will in all probability not be seen as a force majeure event as it is reasonably foreseeable.
What should your force majeure clause in a contract look like?
Along with listing the common acts of God and unforeseeable events that are usually contained in force majeure clauses, this pandemic and the world crisis surrounding its effects requires that we re-look at our force majeure clauses to ensure that it sufficiently covers the events that your business could encounter that would prevent or have an effect on your ability to perform in terms of the contract.
With this in mind; the nature of your business, the products/services that you provide, and the suppliers you utilise, become exceptionally important in crafting an appropriate force majeure clause that will be able to protect your business in an event such as the coronavirus.
Here is a list of considerations and suggestions to be cognisant of when crafting/reviewing your force majeure clause:
- Adding a specific reference to things such as “Government action” and “pandemic” to ensure that in future there is no uncertainty about whether a pandemic such as the coronavirus would constitute a force majeure event for your business. It is however important to note here that anything that is reasonably foreseeable falls outside the ambit of a force majeure event. Accordingly, learning from the coronavirus and its impacts are imperative to ensure that your business is more equipped to navigate a pandemic such as this one in the future, wherever reasonably possible.
- Listing business specific material adverse causes (MAC’s) that could prevent or have an effect on your ability to perform in terms of a contract. A guideline would be to reference more specific objectives. For example, a natural disaster in the United States of America may not be a force majeure for a business in South Africa; but the cancellation of orders from American clients may result in a material adverse change in your company’s finances, preventing or having an effect on your company’s ability to perform in terms of a contract.
Lucy Phillips heads up Consilium Legal, after founding the company with Natalie Laurencik in 2012. As a specialised consultancy, Consilium is focused on the commercial aspect of its clients’ businesses, such as commercial, corporate and advisory work. Having previously worked at FNB, where she was Legal Contracts Manager, and as Head of Legal (procurement) at Rand Merchant Bank; Phillips has extensive experience and expertise in staff training and continuing education on data privacy; consumer protection; roles and duties of directors under the Companies Act 2008 and the laws relating to social media.
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