Contracts and Covid-19: When you simply can’t pay

South African law allows the suspension of contractual obligation under very specific circumstances.

“I was supposed to get married, but thanks to the outbreak of Covid-19, our plans had to be put on hold. However, I had paid deposits to various service providers (hair, makeup, venue hire etc) – will my deposits be refunded?”  – Donsy (25)

“My hairdressing business employs five people. Our only source of income is our clients. We have not been able to work for more than a month.  If the business has no money and I cannot pay my employees, am I in breach of my agreement with them?” – Ronel (32)

“If I cannot pay my creditor – as in I am literally unable to based on circumstances beyond my control – can she demand payment? She cannot legally hold me accountable, right?” – Benjamin (40)

It is now April 27, 2020. The coronavirus has taken its toll on the economy, both domestically and internationally, and this is becoming more and more evident with each passing day.

The future, in the short term, does not look promising. National Treasury has projected a deep recession in South Africa, followed by a slight upswing in 2021.

Given this gloomy economic outlook, many people and businesses will in all likelihood not be able to meet their various contractual obligations.

“If unforeseen circumstances make performance in terms of an agreement impossible, parties to that agreement may be temporarily absolved from their duties.” – Advocate Derek Harms SC in “Covid-19 and Force Majeure”.”

South African law allows this suspension of contractual obligation under very specific circumstances. This is in terms of the common law principle of ‘supervening impossibility of performance,’ or can also be in terms of a contractual force majeure clause.

The term force majeure refers to unforeseeable circumstances that prevent someone from fulfilling a contract. These circumstances are often referred to as vis major, which is Latin for ‘a superior force’, and is sometimes translated as ‘an act of God’.

For a more in-depth view on this, read Advocate Derek Harms’ article titled “Covid-19 and Force Majeure” published by LexisNexis. (Link)

In it, Harms answers a frequently asked question relating to contracts and Covid-19: “Will the Coronavirus (Covid-19) constitute a force majeure event under South African law?” The answer to that, he indicates, is: it depends.

Other sources consulted in compiling this feature are:

‘Coronavirus: Can you escape your contractual liabilities?’ by Jason Valkin from legal firm ENSafrica; and

‘Force majeure and contractual obligations (Covid-19)’ by Norton Rose Fulbright attorneys, George Kahle and Yasmine Wilson.

According to Harms, failing to make your payments and blindly relying on force majeure or the common law doctrine of ‘supervening impossibility of performance’ may be risky in that it could result in legal action being taken against you.

“Businesses should seek legal advice before not honouring contractual obligations because of issues related to the Covid-19 outbreak,” he warns.

When considering whether or not to rely on a force majeure clause, parties should carefully examine the clause to ascertain whether it applies to the scenario at hand.

If your agreement has no such clause, or if a force majeure clause does not include a pandemic and lockdown such as those we are experiencing, you may be able to rely on the common law principle referred to above.

Keep the following in mind when doing so:

  • Your contract must have been concluded before the impossibility to perform arose.
  • The events making performance impossible must be unavoidable (the events should not have been foreseeable and avoidable);
  • Proper performance in terms of the agreement must be impossible based on the unavoidable events causing the impossibility. Distinguish between ‘difficulty’ and ‘impossibility’.
  • The unforeseen circumstances must make performance absolutely or objectively impossible. Objective impossibility includes where performance is physically possible, but cannot be reasonably expected.
  • If the unforeseen circumstances make performance absolutely or objectively impossible, the contractual obligation ceases to exist. The party who faces the absolute impossibility no longer has the duty to perform. The other party will no longer have the corresponding right to claim performance.
  • Once the event causing the impossibility comes to an end and performance becomes possible, the agreement will continue.

According to Harms, a creditor will have the option of terminating the agreement if it transpires that the debtor will be unable to perform for an unreasonably long time. “In the event of the contract being terminated due to the force majeure clause, certain financial obligations can still be applicable and could be paid at a reduced price,” he says.