On 9 April 2020, President Cyril Ramaphosa announced the extension of the nationwide lockdown by a further two weeks. In his announcement, the President appealed to all individuals and businesses, both large and small, to act responsibly and specifically in respect of large businesses, to not resort to force majeure, stop paying their suppliers and to honour their rental commitments.
The President’s appeal brings about two interesting questions. The first question is whether a party to a contract can, due to the COVID-19 pandemic, rely on the legal doctrine of force majeure. The second question is whether it is incumbent upon large businesses in South Africa, as responsible corporate citizens, to heed the President’s request.
Force majeure is a recognised concept in South African contractual law which allows a party to a contract to be excused from the performance of all or some of its obligations in terms of that contract in the event that certain pre – determined circumstances (the force majeure event) arise which prevent that party from fulfilling its obligations in terms of the contract. The contract must therefore contain a force majeure clause and specify those circumstances in terms of which a party would be excused from its performance obligations. In addition to excusing a party from its performance obligations, a force majeure clause will often stipulate that the party prevented from performance by the force majeure event will not be held liable for any loss or damages flowing from its failure to perform.
Force majeure clauses refer to circumstances beyond the control of the contracting parties and deal generally with acts of God, governments or regulatory authorities. Because force majeure is a contractual term that is agreed between parties, the parties are free to structure the clause to encompass a wide range of circumstances that could impact the parties, for example, the breakdown of certain machinery. It is important to understand that while the effects of a force majeure clause may excuse a party to a contract from performance and / or liability for non – performance, the underlying contract is usually not terminated and neither party is entitled to withdraw therefrom unless otherwise stipulated which is generally when performance cannot be resumed. The party seeking to be excused from its contractual obligations bears the onus to prove that the force majeure event was not within its control, that it could not overcome or avoid the event and finally that the event was not caused by fault on its part. Since the underlying contract is not terminated if a force majeure event occurs, the party claiming force majeure is only excused from performance whilst the force majeure event continues and must use reasonable means to attempt to mitigate the effect of the force majeure event and resume performance as soon as possible.
Impossibility of performance on the other hand is a common law remedy known as “supervening impossibility” in terms of which parties’ obligations to perform or receive performance in terms of a contract will be extinguished if performance by one of the parties becomes objectively impossible as a result of an unforeseen and unavoidable event not caused by either of them. The Supreme Court of Appeal, in the case of Transnet Ltd t/a National Ports Authority v The Owner MV Snow Crystal, stipulated that a determination is required whether, in each case, parties may rely on the doctrine of supervening impossibility. This determination includes the consideration of factors such as the nature of the contract, the relationship of the parties, the circumstances of the case and the nature of the impossibility. In order therefore to rely on the doctrine of supervening impossibility, a party must prove that it is legally entitled to do so. If proven, the contract will terminate and the parties will have no subsequent claims for damages based on a breach of contract.
Whether a party may therefore rely on either force majeure or supervening impossibility to avoid or be excused from performance in terms of a contract requires, in the case of force majeure, a consideration of the relevant force majeure clause to determine if it would cover non – performance as a result of COVID-19 and, in the case of supervening impossibility, a consideration of all the surrounding circumstances of that case. Reliance on a force majeure clause however provides parties certainty as to the events in terms of which they may be excused from performance in terms of the contract between them whereas reliance on the common law remedy of supervening impossibility requires that the performance in question be objectively impossible and accordingly provides far less certainty.
Notionally speaking it is fair to assume that parties to a contract could be excused from performance and / or liability in terms thereof as a result of the effects of the COVID-19 outbreak or the governmental regulations imposed in terms of the Disaster Management Act. It is certainly arguable that the outbreak and regulations would make performance impossible for certain businesses, that such impossibility is unavoidable, not foreseeable and not the fault of either contracting party.
Considering that businesses could presumably be excused from performance as a result of the COVID-19 outbreak, the question arises whether such businesses (especially large businesses) should do so in light of the President’s appeal and the application of corporate governance principles. Assuming for the purpose of this article that, by reference to large businesses, the President referred to JSE listed companies, such listed companies are obliged in terms of the JSE listing requirements to apply all the principles of the King Code on Corporate Governance (“the King Code”).
The King Code defines “Corporate Citizenship” as the recognition that an organisation is an integral part of the broader society in which it operates with rights, responsibilities and obligations. Principle 3 of the King Code relates to Responsible Corporate Citizenship and states that “The governing body should ensure that the organisation is and is seen to be a responsible corporate citizen.” The recommended practices provided under principle 3 suggest in turn that the governing body (board of directors) should oversee and monitor how the consequences of the company’s activities affect its status as a responsible corporate citizen in line with agreed measures and targets in areas including the economy and society. It seems therefore that large businesses such as JSE listed companies should, in the first instance, be required to consider whether enforcing force majeure clauses in contracts would adversely affect whether the company is and is seen to be a responsible corporate citizen and, in the second instance, refrain from enforcing force majeure clauses to avoid potentially acting contrary to its corporate governance principles.
The abovementioned requirements are partially codified in the Companies Act 71 of 2008 (“the Act”) with section 7(e) thereof stating the purpose of the Act as being, inter alia, “to continue to provide for the creation and use of companies, in a manner that enhances the economic welfare of South Africa as a partner within the global economy”. In addition, section 76 requires that directors must exercise their powers and perform their functions in the best interests of the company. It therefore seems fair to assume that conducting the affairs of a company in such a manner that could be contrary to the economic welfare of the country, leading to such a company not being viewed as a responsible corporate citizen, would neither be in line with the purposes of the Act nor in the best interests of the company.
Considering that large businesses may risk not being seen as responsible corporate citizens, it remains to be seen whether such businesses will nevertheless enforce force majeure clauses, stop paying their supplier and / or honouring their rental commitments.
Since each matter will undoubtedly present a unique factual background, the legal concepts explored above must be carefully considered within the context of those facts. As such, this article is accordingly not intended to constitute legal advice and readers are therefore encouraged not to act on the advice provided herein without first seeking legal advice in respect of each particular issue so arising and the context within which such issue presents itself.