[Under] Contractual pressure in a lockdown: pushing down on me or you?

Article via Discovery Insure  partner Origin Systems 2 April 2020

This pandemic has impacted us all, creating chaos by casting doubt and uncertainty over the most basic of daily tasks. A significant question for both businesses and individuals at the moment is what this virus means for the contractual obligations which shape our day-to-day lives?

In their personal lives, many people are preoccupied with questions like: Do I need to pay my gym contract/my rental/my domestic worker?; or what if I’ve contracted for the delivery of goods or services and COVID-19 means that I haven’t got them yet?

In a business context, the implications of COVID-19 are broad and multifaceted, spanning supplier relationshipsemployment law, compliance and risk management.

In navigating this new landscape, it’s useful to return to the basics because the short answer is that there is no one-size-fits-all solution to the question of what COVID-19 means to your obligations. A multitude of intertwining factors will define how COVID-19 impacts each situation.  Some of the relevant considerations include the factual circumstance underpinning the transaction; the contractual clauses governing force majeure, breach and delayed performance; jurisdiction, and the governing law.

But rather than reciting legal textbooks, it’s best to adopt a more practical approach by starting with a closer look at how your contracts cater for this pandemic, if at all.

When doing this, it’s essential to ask yourself what the desired outcome is?  Do you want to enforce the terms, escape the terms or vary them? You might also consider factors that go beyond an analysis of the law, such as issues of social responsibility within the context of a national crisis.  Once you have established your end-goal, look to the provisions of the agreement itself to see if they line up with the desired outcome.

Clauses of the contract

The terms of an agreement are more than just what, when and how. A well-drafted contract will provide you with a rulebook to govern the relationship between yourself and the other party. The contract may tell you which country’s laws are applicable, the procedure for a dispute, and importantly, it might say what happens when an extraordinary event occurs (like a pandemic). Review the contract to see if it contains any such provisions, which may look something like:

Clauses which excuse performance

The contract may contain a clause which excuses one or both parties from performing in terms of the agreement. The exclusion could be in the form of force majeure/vis major clauses, with or without “catch-all” phrases.

These clauses often list circumstances which are considered unforeseeable and out of the reasonable control of one or both of the contracting parties – so-called “acts of God”.  Should a listed event occur, the provision will govern what happens to the contract. It may alter, vary, or excuse performance for one or both parties should it become objectively impossible.

If your contract does contain such a clause, check to see whether pandemics are covered. If not explicitly listed, watch out for “catch-all” phrases such as “including but not limited to” or “any other event beyond the control of the parties”. These phrases mean the clause is not a closed list, and a pandemic is potentially within its scope.  If this is the case, the impact of the clause would ordinarily be that the parties are excused from performing in terms of the contract for so long as the “act of God” prevents performance.  Note, however, that some clauses will place a time limit (e.g. 3 months) on the period of suspension, after which either party is entitled (but not obliged) to cancel the contract.

Clauses which indemnify or limit liability

Your contract might possess a clause which indemnifies a party or limits liability for failure to perform in terms of the agreement. These clauses do not excuse a party from performance but will limit the financial consequences of partial or non-performance.

Breach of contract

Check your agreement for a breach clause or any terms which say that non-performance constitutes a breach. Search for terms which bind a party to perform or to an alternative performance, even under today’s circumstances. These clauses may say things such as, “shall not be released from payment under any circumstance” or “where performance is rendered impossible the party unable to perform shall pay the injured party the full value of the performance plus damages.”

If your contract does not contain the above clauses, or the clauses do not cater to the current circumstances, then your next stop is what we refer to as “the common law”.

Common Law

Rather than using a ‘big-book of law’ South Africa has a system of law known as the common law. These are not rules which you will find in legislation but from past court decisions and principles established by selected Roman-Dutch authorities. Within the common law, you will discover concepts which may apply to your contracts in the absence of specific provisions.

Supervening impossibility of performance

In terms of South African common law, no one can be obliged to do the impossible. This principle allows parties to suspend or extinguish obligations in terms of the contract without being penalised, but only where an unforeseeable and unavoidable occurrence has made the performance objectively impossible. This defence may be raised where an aggrieved party brings a claim for specific performance or breach and damages against the other party.

In South Africa, if the impossibility is absolute and permanent, then the rights and obligations of the contract are extinguished completely. If performance will become possible again once the circumstances have passed then the rights and obligations become suspended until that time.

Objective impossibility can be:

  • physical impossibility; or
  • an unreasonable expectation of performance,

caused by:

  • an unavoidable and unforeseeable event which occurred after the conclusion of the contract.

It is not an objective impossibility where performance has simply become more difficult or financially onerous. The impossibility of performance must also be objective – in the sense that no-one could reasonably perform (as opposed to circumstances in which the performance has become impossible because of the specific or personal circumstances of the contractual party).  For these reasons, it is extremely rare (if not unheard of) that the common law would treat an obligation to pay money as having become objectively impossible.  Having said this, a party is not legally obliged to pay for the delivery of goods or a service, if the other party cannot deliver the goods or services because of objective impossibility (this is known as ‘the principle of reciprocity’).

While the above exercise may help you assess your position in this pandemic, it is essential to remember that parties on both ends of the agreement simply want to come out in the best financial position possible under challenging circumstances.

Before attempting to enforce a hardline stance, seek out considered advice and remember that COVID-19 is very real for now, but it will pass. What would you like your contractual relationships to look like on the other end of this pandemic? While the law or your contract may prescribe a particular position, events like this remind us also of our social responsibility to one another.

Businesses should be mindful that how they treat contracting partners today will impact negotiating contractual relationships post-pandemic; how they manage clients and individuals under their care will inform brand opinion and relations in the future.

When facing a specific dilemma, individuals should be mindful of their contracting position. You may be hoping for a windfall from the gym owner or the bank on your contracts with them. In the same way, vulnerable workers such as domestic workers or gardeners will be looking for your support and kindness as they try and navigate severe financial and family stress.

What is clear is that the pandemic highlights the need for a well-drafted agreement. So whether you are a business or an individual, make sure you have the right contracting partner on hand to advise and guide you through the uncertainty and help ensure your future contracts have you well covered.

So in summary, a brief look at the law as it stands tells us that for as long as one party does not perform, you do not have to pay them (unless your contract provides otherwise).  However, keep in mind the social fabric of our nation and remember that the strict provisions of your agreement may need to be tempered with some flexibility that takes account of our shared humanity and social responsibility.  In other words, when focussing on your immediate next steps, keep an eye on the long-term view…

With our I&DRS clients placed at Discovery Insure, they have access to the Embedded legal support benefit, which is automatically included in their plan at no additional cost offered through Discovery Insure in partnership with Origin Systems.