31 Aug 2020
As a result of the COVID-19 pandemic, it has now become rather well known that a debtor may defend himself for the non-performance of an obligation, or for a delay in the performance of an obligation by claiming (and proving) force majeure. But is it really such a cure-all for non-compliance with contractual obligations?
The principle of force majeure is one which has featured numerous times local jurisprudence. This principle is indirectly found in the following articles:
A force majeure event relates to an event that is: (i) irresistible (i.e. makes it impossible for the debtor to perform the obligation); (ii) unpredictable; (iii) caused by something external; and (iv) completely unavoidable and beyond the debtor’s control.
With respect to the first element; i.e. irresistibility, the interpretation adopted by our courts has not always been uniform, in the sense that such an element has at times been extended to cover situations which although not impossible to perform, have become excessively onerous in nature, and still considered “irresistible”.
An important observation to make is that all the references in our Civil Code, which indirectly refer to such a principle provide for the non-liability for damages in the event that an obligation is not performed, or is otherwise delayed, due to force majeure.
What happens in the case of an event being deemed to fall under force majeure?
Our law, when referring to force majeure situations, provides that a contracting party failing to perform his obligations may be exempted from any liability for the failure of the non-performance of such obligations due to the force majeure event.
Should the force majeure event give rise to a situation where contractual obligations are not performed, this should not automatically give rise to the rescission of a contract.
It follows therefore that, even though the performance of obligations may be hindered, a claim of force majeure will not excuse a party from performing his obligations.
In other words, when one claims force majeure, one is making a claim to the extent that he is not to be held liable for any damages which may result due to the non-performance, or due to a delay in the performance of his contractual obligations – nothing more and nothing less. As the title of this article says, claiming force majeure is not a “get out of jail free card” and should not be abused or stretched beyond what it was intended for.
Having said this, it is important to look at one’s contracts, seeing that it is also possible for a contract to provide for the termination of the agreement in the event of a force majeure event. Meaning, that a contract may stipulate that, as a consequence of the force majeure event, it may be terminated.
Does the COVID-19 pandemic give rise to a force majeure event?
Due to the COVID-19 pandemic certain contractual obligations have been halted or delayed. However, a question that arises is if the COVID-19 pandemic may be classified as a ‘force majeure’ event.
In order for the COVID-19 pandemic to give rise to a claim of force majeure, the performance of the contractual obligations must be rendered impossible and not simply be made more burdensome or become more expensive or unprofitable.
So, how is one to determine if the COVID-19 pandemic gives rise to a force majeure event? Contracting parties should make reference to the provisions of the contracts outlining their obligations to see if a force majeure clause is in place. Furthermore, they should review the force majeure clause to check if it encompasses a pandemic as a possible force majeure event.
What should a contracting party do?
Firstly, the contract’s governing law must be determined. If the contract is governed by a jurisdiction that does not recognise such a concept (such as Common law jurisdictions), one needs to see if a force majeure clause has been agreed upon between the parties; and if so, if a pandemic is understood to fall within the definition granted under said force majeure clause. If no such clause is found, then one should refer to similar notions (such as the Common law notion of frustration which is similar to the concept of force majeure in Civil law countries).
There may be situations where a contract does not provide for a force majeure clause; however, seeing that the governing law would be one that recognises such a concept, then a claim in this regard may still be brought.
COVID-19’s effect on contractual relations relating to commercial leases
When it comes to commercial leases, the contracting parties may have agreed between one another that a di fermo period has to be satisfied; i.e. the lessee would be bound to pay rent to the lessor for the entire di fermo period. Could a contracting party opt out of the lease contract prior to the di fermo period without facing any liability? Can the COVID-19 pandemic be deemed as a force majeure event that gives rise to this?
The best advice here is to see how the obligations of the lessee (i.e. to pay rent to the lessor) may be hindered by the COVID-19 situation. Was the lessee employed and is currently not working? Is the lessee being granted financial help by the government? All these factors have to be considered. It is not simply a situation of “yes, one can opt out” or “no, one can’t opt out” - but we are to look at each particular situation on a case-by-case basis in order to determine if obligations are simply harder to conduct or if they are outright impossible to perform.
COVID-19’s effect on contractual relations relating to promise of sales
Many a time, promise of sale agreements would be subject to a condition stating that a sale shall be carried out in the event that a sanction letter outlining the granting of a loan to the prospective buyer by a bank is issued. So, what if a person is currently unemployed due to the COVID-19 pandemic? He would consequently no longer satisfy the conditions required for the bank to be issued the loan. What if the sanction letter was already issued and the promise of sale was already signed? Clearly this party will not be able to enter into the sale agreement. Again, many factors have to be considered in order to determine if a claim of force majeure may be raised.