The scope of this article is to discuss the effects of Covid-19 on contractual obligations. The general rule of contracts is that each party to a contract has to perform its end of the contract. What then happens when it becomes impossible for a party to a contract to perform because of an Act of God (force majeure)?
Does l Covid-19 qualify as a force majeure? If it does qualify, what will be the effects of a force majeure on a contract? The answer to the questions lies in various factors at play.
The disease is causing economic mayhem across the globe. A lot of corporations and individuals now find themselves in situations where they cannot perform their contractual obligations. Does the law provide a remedy to those who find themselves caught up in this chaos?
In terms of the law of contract, an Act of God is defined as an event that is unforeseen and unforeseeable and out of the reasonable control of one or both parties which makes it objectively impossible for or one or both parties to perform their obligations under the contract.
The effects of such an event could not have been prevented or avoided even if due care had been taken. The legal term used for the principle of Act of God is Force Majeure. Businesses and individuals must not blindly rely on force majeure to avoid honouring their obligations, to avoid damages for breach of contract. A thorough interpretation of the contract and application of the law ought to expose the position to be taken. It is advisable to seek legal advice first.
So who can escape liability under of force majeure?
Those with contracts with a force majeure clause are more likely to wiggle out of their contractual obligations scotch free, of course depending on the wording of the clause. A force majeure clause is a clause in a contract which specifically states the course of action to be taken in the event that performance becomes impossible because of an act of God. Depending on the wording, a force majeure clause usually exonerates a party from performance in the event that performance becomes impossible. A force majeure clause also usually includes Acts of God, Acts of Authorities and Pandemics that the party/ parties could not reasonably foresee at the time the contract was concluded. Some force majeure clauses allow suspension or termination of performance. The latter is preferred by most debtors. Most businesses and individuals alike are looking for ways that may help them wiggle out of their obligations without the harsh consequences for breach of contract damages. If the legal rules are applied correctly in the unforgiving legal environment, force majeure will set free a lot of obligations.
What then happens if there is no force majeure clause in your contract?
In cases where performance becomes impossible and the contract does not have a force majeure clause the party failing to perform will have to seek recourse of the doctrine of frustration or supervening impossibility. Impossibility has to be qualified, it is not automatic. So what factors are at play here and what are the consequences thereof?
Supervening impossibility relates to those cases where it becomes impossible to perform after the contract has been concluded. This is a question most parties to contracts are faced with amid the Covid-19 pandemic. It’s no doubt that the principle has opened floodgates of lawsuits of varying nature, from tenants failing to meet their rental obligations to contactors failing to deliver perishable cargo etc. In order to determine what the effect of impossibility in these cases is, one should enquire the cause of the impossibility. If it was caused by an act of God (force majeure) or chance (causus fortuitus), the probability of successfully escaping liability is high. If the supervening impossibility was caused by the fault of the debtor (maliciously or negligently), the debtor will be held liable in terms of the contract.
Causus fortuitus (Chance) refers to inevitable accidents such as theft and death. These incidents are less serious than force majeure but share the same element of enforceability with force majeure.
In conclusion, we leave it up to your imagination to determine whether or not Covid-19 is a force majeure or falls under frustration or impossibility? Does your contract contain a force majeure clause, would you want to amend it to include one? Would you want to know whether or not you can escape liability under your contact? We would love to hear from you we are just an email away.