Legal Case Studies
CASE STUDY FORCE MAJEURE
An event beyond control and could not have been foreseen or prevented.
Force majeure is a legal concept that refers to unexpected and uncontrollable events that make it impossible or impractical for one or both parties to fulfil their contractual obligations. The term comes from French law and literally means "superior force." In essence, it is an event that is beyond the control of the parties involved and could not have been foreseen or prevented.
The significance of force majeure is that it allows parties to be released from their contractual obligations without penalty or liability. The events that qualify as force majeure are typically listed in the contract, and can include natural disasters, wars, strikes, government actions, and other unforeseeable events.
Let me provide you with an example. Imagine that your business is a supplier of raw materials to a manufacturing company. You have a contract with the manufacturing company that requires you to deliver the raw materials every month. However, a natural disaster such as a hurricane or earthquake hits your area, and your operations are shut down. You are unable to fulfil your contractual obligations due to the unforeseeable and uncontrollable event of the natural disaster.
In this scenario, force majeure can be invoked to release you from your contractual obligations without any liability or penalty. The manufacturing company would have to seek other suppliers or wait until your operations resume.
It is important to note that force majeure is not automatic and must be explicitly stated in the contract. Therefore, it is crucial to review and negotiate force majeure clauses carefully to ensure that your business is protected in case of unforeseeable events.
FORCE MAJUERE AND COVID-19 PANDEMIC
The COVID-19 pandemic is a prime example of how force majeure has played a significant role in business contracts. The pandemic was an unforeseeable event that had a widespread impact on businesses and economies globally. Many businesses were unable to fulfil their contractual obligations due to the pandemic, and force majeure clauses were invoked to excuse non-performance.
For instance, travel and event-related businesses were heavily affected by the pandemic due to travel restrictions and social distancing measures. Many contracts related to these industries included force majeure clauses that allowed the parties to be released from their contractual obligations in case of events beyond their control, such as a pandemic.
Moreover, businesses that relied on international supply chains were also impacted by the pandemic. The pandemic caused delays in the transportation of goods and the shutdown of manufacturing facilities, leading to a shortage of raw materials and products. Force majeure clauses in such contracts enabled parties to be released from their contractual obligations if their performance was affected by the pandemic.
Overall, the COVID-19 pandemic serves as a clear example of how force majeure can play a critical role in business contracts during unforeseeable and uncontrollable events. It highlights the importance of carefully drafting and negotiating force majeure clauses in contracts to protect the interests of all parties involved.
INTERNATIONAL CASE LAW
A Snow Storm
There have been several cases where force majeure clauses have been invoked in response to unexpected events. One such case is the case of "Bank of America Illinois v. RTC" (1994). In this case, a bank had entered into a contract with a savings and loan association to provide certain services. The contract contained a force majeure clause that stated that the bank would not be liable for any failure to perform its obligations if the failure was due to events beyond its control.
During the contract period, a severe snowstorm struck the area, which disrupted the bank's operations, and it was unable to provide the services to the savings and loan association. The bank invoked the force majeure clause to excuse its non-performance.
The savings and loan association argued that the snowstorm was a foreseeable event and that the bank should have taken measures to prevent its disruption. However, the court ruled that the force majeure clause was applicable in this case because the snowstorm was an unexpected event that could not have been foreseen or prevented by the bank. Therefore, the bank was released from its contractual obligations without any liability.
This case highlights the significance and application of force majeure clauses in contracts. It also emphasizes the importance of defining the events that qualify as force majeure and how the parties can invoke such clauses in case of unexpected events.
SOUTH AFRICAN CASE LAW
A Severe Drought
There have been several cases in South Africa where force majeure clauses have been invoked in response to unexpected events. One such case is "Classic Contracts (Pty) Ltd v. W F Kroon Transport (Pty) Ltd" (1997), which involved a contract for the sale and delivery of potatoes.
The contract included a force majeure clause that stated that if the seller was prevented from delivering the potatoes due to unforeseen circumstances, such as war, strikes, or natural disasters, the contract would be suspended until the circumstances no longer prevented delivery.
During the contract period, a severe drought occurred in the potato-producing region, which made it impossible for the seller to fulfil the contract. The seller invoked the force majeure clause, arguing that the drought was an unforeseen event that prevented delivery.
The buyer argued that the drought was a foreseeable event and that the seller should have taken measures to prevent its impact on delivery. However, the court ruled that the force majeure clause was applicable in this case because the drought was an unexpected event that could not have been foreseen or prevented by the seller. Therefore, the contract was suspended until the circumstances no longer prevented delivery.
This case illustrates how force majeure clauses are applicable in South African law and how they can be used to excuse non-performance in unforeseen and uncontrollable events. It also emphasizes the importance of carefully defining the events that qualify as force majeure in contracts to protect the interests of all parties involved.
A Labour Strike
Another case where force majeure was invoked in South African law is the case of "Transnet Limited t/a National Ports Authority v Owner of mv Snow Crystal" (2004).
In this case, the National Ports Authority (NPA) had entered into a contract with the owner of a ship for the berthing and handling of the vessel at the port. The contract included a force majeure clause that stated that the NPA would not be liable for any delay or failure to perform its obligations due to events beyond its control.
During the contract period, a labour strike occurred at the port, which prevented the NPA from performing its obligations under the contract. The NPA invoked the force majeure clause to excuse its non-performance.
The ship owner argued that the strike was a foreseeable event, and the NPA should have taken measures to prevent its impact on the contract. However, the court ruled that the strike was an event beyond the control of the NPA and that the force majeure clause was applicable in this case. Therefore, the NPA was not liable for any delay or failure to perform its obligations.
CASE STUDY FORCE MAJEURE - PART 2
COVID-19 PANDEMIC: A CRISIS TO BE RECOGNISED AS A FORCE MAJEURE EVENT IN SOUTH AFRICA?
While Covid-19 has become increasingly less prevalent in our minds, it remains one of the most significant crises in our immediate history and there is no certainty that such an event will not occur again in the near future.
For many businesses, COVID-19 was an unexpected event which resulted in contractual performance being, in their view, impossible, with the numerous restrictions on trade, movement, travel, and work. As such, many sought to rely on Force Majeure clauses contained in their contract, when for instance, lack of income owing to halted trade as a result of COVID-19 restrictions made it impossible to pay rental amounts and thus, to perform in terms of a lease.
In order for an event to trigger a Force Majeure clause, the event must reasonably fit within the description of a Force Majeure event as contained in the Force Majeure clause. Such an event must take place after the contract in question was signed, be unforeseeable and reasonably unavoidable, and must cause objective impossibility of performance.
With respect to the COVID-19 pandemic, where there is a Force Majeure clause, there is certainty regarding whether COVID-19 would qualify as a Force Majeure event as the clause will refer to diseases, or pandemics, or other similar events as being Force Majeure events for the purpose of the contract. In this instance, where the requirements of the clause are met, no challenge could reasonably be raised to the use of the Force Majeure defense.
Where a contract does not contain a Force Majeure clause, the common law principle of supervening impossibility will apply. The requirements for supervening impossibility are similar to those applied to Force Majeure clauses in that the event must have been unforeseen, unforeseeable and must make performance under the agreement impossible.
In the case of Freestone Property Investment (Pty) Ltd vs Remake Consultants CC and another 2021 (6) SA 470 (GJ), Freestone and Remake entered into two written commercial lease agreements in which there were no Force Majeure clauses. During the hard Lockdown, and for a period of six months thereafter when limited trade became possible, Remake failed to make rental payments in terms of the leases. Freestone terminated the lease agreements on the basis of Remake’s non-performance.
Remake argued that the non-performance was as a result of supervening impossibility, being the declaration of the state of disaster which made performance by both parties in terms of the lease agreements impossible, and thus, that the agreements were suspended for the period of non-performance. The Court was of the view that supervening impossibility could be ap plied to the hard lockdown because both parties were objectively unable to perform. It could not however be applied to the remaining period of non-performance by Remake where occupation of the leased premises was possible, and rental was due, and any impossibility of performance on the part of Remake was subjective.
Taking into account what we learn from the cases above, it is important that you ensure that your contracts include comprehensive Force Majeure clauses that specify the events when the clause will apply, how the clause will apply, and what happens when the clause applies. This will ensure that you have certainty of your defense under the contract if you are unable to perform because of an event like a pandemic, or, alternatively, certainty regarding whether the other party will have a defense under the contract when they cannot perform. Include words like epidemic, pandemic, disease, death or illness to provide for events like COVID-19. Additional valuable events to include are strike, lockouts, unrest, acts of god, earthquakes, or change in law. Be as specific as possible in detailing how the clause applies and its consequences and as broad as possible in describing the events which trigger the Force Majeure clause.