How do coronavirus and COVID-19 affect contracts in South Africa? The pandemic is having a significant impact on many types of contracts in South Africa and many people are trying to apply contractual legal principles to them to work out what to do. Managing contractual relationships in these times is hard because many organisations and people can’t meet their contractual obligations.

Many employees cannot work. Many can’t pay for the goods or services they have received. Many can’t provide the goods or services they used to provide. Many can’t pay their rent. And many can’t pay the instalments on their loans. Some of these contracts involve lots of money.

There are not really universal answers that apply to all contracts. Often, it is important to refer to the specific contract to see what it says. We can talk in general terms here but it important for a lawyer (like the attorneys at Michalsons) to apply their mind to specific contractual relationships.

Use common sense and be kind

Before getting into the legal technicalities, I’d like to say that the solution is seldom going to be legal. Strange statement coming from a lawyer isn’t it? Courts have all but shut down. Taking legal action is going to be harder than before – courts that were under pressure will be more strained than before the disease. Courts will try to digitise but it will be a long process. And what’s the point of taking legal action against a person who simply cannot pay or a tenant who cannot leave the place where they are. The solution is most cases will have to be commercial, using common sense and with people being kind to each other.

We have to find solutions that work for everyone and not just one party to a contract.

How we can help you

  • Know what you agreed would happen in these circumstances by asking us to interpret a contract for you. We have lots of experience, especially with employment contracts, IT contracts, residential lease agreements and commercial lease agreements.
  • Resolve a dispute or find a way forward by asking us to conduct an online mediation for you.
  • Manage your employees whilst knowing what your legal rights and responsibilities are by asking us to advise you – we can hold online consultations – or providing you with a legal opinion.
  • Change an agreement or contract by asking us to draft an addendum or modification schedule.
  • Deal with similar issues better in future by asking us to update the relevant clauses in your contract templates.

What types of contracts are most affected?

Many different kinds of commercial or business contracts or agreements.

  • Employment contracts especially because, with lockdown, people can’t work.
  • Lease agreements because many tenants are not able to pay their rent.
  • Supplier agreement because suppliers can’t supply and customers can’t pay.
  • Loan agreements because people can’t repay their loans.

Checklist of proactive action you can take

  1. Do a risk assessment on your counterparties on the chance of them failing to perform.
  2. Find the contracts with high-risk counterparties.
  3. Review the contracts to look for force majeure clauses.
  4. Investigate alternative arrangements to mitigate non -performance by a critical supplier.
  5. Determining if you need to share any additional information with funders or creditors based on undertakings in your contracts with them.
  6. Update your templates so that they adequately deal with force majeure.
  7. If you will inevitably breach a contract, consider whether to proactively negotiate with the counterparty to agree an alternative and preserve the relationship.

Application of contract law

Force majeure or unforeseen circumstances beyond control

Coronavirus and COVID-19 are possibly events of force majeure that might result in the suspension of the contract. In some cases, contracts can also be terminated. In some cases, the disease was foreseeable. It is important to check the actual contract to see how force majeure was defined. Does your contract have a force majeure clause? You might be asking what is force majeure? It was originally a French term and Wikipedia has a pretty good explanation.

Supervening impossibility of performance

If there isn’t a force majeure clause, then in South Africa the concept of supervening impossibility of performance comes into play. This is where performance was possible at the conclusion of the contract but subsequently becomes objectively and permanently impossible through no fault of the parties. Coronavirus is probably a supervening impossibility of performance and may, therefore, excuse non-performance under a contract. There is a useful SCA judgment that deals with foreseeing contractual performance.

Impossibility due to illegality

The operation of a contract can be suspended by the impossibility of performance, including where the impossibility is due to illegality. In other words, I could not perform because it was illegal for me to do so. Regulations requiring me to stay at home prevented me from performing.

Mistaken common assumption

When people enter into a contract there is a common assumption that things are and will be a certain way. When circumstances change drastically, it can be argued that that common assumption is no longer valid and therefore invalidates the contract.

Suspend, change, cancel or terminate?

The answer might be to suspend a contract for a period of time. Many people will change contracts in writing once they have agreed how to deal with the new circumstances by recording the change in writing.

You normally cancel a contract for cause or breach, while a contract terminates due to the passing of time. Some people will want to cancel contracts.