LET’S TALK CONTRACTS Impact of state of disaster on rights and obligations
We are inundated with inquiries from clients wanting to know what the effect of the declared state of disaster, and particularly the closure of businesses, may have on their rights and obligations under agreements they have entered into. The position is particularly relevant in respect of lease agreements. We, together with everybody else, are in unchartered waters and, as is usual in such situations, everybody seems to offer advice, some of it helpful and some of it dangerous. Having considered the legal position and taking cognisance of commercial and economic realities, the purpose of this note is therefore to offer some guidance to assist our clients in making what will, in most cases, be difficult decisions.
Our law recognises that a supervening impossibility to perform obligations under a contract, discharges the contract. The events giving rise to such impossibility will be any events that are unforeseeable with reasonable foresight and unavoidable with reasonable care. Acts of state, such as the current declared state of disaster, would fall into this category.
The event must render performance objectively impossible. The fact that the supervening event has made it uneconomical for a party to perform in terms of the agreement, does not mean that performance has become impossible. In the context of a lease, an earthquake that destroys a building, makes it impossible for the landlord to fulfil its obligation to deliver the premises to the tenant and the agreement will fall away with the parties being excused from performing their respective obligations. The fact that a tenant has had a bad trading month resulting in limited cash flow, does not render its performance (payment of the rental) objectively impossible.
Whether a supervening event is of such a nature that it excuses a party to a contract from performing its obligations in terms of the contract, must be considered in the light of all the surrounding circumstances, such as the nature of the event, the nature of the respective parties’ businesses and, most significantly, the terms of the specific agreement. We urge our clients not to make any knee-jerk decisions until all relevant, surrounding circumstances have been considered. Depending on each client’s unique circumstances, the legal position may be viewed differently and although certain general propositions can be stated in broad strokes, there is definitely no single answer and one size does not fit all!
In the current context, the following may be said:
The declared state of disaster constitutes a supervening event that may, in certain circumstances, render performance under an agreement objectively impossible;
Whether performance under a contract is rendered objectively impossible, must be examined in the light of all the surrounding circumstances. Significantly, this includes a thorough examination of the agreement and what the respective parties have agreed to contractually;
The party wishing to rely on the state of disaster to excuse its performance under the contract, bears the burden of proving it;
A failure by a party to perform its obligations because it mistakenly relied on the declared state of disaster, will constitute a breach of contract, which entitles the other party to its normal legal remedies;
A so-called force majeure clause in an agreement may deprive a party of its right to rely on a supervening event to excuse its performance and will in most cases regulate the steps that the parties need to take to deal with such an event. A failure to comply with such provisions will amount to breach of contract;
The state of disaster will have an extremely limited impact on parties’ rights and obligations under residential leases, which will, in addition to the specific contract terms, be governed by the provisions of the Rental Housing Act and the Consumer Protection Act.
We once again urge our clients not to act precipitously and take steps that may have negative consequences. We are available to assist you in considering the terms of your specific contracts and all the circumstances and to advise you on the correct course of action to take. In relational agreements, such as lease agreements, which will continue to endure beyond the current state of disaster, we suggest that the parties enter into discussions to explore ways of managing their relationship through the current circumstances.
Should you require any assistance or advice, please contact our offices on 041 363 6044 or email@example.com.