Law firm Cliffe Dekker Hofmeyr (CDH) on April 9 discussed some of the pertinent issues that its clients were facing in the wake of the Covid-19 pandemic in South Africa.
These issues include the enforceability of contracts, force majeure clauses, commercial leases, distributions and liquidity tests and the convening of shareholder meetings.
CDH corporate and commercial legal directors Yaniv Kleitman and David Pinnock participated in the panel discussion webinar.
Kleitman explained that Covid-19 had caused an uncontrollable change in circumstances, affecting contracts and corporate activities across the spectrum, with implications including economic hardships.
Despite any Covid-19 impacts, the text within agreements and contracts still binds both parties to the terms, however, more reasonable results can be negotiated between the parties.
Kleitman said South African law does not provide for extreme circumstances where contracts are modified in accordance with circumstances, but it does have doctrines that kick in that come close to that.
These doctrines are around supervening impossibility, force majeure clauses, tacit terms that are not explicitly written in the agreement, but that pertain to certain circumstances, as well as the court’s discretion to disallow performance of a contract.
The courts have an overarching discretion to rather allow damages or cancellation.
“If [a contract] results in undue hardship for one of the parties to be compelled to perform under an agreement, a court can award a cancellation of agreement,” Kleitman noted.
Additionally, Constitutional-law-type arguments can apply. “If the enforcement of an agreement would be unfair to one party, resulting in a disproportionate share of harm and benefit gained between the parties, it becomes a Constitutional issue, but it is generally not enough of a defence to show that the agreement will cause undue hardship.”
Also relevant during this time are clauses to renegotiating good faith, which normally provides for change in circumstances and renegotiation of terms in a contract.
“Clauses to negotiate in good faith are unenforceable, unless there is a deadlock around agreement of new terms.
“Then there could be contractual discretions, for example to increase an interest rate, but that discretion has to be exercised in good faith – you cannot just change the terms of the agreement out of bounds without reason,” Kleitman said.
He further noted that sometimes the Consumer Protection Act or the Companies Act, could help; for example, around share buyback agreements where courts can intervene to reduce damages for a particular party.
“Your starting point in analysing whether you are able to get out of a contract without being liable is to look at whether the contract has a force majeure clause. If there is one, you will be trapped in that clause and consider your options based on what is written in the clause.
“Force majeure has specific remedies and consequences involved, therefore there is no one generic answer for how it can be interpreted or applied in law,” said Pinnock.
He added that if there was not a force majeure clause, supervening impossibility of performance became valid, which was highly dependent on what the circumstances were that were limiting one party in performing its duties. The cause might flow out of regulations under the Disaster Management Act, in this case during the lockdown, and not necessarily owing to Covid-19 directly.
Ultimately, CDH said contracts needed to be looked at on a case-by-case basis, considering the specific circumstances impacting on the one party’s ability to perform and whether it was justifiable to declare force majeure or claim supervening impossibility.
“We are seeing kneejerk responses where companies are too eagerly claiming force majeure, but a notice of force majeure is not force majeure and you will be in breach of contract. People are seeing it as a negotiation tool.
“Once you have given notice, lifting of exclusivity can then happen or renegotiation of terms between parties, or a right of termination can happen. However, the period of the force majeure will be difficult to determine here,” Pinnock pointed out.
He explained that the force majeure period would likely start from the day of notice and then end once the lockdown regulations were totally released. That period would be specific to contracts and there could be a lot of dispute around those timelines
“Supervening impossibility will be difficult to rely on as a solution during this time, while it will be important to determine what is the cause behind a force majeure, since economic hardship is not a sufficient reason in most cases,” Pinnock said.