Part 2 of a legal analysis of the COVID-19 outbreak. In this article we consider the legal issues faced by businesses as result of possible supply chain disruptions, from the perspective of both the supplier and the recipient of goods and services.
The World Health Organisation has declared coronavirus disease (COVID-19) a global pandemic. The Minister of Cooperative Governance and Traditional Affairs has, in terms of the Disaster Management Act of 2002, and acting on the advice of the National Disaster Management Centre, declared COVID-19 outbreak a national state of disaster. Pursuant to this announcement, the Minister, on 19 March 2020, published regulations "regarding the steps necessary to prevent an escalation of the disaster or to alleviate, contain and minimise the effects of the disaster". In the first article in this series, we looked at the challenges facing companies in maintaining internal standards of good governance. In this article we consider the legal issues faced by businesses as result of possible supply chain disruptions, from the perspective of both the supplier and the recipient of goods and services.
Locally, export and import related businesses had been anticipating the effects of the virus for some time before it actually landed on our shores. One of the areas where the effects of the outbreak has been felt is in the chains of supply of products and services. From a legal point of view, a supply chain is primarily a series of contractual agreements, in terms of which parties undertake to supply and purchase goods and services.
Due to the effects of the pandemic, supply of goods or services in terms of numerous is likely to be delayed or become partially or entirely impossible. When this occurs, the purchaser may seek to place the supplier in breach, cancel the agreement and claim damages on account of the non-performance. The parties then need to consider their legal positions, based on the terms of the agreement or other applicable principles.
Many contracts incorporate clauses which have the effect of postponing the performance of a party's obligations for so long as an event of "force majeure" lasts, or even releasing the party entirely.
In legal terms, a "force majeure event" is an unforeseeable circumstance or superior force beyond the reasonable control of any contracting party which prevents a contracting party from fulfilling its contractual obligations. Typically, this would include natural disasters such as fires, storms and earthquakes, and third party actions such as strikes, acts of war or government actions.
When a force majeure event occurs, the party whose performance is affected is usually required to give notice to the other party or parties, advising that the event has occurred and how long the force majeure event will last, where it is possible to determine. Depending on the terms of the contract, one or the other of the parties may be entitled to cancel the contract should the force majeure event not cease within a stipulated period of time.
The first essential step by a business whose operations are likely to be compromised by the effects of the pandemic (whether because it or its suppliers will not be able to deliver goods or services), should be a review of all the agreements that they have concluded, whether as suppliers or buyers, paying close attention to the wording and interpretation of force majeure provisions. The event being relied upon must fit precisely the definition of a "force majeure event" in terms of the agreement. For example, the existence of a pandemic, which does not actually incapacitate a large number of the supplier's personnel, may not in itself make it impossible for the supplier to produce or deliver the products, but if it is followed by government regulations which have the effect of preventing the supplier from delivering, the supplier may well be able to rely on a force majeure exemption.
Even where the contract does not contain an express force majeure exemption, a supplier who is unable to deliver as required by the contract may be exempted if it becomes objectively impossible for him to so do so by unforeseeable events beyond the control of either party. This is known in South African law as "supervening impossibility of performance". In order to rely on this doctrine, the supplier must be able to prove that:
- It was not possible for it to foresee, at the time the contract was concluded, the circumstances that have arisen;
- It would be impossible for anyone to perform the obligations concerned, and not only for that supplier;
- The performance has actually become impossible, not merely inconvenient or uneconomical.
On the other hand, it is not necessary for the performance to be physically impossible; the supplier would also be exempted if due to regulations passed to combat the effects of the pandemic, it has become impossible to deliver goods or render the services without contravening the law. What is important to recognise, whether a contract includes a force majeure provision or not, or whether a supplier is raising a supervening impossibility of performance, is that each case is fact specific. The type of products or services concerned, the circumstances giving rise to the disruption in delivery and most importantly, the wording of the contract must all be considered. The lessons learned from the events should also be taken on board to inform the content of future contracts. Businesses affected by these challenges should consider and seek expert professional advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.