Entering into agreements is a normal run-of-the-mill activity for every business owner and almost every individual. Not all agreements entered into between parties are reduced to writing. The failure to reduce a agreement to writing has its own potential legal pitfalls (albeit that verbal agreements are fully binding in law). The simple act of buying a bottle of water from a supermarket owner is a verbal agreement that has the same legal effect as a comprehensive written agreement.
This article examines the legal position that arises when the parties have entered into a verbal agreement and where one party is required to perform during the national shut-down, but is precluded from performing because of the national shut-down?
In the event that an agreement is not reduced to writing, it means that a party cannot rely on a force majeure clause as there is no written agreement to ascertain the express events or occurrences which would allow one to rely on the force majeure clause. A written agreement may also fail to record a force majeure clause. In these instances, the common law principle of supervening impossibility of performance (“supervening impossibility”) comes into play.
In the context of South African common law, in absence of an applicable force majeure clause, any event or occurrence which is beyond the control of the parties to the agreement, and which makes the fulfilment of the respective parties’ obligations impossible after the agreement is concluded, will be dealt with in accordance with the principle of ‘supervening impossibility’.
Supervening impossibility occurs when it becomes objectively or absolutely impossible to fulfil contractual obligations under an agreement. For example, person A and person B conclude a verbal agreement whereby person B is to deliver grain to person A, but subsequent to the conclusion of the agreement, the grain that was to be delivered by person B has been destroyed by a flash flood, and therefore person B is unable to perform in terms of the agreement. Person B is in breach of the agreement as the obligation of performance can no longer be completed because performance has become objectively or absolutely impossible after the conclusion of the agreement (i.e. the grain has been destroyed). Person A may claim certain legal remedies as a result of the breach of the agreement, however person B may raise the common law principle of ‘supervening impossibility’.
The South African Government has issued Regulations that only businesses which perform an essential service may continue to operate as normal during the 21 day lockdown, and that it is considered a criminal offence to leave your home in an instance where you are not an essential worker, providing an essential service, buying essential items (such as food or medication) or collecting a social grant.
As a practical example:
- Business A and Business B have concluded a verbal agreement (or a written agreement without a force majeure clause), in terms whereof Business B is required to deliver goods to Business A during the lockdown period.
- Business B is not delivering essential goods and is therefore prohibited from complying with its obligations. Consequently, Business B cannot lawfully fulfil its obligations in terms of the agreement. In normal circumstances, Business B will be in breach of the agreement and will be liable for damages.
- Business B is entitled to invoke the common law principle of supervening impossibility, if the agreement was concluded prior to the lockdown, being the event which rendered the performance of obligations impossible.
It is important to note that the event or occurrence which gives rise to the impossibility to perform the obligations which flow from the conclusion of an agreement must not be self-created by the party seeking to rely on the common law principle (“the defaulting party”). The same is said that the principle will not protect the defaulting party when the event or occurrence giving rise to the impossibility is due to the fault of the defaulting party. Should the innocent party claim breach of the agreement, and seek specific performance, then the defaulting party, who wishes to rely on the common law principle, will be required to prove the existence of the event that gave rise to the impossibility of performance.
In ascertaining whether or not the common law principle may be successfully applied, the courts (as a general rule) will consider the following factors, namely:
- the nature of the agreement;
- the relationship between the parties to the agreement;
- the circumstances of the matter;
- the circumstances giving rise to the event or occurrence preventing performance;
- the nature of the impossibility invoked by the innocent party; and
- any other factor the court may deem necessary.
The court in Unlocked Properties 4 (Pty) Ltd v A Commercial Properties CC 2016 ZAGPJHC stated that the impossibility must be absolute or objective as opposed to relative or subjective. Subjective impossibility to receive or to make performance does not terminate the agreement or extinguish the obligation.
Absolute impossibility must be understood to mean that it must be impossible for any person to perform that which the defaulting party is required to perform. If a party who is not a party to the agreement is able to perform the obligation of the defaulting party, then the defaulting party runs the risk of the court rejecting their defence of supervening impossibility of performance. It is not enough for the defaulting party to be unable to perform its obligations due to the impossibility, and it must be so that any party will be prevented from performing the obligation as a result of the impossibility.
The answer to the question of whether or not you are entitled to rely on the common law principle of supervening impossibility will require a complete analysis of the terms of your agreement and the facts. It is for this reason that a party who wishes to invoke the common law principle consult with an attorney, as the facts of each case will differ.
Our experienced commercial attorneys are available to review your agreement and advise you on the legal implications of your ability to perform and/or inability to perform during the 21 day lockdown (or any extension thereof).
*** Please note that this article (and the information contained herein) is to be used to inform members of the public. This article (and the information contained herein) should not be construed as being legal advice, and members of the public are advised to consult their legal practitioner where possible. Harris Billings Incorporated will not be held liable for any damages suffered as a result of reliance on this article (or the information contained herein). ***