Force majeure in instances of drought
Provided by Cliffe Dekker Hofmeyr
By Denise Durand
Topics Contract Law | Dispute Resolution | Insurance Law
29 Oct 2019
Force majeure refers to circumstances beyond the control of the parties and are intended to deal with, among other things, unforeseen acts of God, of governments and regulatory authorities; chemical or radioactive contamination; failure or delays in transportation; change in law; and war. Force majeure provisions will usually contain a non-exhaustive list of events that the contracting parties agree to treat as force majeure and which render contractual performance impossible. This is an attempt by parties to cater to instances where the breach of a contract. i.e. non-performance, is caused by circumstances beyond the control of the parties.
If provision is not made in a force majeure clause for specific circumstances that will prevent performance by a party, the parties will have to rely on the common law principle of supervening impossibility.
The common law position as seen in Unibank Savings & Loans Ltd (formerly Community Bank) v Absa Bank Ltd 2000 (4) SA 191 (W) 198 B-E is that if performance of a contract is impossible due to unforeseen events (not caused by the parties), parties are excused from performing in terms of the contract. It was further held that, “the impossibility must be absolute or objective as opposed to relative or subjective”. Furthermore, the parties must not have had reasonable foresight of the event causing impossibility at the time the contract was concluded – Nuclear Fuels Corporation of SA (Pty) Ltd v Orda AG 1996 (4) SA 1190 (A).
In determining impossibility, the court in Hersman v Shapiro & Co 1926 TPD 367, held:
The contract in that case called for the delivery (at a future date) of a certain quantity and grade of corn. In the year in question there were excessive rains in the Transvaal region, however, and there was a resultant scarcity of corn of the required quality. Performance for the defendant became, as a result, far more difficult and expensive. Indeed he argued for discharge of his contractual obligation. Stratford J held that one must ‘look to the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility invoked by the defendant’ to see whether the contract should be discharged. Evidence led in the case established that the defendant had not looked to surrounding provinces and countries, nor had he offered ‘fanciful’ prices: the desired grade of corn was not unobtainable, but merely scarce. The court refused to discharge the defendant’s obligation. (also confirmed in MV Snow Crystal Transnet Ltd T/A National Ports Authority v Owner of MV Snow Crystal 2008 (4) SA 111 (SCA)).
Having regard to the above, it appears that a force majeure event must be a legal or physical restraint and not merely an economic one.
Applying the above to the recent drought in the city of Cape Town, where a company or individual relies on the common law of impossibility as a result of an act by a government authority and/or an act of nature in regard to the use and supply of water, and not on the strength of a force majeure clause in a contract, it could be argued that:
- there was no impossibility in performing in terms of an agreement as there was still availability of water, alternatively, water could have been accessed from alternative sources albeit in costly or limited quantities;
- in agreements concluded in the last few years leading up to the drought, the parties to the agreement would have been fully aware of the general lack of water in the area, alternatively, should have reasonably foreseen the effects that the drought in the area would have had on its business;
- the effects of the drought could have been alleviated by implementing alternative methods for providing water.
Having regard to the above, the circumstances of the drought may not have met the requirements of impossibility and as a result, raising impossibility as a defence to performance could fail depending on the circumstances of each case.
In order to cater to situations of unforeseen or changed circumstances, parties to an agreement must ensure that force majeure is not only included as a clause in their agreements but must make certain that the clause provided is extensive. The risk of poorly drafted force majeure clause is that parties are bound to the agreement and thus will not be able to escape its obligations, alternatively, will be forced to rely on the common law principle of impossibility which has strict requirements. Furthermore, parties should consider inserting ‘hardship’ clauses into their agreements to guard against situations where a force majeure clause cannot be relied on.
- The significance of force majeure provisions on contractual arrangements
- Impossible? The contractual defense of impossibility of performance