General Issues

LOCKED DOWN BUT NOT LOCKED OUT

By 24/04/2020 No Comments

1. Our economy is fragile. Covid19 and the Lockdown has brought financial uncertainty to the commercial business sector and ordinary income earners.

2. The Lockdown has produced a flurry of articles, blogs and “opinions” concerning the effect of the Lockdown on inter alia commercial contracts. In many instances (but not all) the expressed opinions have consisted of an ordinary restatement of textbook authorities. This has been done without due regard to the practical insights
that are being sought.

3. In this note I will attempt to provide some practical perspective on the diversity of views (sometimes incorrect) that populate the internet and social media. This note is not intended to be exhaustive. It is but a starting point for interested parties to assess their positions. This note is also not intended to deal with those who have become ill from the Covid19 virus. The considerations that would apply in such circumstances fall outside the ambit of this note. This is also so in respect of matters relating to employment law.

4. This note will place an emphasis on contracts that had already been concluded and were ongoing as at the commencement of the Lockdown.

5. In my view the Covid19 virus and the Lockdown have been wrongly conflated. They are of course causally connected to each other in addressing the health consequences of the virus. However, in the context of commercial transactions the Lockdown is the true benchmark against which business should assess its contractual rights and obligations.

6. The contractual principles that arise for consideration in the circumstances of the current Lockdown are often referred to as “impossibility of performance”.Lawyers often refer to this concept by reference to a Latin maxim lex non cogit ad impossibilia.

7. The general principle is that an impossibility of performance extinguishes the obligations under the contract. There are however exceptions. These often arise in the context of agreements that endure for an extended period and where the event giving rise to the impossibility of performance is temporary.

8. Many of the “opinions” written in recent days have referred to the requirement as to whether the “impossibility of performance” is objective or subjective. In general, and within the context of the Lockdown an assessment of the objective or subjective nature of the impossibility will probably not arise. In almost all instances (although there may be rare exceptions) a contracting party’s ability or inability to perform will be objective.

9. Remember that just because performance has been made more difficult does not make it impossible.

10. Most commercial contracts are commonly categorized as “reciprocal contracts”. The character of a reciprocal contracts is that it creates rights and obligations owed by the parties to each other. To some extent their rights and obligations dovetail with each other. The compliance by the parties with their respective rights and obligation usually occurs by way of a sequence determined by the terms of the agreement or by law. This sequence will require a particular party to honour all or part of their obligations (or to tender performance) before it can demand that the other party to reciprocate by performing its obligations.

11. A commercial lease is a good example of a reciprocal contract. In a commercial lease the landlord agrees to make premises available to a tenant for a fixed period at a monthly rental. In terms of this contract the landlord must perform first. That is, it must make the premises available to the tenant before it can demand rental. Only once the landlord has made the premises available to the tenant for beneficial occupation does the tenant become obliged to pay rental.

12. When a Lockdown occurs, the landlord cannot make the premises available for use. The landlord is in fact prohibited in law from doing so. Of course, if the premises are de facto being used to provide essential services the fact of a Lockdown will be irrelevant.

13. The common law in relation to the impossibility of performance of leases is stated by one of our original common law writers by the name of Van der Linden. He stated
the common law as follows:

‘The lessee is entitled to demand the entire remission of the rent, or an abatement of part, according as he has had no use of the thing let, during the whole or part of the time of the lease, unless this had been occasioned by his own act. To this head also appertains the case when through inundation, tempest, or such like unavoidable misfortunes, the land has produced nothing.’

14. The above statement of the common law in respect of leases explains the reciprocity principle insofar as it relates to leases. What we see is that because the inability of the landlord to perform is only temporary the rights and obligations between the landlord and the tenant in terms of the lease are only suspended. That is to say the lease does not come to an end. What ends is the tenant’s obligation to pay rental during the Lockdown period.

15. A further example of the temporary suspension of obligation during a period of impossibility of performance was explained a 1799 English decision. In that case a council order had placed a temporary embargo upon shipping. The court found that the embargo suspended but did not end the contract in connection with the voyage, and that upon the removal of the embargo the contractual liabilities were restored.

16. There are many special rules that relate to sale in the context of impossibility of performance. Many of them (but not all) relate to circumstances where performance is [because of the Lockdown] permanent. The rules relating to sale sometimes shift the consequences of the [Lockdown] to the seller or the purchaser.

17. The effect of the enforceability of a contract caused by the Lockdown (whether temporarily or permanent) must be assessed by reference to the nature of the contract and whether the parties intended the impossibility to liberate them of their obligations. In some instances, it will be clear that the parties could not have intended that the contract continue. An example would be where time was of the essence, meaning that a particular obligation had to be performed by a specific date.

18. A temporary interruption of the performance of a contract with continuing obligations will normally (but not always) mean that the contract remains enforceable. The length of the Lockdown will remain a factor in assessing the continued validity of the contract. What is unreasonably long will depend upon the nature of the contract and
the surrounding circumstances. The court will look at the contract holistically by reference to its language, context and purpose.

19. There is a very important qualification to all that has been said thus far. Parties are always at liberty to agree in writing or orally/verbally what effect an impossibility of performance will have on their agreement. The parties are then bound to the terms to which they agreed. A contracting party must accordingly read the terms of its contract very carefully before making any assessment as to their rights and obligations under the contract in the context of the current Lockdown. You should consult your lawyer before making any decision.

20. I express no views as to the situation that will arise if the Lockdown endures for any longer period.

21. It is important to note that the Lockdown may cause many persons and entities to become financially distressed. The Lockdown will be no excuse for a party to refuse to pay their debts. If the Lockdown has placed a person or entity under financial stress, they may have recourse to remedies such as debt review, sequestration, liquidation or business rescue.

Warren Pye
Advocate
Group One, Sandton
Sandton