December 03, 2020

Word of warning to SMMEs under COVID-19

Hanno Bekker, the Founding Director of The Legal & Research Group, has found that many consumers and small business owners are under-educated on contractual clauses, such as force majeure, that may help them in extreme circumstances such as the current COVID19 pandemic.

Force majeure can be defined as any unforeseeable act of God, act of government or any act that is out of your direct control that makes it impossible for one to fulfil a contractual agreement.

For force majeure to be relevant it must be absolutely, unavoidably and objectively impossible for you to perform your contractual duty and it must be clear that you have in as far as possible attempted to avoid these types of circumstances.

Where force majeure is not present in a contract, the common law principle of supervening impossibility of performance can be relied upon. This means that claims of inability to fulfil a contract will be made under common law and not contract law.

However, the burden of proof required in these types of cases is much heavier and although the principle covers a far broader range of circumstances, the scrutiny is far more intense in the judging of these claims.

In this pandemic, many businesses may think that claiming force majeure is a possible solution regarding rent due to landlords. However, if your business has liquid capital and good profit margins in recent months your landlord can claim that your financial position is secure enough and reject your claim of force majeure.

This can lead to lengthy and expensive battles surrounding a breach of contract.

The principle of force majeure may also encompass the impossibility of performance. For example, if your business relies on product delivery and due to lockdown, you are unable to deliver, you may claim force majeure. However, both the person who must provide the goods/services and the person that must pay for the goods/services can claim force majeure.

Business owners need to seriously consider the long-term damage to cash flow and client relations that claiming force majeure may have. Businesses run the risk of clients simply taking their business to companies that can deliver which can decimate future cash flow.

Additionally, if businesses are unable to fulfil their contracts with their landlords, the landlords can permanently terminate the lease agreement.

Hanno strongly urges everyone to seriously examine any contracts and credit agreements that they may have signed. He recommends that all businesses make sure that their force majeure clauses are detailed and stipulate plainly as many conditions as possible under which they can be activated.

He warns that if there is a scapegoat, such as the clause encompassing an Act of God and not of government, the other party may automatically prevent you from claiming.

Above all, Hanno reiterates just how important it is for every business owner to make sure that they understand what a properly written contract entails and that they read, and importantly understand, their rights and obligations in terms of their contracts.

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  • Author: Moira Levy

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Notes from the House is an independent online publication that tracks and monitors Parliament’s role in fulfilling its constitutional responsibilities to improve the lives of South African citizens. Published by Moira Levy with the support of the Claude Leon Foundation.

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