When the virus crisis is over, the legal battles begin

Written by Ciaran Ryan. Posted in Journalism

SA courts generally recognise force majeure as a reason for contract non-performance, but what about individuals who cannot pay their debts? From Moneyweb.

Any bank seeking to evict a homeowner will likely get short shrift from the courts as judges are required to consider all circumstances – including loss of income due to Covid-19 – before granting an order. Image: Shutterstock

Any bank seeking to evict a homeowner will likely get short shrift from the courts as judges are required to consider all circumstances – including loss of income due to Covid-19 – before granting an order. Image: Shutterstock

While the Covid-19 outbreak carves a vein of destruction across the planet, companies worldwide are reviewing millions of contracts to assess whether they can plead force majeure – or an inability to perform due to the pandemic.

It’s a dead certainty that the courts will be clogged for years with cases arguing the limits of force majeure. Judges will be called on to separate the opportunists – those who had already defaulted on contract obligations which had nothing to do with the virus – from genuine cases of force majeure.

In most cases, companies will be able to plead force majeure as a justifiable reason for being unable to perform on a contract. The China Council for the Promotion of International Trade announced on January 30 that it would issue force majeure certificates, which will assist in legitimising any claims for contract non-performance due to force majeure.

The burden is on the party claiming force majeure to prove that the coronavirus falls within the contract wording and that non-performance was a result of the outbreak.

“It must also show there were no alternative means for performing its obligations and that it has taken all reasonable steps,” writes Liz Pinnock, head of legal at audit, tax and consulting firm RSM, in a recent article on force majeure.

Companies will be seeking to be excused from liability for non-performance, which in most cases will mean renegotiating the terms of the contract by, for example, extending timelines for delivery.

‘Impossibility’ needs to be proven

In a recent article, Justine Krige of Cliffe Dekker Hofmeyr says SA law does not excuse the performance of a contract in all cases of force majeure. “There are certain conditions that must be fulfilled in order for a force majeure to trigger the type of impossibility that extinguishes a party’s contractual obligations.”

She says these are:

  1. The impossibility must be objectively impossible.
  2. It must be absolute as opposed to probable.
  3. It must be absolute as opposed to relative (in other words, if it relates to something that can in general be done, but the one party seeking to escape liability cannot personally perform it, such party remains liable in contract).
  4. The impossibility must be unavoidable by a reasonable person.
  5. It must not be the fault of either party.
  6. The mere fact that a disaster or event was foreseeable, does not necessarily mean that it ought to have been foreseeable or that it is avoidable by a reasonable person.

While companies have highly-paid lawyers to protect their interests, individuals do not. When they apply for a bank loan, they sign an agreement drafted by the bank and heavily skewed in the bank’s favour. In such cases, debtors falling behind on their mortgage and car payments will be unable to plead force majeure, says consumer lawyer Leonard Benjamin.

Two sides to every contract

“Default [by a debtor] is purely a factual issue. Even a deceased person would be in default if their bank froze the account out of which payments were being made on being notified of the death. It’s not a question of blameworthiness. The main thing about a loan is that the lender will have performed fully by advancing the money so it falls only on the consumer to honour their side of the contract by repaying the loan.

“If, in an agreement between companies, the obligations under the agreement are reciprocal, one party’s performance is conditional on the other’s,” adds Benjamin. “A force majeure clause simply excuses the supplier’s performance but it will also prevent it from claiming that the consumer perform.

“A loan is different, as the bank would already have performed in full by advancing the funds.”

Banks risk massive reputational damage if they start pursuing customers through the courts for arrears brought about as a result of Covid-19, says Benjamin. However, any bank seeking an eviction against a homeowner will likely get short shrift from the courts, as judges are required to consider all the borrower’s circumstances – including loss of income due to the Covid-19 crisis – before granting an eviction order.

Banks are already coming under pressure for their “underwhelming” response to the Covid lockdown compared to the response in other countries.

Read: SA banks ‘underwhelm’ with response to virus fallout

Standard Bank’s response appears to be the most generous so far, offering short-term payment holidays for students and small businesses in good standing. The response from the other banks has been more of a “call us if you’re in trouble” approach, while governments elsewhere have made more decisive moves to protect borrowers.

Read: Rate cut not enough

The US has placed a freeze on foreclosures and evictions, while several other countries have announced or are planning to introduce debt repayment holidays for consumers in distress. The UK has announced a three-month payment holiday, and European banks are being pushed to offer similar forebearance.

Calls for decisive intervention

In SA, political parties and trade unions are calling for much more decisive intervention from the banks than the lukewarm response to the crisis so far.

National African Congress of Trade Unions (Nactu) and Lungelo Lethu Human Rights are among a growing number of groups calling for a total freeze on legal action related to debt recovery, particularly mortgage and car payments.

Cosatu wants across-the-board rather than piecemeal loan deferments.

The DA wants a four-month loan repayment holiday.

The EFF wants a payment holiday for a whole range of personal debts.

Nactu says government should invoke emergency powers to jail anyone pursuing legal action against mortgage borrowers and car owners until the economic crisis has stabilised, on the grounds that the country is facing an existential crisis.

US economist Michael Hudson says the massive debts accumulated over the last two decades can never be repaid and must be written off, as was done repeatedly in history. This would be the stimulus needed for an unprecedented economic recovery, he says.

Read: Forgive them their debts

That may be an unlikely scenario right now, but seems inevitable in the longer run as the economic wreckage caused by the virus and decades of living on unsustainable debt becomes more apparent.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.