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Is the COVID-19 lockdown automatic grounds for breach of contract?
13 May 2020
 
“Our business scheduled a launch function for a new product in April. A function venue was booked for the event. With the COVID-19 lockdown we cannot hold the function anymore and informed the venue that we want to cancel the contract. They however replied that they will accommodate us after the lockdown. We will probably still do the launch later, but don’t want to be bound to this venue as we may have to adapt the format of the function after the lockdown. The contract only provides for breach of contract. Can we cancel the contract for breach as the venue was unable to hold the function?”

To answer your question, one must first differentiate between breach of contract and impossibility to perform under a contract. 

Breach of contract typically occurs where one party fails to deliver or perform in accordance with the agreed terms of the contract. It must be noted that with a breach, the failure is due to circumstances which are within the control of the party from whom performance is due. Such breach, if not remedied, entitles the aggrieved party to, among other remedies, cancel the agreement.

Impossibility to perform, on the other hand, occurs where a party is unable to perform or deliver completely or absolutely due to a change in circumstance which prevents the party from delivering or performing in terms of the contract. Such impossibility only occurs where the circumstances are out of the control of the party from whom the performance is due. In such a case, the obligation of the party from which the performance is due may be suspended for the period during which the impossibility continues.

Our courts have held that although a breach of contract can entitle an innocent party to cancel a contract, the presence of a temporary impossibility only suspends the obligations of a party for the period of which the impossibility continues. Temporary impossibility therefore neither brings an end to an obligation nor does it generate a right to terminate an obligation.

In your situation, assuming the contract is silent on provisions which deal with a situation such as the COVID-19 lockdown, the function venue could raise the defence of a temporary impossibility to perform. 

In your case, the national lockdown in response to the COVID-19 pandemic gave rise to a supervening impossibility to perform by the function venue. The national lockdown was not within the control of the function venue. Consequently, the function venue’s failure to perform does not give rise to a breach of the agreement, but rather a temporary impossibility to perform on their side. Their willingness to avail the function venue after the lockdown confirms their view that they will still be able to perform once the lockdown has passed. 

This may therefore limit your rights to cancel the contract for breach. This is not to say that you are tied in to the contract forever. If your contract does not have specific provisions which regulate an occurrence which create an impossibility to perform our courts could apply the common law approach to a supervening impossibility to determine whether it is reasonable and fair for the contract to remain in force or whether the nature and duration of the supervening impossibility is of such a nature that the foundation of the contract has been destroyed and the contract should be cancelled. As always, the specific circumstances of each situation will dictate whether such cancellation would be possible or not.

Our advice is to discuss the contract with your attorney to advise on whether you have sufficient grounds for cancellation as well as alternative options that could be considered should you not be able to do so.
 
 
 
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