Can Covid 19 be used as a supervening impossibility defence?

Covid 19 has been in the spotlight for an extended period and will probably continue to be a lively topic of discussion for the foreseeable future. The Covid pandemic has undoubtedly had a negative impact on businesses resulting in the failure to perform contractually.

Covid 19 has been in the spotlight for an extended period and will probably continue to be a lively topic of discussion for the foreseeable future. The Covid pandemic has undoubtedly had a negative impact on businesses resulting in the failure to perform contractually. Although the pandemic may in some instances excuse the performance of a contractual obligation, the circumstances will be closely scrutinized by our Courts and a creditor would usually not be readily deprived of a rightful remedy.

 

In the event that a written agreement does not include the standard force majeure clause, either contracting party is entitled to rely on the common law principle of “supervening impossibility” which is a defence extinguishing a party’s right to perform contractually where such performance becomes objectively impossible. This doctrine is imputed into a commercial agreement automatically as forming part of the naturalia of such an agreement being a term flowing naturally from, and forming part of the contract, as an operation of law. The question however arises – can the Covid pandemic be raised as a “supervening impossibility” defence?

 

This was one of the issues in dispute in the case of Nedbank Limited v Wesley Groenewald Familie Trust and two others where judgment was handed down on 2 June 2021. Nedbank and the Wesley Groenewald Familie Trust entered into a loan agreement and registered a first covering mortgage bond in favour of Nedbank as security for all and any sums of money owing to Nedbank. The second and third defendants (Mr and Mrs Groenewald) bound themselves to Nedbank, in their personal capacity, as sureties and co-principal debtors for the debt of the Trust.

 

The defendants breached the loan agreement and fell into arrears as a result of their failure to make monthly repayments towards the loan. Nedbank thereafter instituted legal action against the defendants and subsequently Summary Judgment proceedings which were opposed by the defendants.

 

One of the defences raised by the defendants was that the Covid-19 pandemic and the restrictions that resulted from it constitute a “supervening impossibility.” The defendants argued in particular that the restrictions on economic activity made it impossible to generate an income preventing compliance with the agreement with Nedbank.

 

The Court found that the nature of the agreement between the parties was a mortgage loan relating to property and the defendant’s repayment obligations were not dependant on the businesses of the sureties being able to generate an income. The Court further held that the law does not regard mere personal incapability to perform as constituting impossibility. The defendants had income which was not disclosed to the Court and the fact that there was a change in financial situation and commercial circumstances, which negatively impacted their contractual obligations, did not constitute impossibility.

 

The Court, in finding in favour of Nedbank, made the following statement which is of particular relevance :

 

“The Covid-19pandemic and its crippling effect on the economy and businesses in general must be recognised when considering matters where it caused persons to default on their obligations. Not doing so would undermine the severe effect the pandemic had and continues to have. It would, however, be untenable that persons in default with a means of avoiding or minimising their failure to honour their obligations be allowed to use the pandemic as a shield to deprive creditors of what they are rightfully entitled to. I find that the restrictions brought about by the pandemic did not constitute a supervening impossibility in the present circumstances.”

 

Whilst each case will be decided on its own merits, the Judgment in the Nedbank case indicates that, although the pandemic has seriously impacted the economic landscape, our Courts will not readily accept this as a ground for justification when failing to meet contractual obligations.

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