El Niño puts business contracts under pressure as drought risks rise

As South Africa faces the prospect of a strengthening El Niño cycle, associates at law firm Cliffe Dekker Hofmeyr (CDH) warn that agricultural producers, agribusinesses, input suppliers, processors and commodity traders should pay close attention to risk allocation in their commercial contracts.

This comes as forecasts indicate that El Niño conditions are likely to bring hotter and drier weather to much of Southern Africa, increasing the risk of supply chain disruptions, drought, wildfires, water shortages, reduced crop yields and livestock losses.

El Niño is not a legal event but a recurring climatic phenomenon; however, its consequences may have significant contractual implications, according to CDH director Lucinde Rhoodie.

El Niño and its importance

El Niño is a natural climate pattern in which surface waters in the central and eastern Pacific Ocean become much warmer than usual.

Although it originates thousands of kilometres from Southern Africa, it is well known for altering global weather patterns. In Southern Africa, El Niño events are frequently associated with hotter, drier conditions, increased drought risk, water scarcity, and agricultural disruption.

The most recent forecasts from the World Meteorological Organisation (WMO) indicate a strengthening El Niño event, with elevated risks of above-average temperatures and shifting rainfall patterns across parts of Africa. Southern Africa may experience drought conditions, pressure on water resources and associated economic impacts.

El Niño risks on businesses

Rhoodie said that for businesses operating in sectors such as agriculture, mining, energy, manufacturing, logistics and construction, El Niño’s impacts can affect their ability to perform contractual obligations, from delivering products and services to maintaining production levels and meeting project deadlines.

“One option available to parties operating, for example, in the agricultural sector is to include force majeure clauses in their contracts,” she added.

“Unlike some jurisdictions, South African law does not contain a statutory definition of force majeure.

“Instead, parties generally rely on express force majeure clauses contained in contracts, or the common law doctrine of supervening impossibility of performance where no contractual provision exists.”

Force majeure as a clause

Force majeure is a contractual mechanism that typically excuses or suspends performance when an extraordinary event, beyond the reasonable control of the parties, prevents one or both from carrying out their obligations.

Unlike ordinary commercial risk (price spikes, supplier delays you could have planned for), force majeure captures the truly exceptional: events that are external, unforeseeable (or not reasonably foreseeable) and unavoidable, and that cause the impossibility of performance.

“Under South African common law, in the absence of a force majeure clause in a contract, a genuine objective supervening impossibility can discharge duties,” said Rhoodie.

“However, a clear force majeure clause is invaluable because it defines events, notice steps, mitigation duties, and consequences with far more certainty than common law alone. Subjective factors such as mere inconvenience, increased cost, reduced profitability or operational hardship will ordinarily not suffice.”

Can El Niño constitute a force majeure event?

Senior associate in dispute resolution at CDH, Liëtte van Schalkwyk, said whether El Niño can constitute a force majeure event depends on the wording of the specific contract and the facts of each case.

“Importantly, El Niño itself is unlikely to constitute the triggering event. Rather, the relevant question is whether the consequences of El Niño fall within the scope of the force majeure clause,” she added.

Where a clause expressly includes events such as “natural disasters”, “acts of God”, “drought”, “extreme weather events” or similar wording, there may be a stronger basis to invoke the force majeure protection afforded in a contract.

Whether a party is entitled to relief will depend on establishing a nexus between the event and the inability to perform.

Practical steps for businesses

According to Van Schalkwyk, organisations should consider reviewing existing contracts to determine:

• Whether the force majeure clause is fit for purpose

  : Many older contracts do not expressly address droughts, water shortages, heatwaves, environmental emergencies or climate-related disruptions.

• Notice requirements

  : Force majeure provisions often contain strict notification obligations. Failure to provide timely notice may prejudice a party’s ability to rely on the clause.

• Mitigation obligations

  : Most clauses require affected parties to take reasonable steps to minimise the event’s effects and resume performance as soon as possible. The farmer must then consider the steps needed to mitigate losses.

• Supply-chain exposure

  : Businesses should evaluate whether key suppliers and subcontractors are vulnerable to drought, water restrictions, transport disruptions or energy constraints.

• Climate-specific drafting

  : Future contracts may benefit from expressly addressing climate-related risks, including droughts, floods, water restrictions, wildfires and other extreme weather events.