COVID-19: A Force Majeure Event?

The unexpected outbreak of COVID-19 and its unforeseen consequences all over the world have not left the commercial sector in Cyprus unaffected. Emergency measures such as travel restrictions, citizens placed on quarantine and self-isolation are only some of the factors that have impacted and continue to impact parties to commercial transactions that render contract performance physically or commercially impossible. May, a party invoke contractually agreed force majeure clauses or, the doctrine of frustration in an attempt to protect themselves from being unable to meet its contractual obligations?

Force Majeure

The concept of “force majeure” (meaning “superior force”), is used commonly in contracts as a clause that essentially releases both parties from liability or obligation when an unexpected event or circumstance beyond the control of the parties, prevents one or both parties from fulfilling their obligations under the contract.

Determining whether the Corona-virus outbreak constitutes a force majeure event, is a matter of construction and will depend on the specific wording and the scope of the clause.

It is the case that force majeure clauses often contain a list of events that qualify as force majeure events. For instance, terms such as “epidemic”, “pandemic”, or more generic terms such as “disease” and “illness” are often expressly listed as events of force majeure. In such cases, it will be easier to claim force majeure protection, as COVID-19 is likely to qualify as a force majeure event. Also, terms such as “acts of government” or “national or regional emergency” may be listed so as to cover emergency measures taken by the government such as travel bans or placing citizens in quarantine in case of this novel outbreak.

Additionally, under common law, a party seeking to invoke that its ability to perform the contract has been prevented by a force-majeure event, has the burden to prove certain elements. These are:

a) that the event was unforeseeable;

b) that it has taken all reasonable steps to avoid or mitigate the effects of the force majeure event; and

c) that the event was beyond its control and thus impossible to overcome.

Most importantly, there must be a causal connection between the force majeure event that made it physically or legally impossible to perform the contractual obligations. With the COVID-19 case, the affected party has to show that due to the outbreak of Corona-virus and its resulting governmental measures, no alternative measures exist for performing its duties under the contract.

Frustration

In case the contract does not include any force majeure clause, the affected party may attempt to excuse its failure to perform its contractual obligations under the doctrine of frustration. Subject to Section 56(2) of the Contract Law Cap.149, as amended, “a contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. As interpreted by Cyprus courts, section 56(2) is only applicable to an impossibility which destroys the foundation of the contract, which requires a high threshold for proof of frustration of a contractual undertaking.

Recommended actions:

If you have executed a contract or are considering entering into new contract during this period, you should review the force majeure clauses carefully in order to understand the circumstances under which you can declare a force majeure and whether the Corona-virus outbreak and the resulting emergency measures may fall under its scope.

Further, notification processes and deadlines should be also reviewed carefully, in order to ensure that your ability to claim force majeure protection is not precluded. Importantly, if you intend to enforce such force majeure clauses, you should consider your obligation to take all the reasonable measures to mitigate the effect of non-performance, otherwise your failure to perform your obligation may not be excused. If in doubt regarding how a force majeure provision applies and whether force majeure protection may cover you, it is recommended to seek legal advice prior to taking any action or sending notices.

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