Coronavirus and its impact on commercial contracts: is it a force majeure event?
With the worldwide spread of coronavirus (covid-19), its declaration by the World Health Organisation as a pandemic and the uncertainty surrounding the current situation, businesses and individuals have been forced to navigate the challenges brought on by the rapid spread of the virus, its impact on their daily lives, freedoms and economic stability, while complying with measures taken by national governments.
In the commercial spectrum, we are also seeing an impact on our clients: on the performance of contracts, limited resources, wellbeing of the workforce and cash flow, which may continue to be significant. Companies worldwide, have begun to declare force majeure in response to the difficulties they face due to the pandemic, with the Chinese government even issuing “force majeure certificates” to companies unable to meet their contractual obligations.
The question is: will such force majeure declarations be effective to protect commercial parties struggling to meet their contractual obligations?
Generally, force majeure clauses are inserted into contracts in an attempt to protect parties from events that are outside their “normal” business or commercial risk. Such clauses, excuse the non-performance of a party’s obligations under the contract if specific events outside the party’s control have occurred which render such performance impossible or radically different from what has been agreed. If successfully invoked, such a clause will excuse the non-performance of the obligations, thus avoiding a breach of the agreement.
In Cyprus law, a force majeure clause cannot be implied into a contract. In other words, if your contract does not contain a force majeure clause, you cannot claim that a force majeure event has arisen. In fact, even if the contract does contain a force majeure clause, the specific wording of the provision must be examined in order for one to determine whether the coronavirus outbreak would be covered under the specific clause. For instance, does the clause expressly include “virus”, “disease”, “governmental action”, “epidemic” or “pandemic”? Or does it use a more general term such as an “act of God”?
The specific circumstances that the clause expressly numbers will have to be reviewed in relation to the contract as a whole as well as with the specific circumstances. For instance, a party’s inability to procure necessary supplies or labour due to a state-imposed lockdown of the specific business sector or due to travel restrictions, may be an applicable force majeure event relating to covid-19.
A party aiming to terminate a contract on the basis of a force majeure event will have to prove: 1) that the force majeure event is beyond its control, 2) that it has prevented and/or delayed and/or made the performance of the contract impossible and 3) that it has taken reasonable steps to mitigate or avoid the event or its consequences. Evidently, if the performance of the contract has been merely rendered more expensive, this shall not give rise to a force majeure event. Rather the performance of the contract must have been truly prevented by the force majeure event.
Some force majeure clauses may provide for the issuance of a notice by the terminating party. Evidence of that notice being served in accordance with the terms of the contract is essential. There are also cases where a contract specifically states that a force majeure event does not mean the termination of the contract but merely that its performance may be suspended for a period of time. A declaration of a force majeure event may however give a right of termination to the recipient of the notice, depending again on the construction of the force majeure in each individual contract.
Finally, parties must consider the potential consequences of a breach and/or default of the contract as the other contracting party may be in a position to raise a claim against them. It should also be considered how the force majeure clause interacts with the contract’s indemnity and termination clauses, if such are in place.
As the termination of a contract may cause significant damages to contracting parties, force majeure clauses are interpreted strictly by Cyprus Courts and thus it is essential to consider the precise terms of any such given clause with careful consideration.
What if my contract does not contain a force majeure clause but I am still struggling to meet my contractual obligations?
If your contract does not contain a force majeure clause, you may consider relying on the common law doctrine of frustration, which in Cyprus, is legislated under Article 56 of the Contracts Act (CAP. 149).
The frustration of a contract may occur where a situation has arisen for which the parties have made no provision for in the contract. The performance of the specific contract becomes illegal or physically impossible or becomes radically different from the obligations that have been undertaken under the contract. However, a contract may be “frustrated” only where it is proven that neither party is at fault and where the change in the circumstances is beyond the control of the parties. In other words, where the frustration is caused due to an unforeseeable event which renders performance of the contract impossible.
Where a contract is frustrated, neither party has to comply with any future obligations. Parties need to be aware, however, that if a contract is frustrated it does not lead to the immediate frustration of any connecting or related agreements, such as any loan or finance contracts.
With the full impact of the coronavirus being still unknown and likely to play out for some months yet, affected parties should review their contracts in order to ascertain their rights and obligations, as this is an issue seemingly becoming more important by the week.
If you would like to discuss any of the issues raised in this article, please contact us.
Contributed by: Melina Tsangarides │Associate│ [email protected]