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COVID-19 AND COMMERCIAL TRANSACTIONS – THE IMPACT OF A PANDEMIC ON CONTRACTUAL PERFORMANCE, FRUSTRATION OF CONTRACTS AND FORCE MAJEURE CLAUSE

CATEGORY: INTERNATIONAL LAW

COVID-19 AND COMMERCIAL TRANSACTIONS – THE IMPACT OF A PANDEMIC ON CONTRACTUAL PERFORMANCE, FRUSTRATION OF CONTRACTS AND FORCE MAJEURE CLAUSE

The Republic of Cyprus didn’t remain unaffected from the outbreak of the new coronavirus disease (hereinafter “COVID - 19”). As from 11th of March 2020, the World Health Organization has declared COVID-19 as a pandemic while on 15/03/2019, the President of the Republic of Cyprus and the Cabinet of Ministers have announced a series of measures concerning the public as well as the private sector, including, inter alia, the suspension of the operation of businesses such as shopping malls, coffee shops, bars, restaurants, theaters, clubs, concentration halls e.t.c for a period of 4 weeks. Furthermore, travel restriction measures, flight cancellations, prohibitions of entrance into the Republic of Cyprus, quarantine and mandatory self-isolation measures are currently in force in an effort to limit the exposure of COVID-19 in public.

Definitely, we are currently facing, on a worldwide level, a crisis that will have a great impact not only on public health but also on the commercial sector and economy generally. Although it is too early to make any comment on the exact impact that COVID-19 crisis will have on the public and private sector, one thing is for sure, a wide range of commercial transactions would not be executed, rendering contracts performance impossible. Below, we consider how the common law doctrine of frustration and “force majeure” provisions apply in commercial contracts in the context of the COVID – 19 outbreak.

 1. THE DOCTRINE OF FRUSTRATION

As it was interpreted through case law of the Supreme Court of Cyprus, the doctrine of frustration is governed under Article 56 of the Contract Law Cap. 149 (hereinafter “the Law”). Specifically, Article 56 provides that when a contract becomes impossible or unlawful of performance, after it is made, on account of circumstances beyond the control of the promisor, becomes void when the act becomes impossible or unlawful. The doctrine of frustration does not apply merely to cases where it becomes physically or commercially impossible to fulfill the contract but also to cases where as a result of a certain state of facts or circumstances, the obligation to perform becomes a radically different obligation from that undertaken initially.

In order for a party to rely on the doctrine of frustration, a close examination shall be made to the clauses included in the contract and the Court, when interpreting such contracts, will take into account the verbal and grammatical wording of the agreement, its general commercial purpose and nature as well as the extent of the frustrating event.

The doctrine of frustration results in the contract automatically coming to an end and the parties to the contract will no longer be bound to execute their obligations. Furthermore and regarding the cases where costs have been incurred by either party to the contract, Article 65 of the Law provides that, if a contract is frustrated, any person that has received any benefit from it, is obliged to reimburse the benefit or pay compensation to the other party.

2. “FORCE MAJEURE” CLAUSE

A “Force Majeure” clause – (i.e. “Act of God” or “superior force”) is commonly used in contracts to define certain unexpected events or circumstances, beyond the control of the parties, that may occur and by virtue of which a contracting party may not be able to execute his obligations under the contract. Therefore, whether a certain event may be considered as a “force majeure” as well as whether in case of such event the contract is terminated or suspended depends on the construction and wording of such clause. Commonly, force majeure clauses include political events such as war, strikes as well as natural disasters including but not limited to floods, wildfires etc. “Pandemics”, “epidemics” or “diseases” may as well be considered as force majeure events but again it depends on the construction and the wording of the clause contained in a contract.

For an event to be interpreted as a “force majeure” three criteria must be satisfied:

  1. it must be beyond the reasonable control of the affected parties,
  2. the parties’ ability to perform their obligations under the contract must have been prevented by the event and
  3. the affected party must have taken all reasonable steps to avoid or mitigate the consequences of non-performance. Expanding further on the third requirement and the duty to mitigate, a party relying on a “force majeure” clause will have to show that it has taken all reasonable measures to avoid the event’s consequences and that there are no alternative means for performing under the contract. Such a test relies on the facts of each case and the nature of the event.

The consequences of a “force majeure” clause again rely on the wording and construction of the contract. Most commonly, events falling under the scope of the “force majeure” clause render the contract as terminated and release the parties from their obligations accordingly.

 3. COVID – 19: A FORCE MAJEURE EVENT?

Considering the impact of COVID- 19 outbreak and the measures that were subsequently announced by the government of the Republic of Cyprus on commercial contracts, the first thing that should be done is a careful review of the contractual provisions included in each agreement, examining whether it includes a “force majeure” clause and the definition of any event falling within that clause. COVID-19 as a pandemic shall be captured under such title as well as under “epidemics” or “diseases”, if such provisions are included in the contract. If not, the impact of COVID-19 and of the governmental measures taken may be interpreted and be able to fall under the scope of public health safety and/or restrictive measures and/or governmental actions, if those categories are included in the force majeure clause.

Alternatively, if a contract does not contain a “force majeure” clause, the affected party may attempt to rely on the doctrine of frustration. Again, such reliance and its consequences will depend on the facts and the circumstances of each case while examination shall be made to the provisions of the contract and their interpretation.

For any further information and assistance on the matter, our firm is at your disposal.

Author: DANIELA IATRIDOU

 

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