The Effects Of COVID-19 Pandemic on Contractual Obligations

The Effects Of COVID-19 Pandemic on Contractual Obligations: Force Majeure and Doctrine of Frustration

The current COVID-19 (coronavirus) pandemic, has legally and commercially affected many businesses that wish to be released from their contractual obligations, either attempting to seek termination and/or suspension and/or extension of their performance,  as a result of “force majeure” events.

The concept of “force majeure” has its roots in French Law.  More specifically the French Civil Code includes express force majeure provisions, which excuse contractual performance where events have happened outside the parties’ control and which could not have been foreseen at the time of contracting and which could not have been avoided by appropriate measures.

Under Cyprus Law, there is no established definition of what constitutes a force majeure event.  As a result, the definition of force majeure is subject to interpretation on a case by case basis, taking also into account the commercial context in which the contract operates.

Furthermore, Cyprus Law does not allow the automatic inclusion of a “force majeure” clause in the contract.  The above said parties are only entitled to invoke this concept if it is expressly stated in their contract.  The inclusion of a “force majeure” clause in a contract will enable a party to be released from liability in the event of not being able to fulfill the terms of the agreement for reasons beyond the party’s control. Examples of “force majeure” events include earthquakes, floods, war, strikes, shortage of material. It is recommended such clauses to be as detailed and as precise as possible since this will determine the accountability of the parties.  As a result, when interpreting a “force majeure” clause which includes conditions such as viruses, diseases, pandemic, health issues, the current outbreak of COVID-19 is likely to qualify.

However, if no such clause is included in the contract, then the parties will have to rely on the doctrine of frustration to find grounds to be excused from contractual performance.

The doctrine of frustration is governed by Cyprus Law under section 56 of the Cyprus Contract Law (Cap. 149) which states that a contract will be deemed automatically discharged where it becomes illegal or otherwise impossible to perform (by an event unforeseeable at the time of contract).  Also, Article 65 of the Law states 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.

The use of the doctrine of frustration as a principle has a relatively very narrow scope.  In order for a party to be able to seek termination of the contract based on the doctrine of frustration, it must prove that performance of the actions stated in the contract has become illegal, physically and/or commercially impossible to be fulfilled and/or there is a fundamental difference from what was anticipated when the contract was made.  In addition, the party must be able to prove that it could not have prevented or mitigated the causes leading to the frustration of the contract.

In considering whether a party can claim a “force majeure” event, it is mandatory to first thoroughly review the terms and conditions of the contract and examine whether such provisions are included which fall under the scope of public health safety and/or the restrictive measures and actions of the government.

Otherwise, if the contract does not include a “force majeure” clause, the party may claim the doctrine of frustration.  However, this again will largely depend on the facts and circumstances of each case taking into consideration the terms and conditions of the contract.

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