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March 31, 2020
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Covid-19 and contractual obligations: ‘force majeure’ or frustration?

With thousands of lives lost or at stake, rising unemployment levels, mobility restrictions and stumbling oil prices, we are now also in a global economic downturn. Governments and banks have announced various support schemes for households and businesses. Entrepreneurs, directors and management teams must set the overall operational strategy to combat the effects of the virus. They must consider their businesses’ supply chain and, if not already, contact their suppliers and enquire about their risk exposure and contingency plans, in case of supply disruptions.

The impact will be significantly different according to the industry or sector concerned. For instance, a substantially harder hit should be further expected particularly in the foreseeable future by businesses in the tourism, leisure, accommodation, and food and beverages sectors. Individuals and organisations alike need to swiftly assess and mitigate losses as well as risk, and consistently evaluate decision-making to progress their business. It is crucially important however particularly during this crisis that sustainable initiatives are taken across all levels.

Force Majeure

A “force majeure” event normally refers to unexpected circumstances beyond a party’s reasonable control that prevent it from performing its contractual obligations. Cyprus law and Courts have not defined the term ‘force majeure and, therefore, would examine the wording and commercial intentions of the parties at the time of entry into the contract.

Any contracting parties that are unable to perform their contractual obligations due to the coronavirus crisis to evaluate whether their circumstances call for application of the force majeure clause (if any) in their contract and to assess the possibility of being released from performance of their obligations, through termination or suspension of the contract - or other particular consequences subject to the contract.

Normally, a force majeure clause in a contract will set out a list of matters that qualify as a force majeure event (e.g. Act of God, war) and determine the obligations of the parties under such events, including, whether the parties can be released from performance of their obligations. Ultimately, the different circumstances of each case would determine the most appropriate approach. Moreover, the competent state and government measures and restrictions are also significantly interlinked for the purposes of our assessment.

Frustration

Moreover, such contracting parties that are unable to perform their contractual obligations due to the coronavirus crisis may be in a position to invoke the common law principle of frustration under section 56 of the Cyprus Contracts Law Cap. 149 as amended (the “Contracts Law”).

Section 56 of the Contracts Law provides, inter alia, that an agreement to do an act impossible in itself is void and a contract to 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. In other words, a contract may also be automatically void if it becomes illegal or impossible to perform due to an event e.g. coronavirus that was not foreseeable at the time of the contract.

To sum up, the coronavirus outbreak has undoubtedly caused an unprecedented, devastating effect globally. Therefore, it would be prudent for contracting parties that may have been affected and cannot perform their contractual obligations due to covid-19 and related governmental measures to assess the enforceability of a force majeure clause (if any) in their contract or the common law doctrine of frustration.

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