Covid-19 and its impact on Contractual Relationships

The drastic outbreak of the Covid-19 pandemic has undeniably had a devastating impact in all countries worldwide.  It has inevitably had vast implications on commerce and business as its swift spread has resulted in extreme measures imposed by Governments causing country wide lockdowns and restrictions on movement internationally.  This unprecedented pandemic in modern times has taken the world by surprise and consequently affected business operations, contracts and obligations of contractual parties to perform.  It has undoubtedly forced parties to revisit and reassess the applicability of clauses such as ‘force majeure’ and ‘frustration’ in their contractual agreements to determine whether there is a possibility of termination or suspension of performance or any other legal consequences.

It is important to note that, whether or not Covid-19 is considered to be a ‘force majeure’ event in a contractual agreement (thus justifying and relieving the defaulting party) will depend on the circumstances, the nature and content of the contract in question.  Its interpretation and wording as well as the commercial context in which the contract operates will play a vital role in determining whether the defaulting party has an obligation of paying damages to the innocent party.  Even if a clause exists in a contractual agreement relating to such pandemics, various other requirements may still have to be satisfied depending on the situation.  This may often be decided by courts of appropriate jurisdiction or arbitration.

Force majeure is usually understood as ‘an event or effect that can be neither anticipated nor controlled’ it is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable due to such an event.  This may allow the parties to terminate or suspend the contract and their obligations under the contract.  The party in default will however be required to demonstrate that it has made attempts to alleviate the impact of such ‘force majeure’ events.  Commonly ‘force majeure’ clauses in contractual agreements refer to acts of God, war, floods, drought, earthquakes, and sudden natural calamities.  Though in some cases, depending on the intention of the parties during the drafting of the clauses, they may agree to include matters such as governmental or regulatory prohibitions, and any other matters in which the parties could consider amount to ‘force majeure’.  The importance and purpose of exhaustively defining the term ‘force majeure’ in contractual agreements is to safeguard the rights of the contracting parties in order to excuse them from not fulfilling certain contractual obligations under such unforeseen events which do not fall under their control.

Even though the Covid-19 outbreak has been characterized as a pandemic by the World Health Organization, it does not automatically qualify as a ‘force majeure’ event.  Each contractual relationship needs to be carefully assessed on a case-by-case basis in order to interpret the exact intentions of the parties during the creation of such contractual agreements.  This is also due to the fact that in Cyprus no legal definition of ‘force majeure’ exists.  The precise language used in the clause is very important as it will reflect the exact nature and subject-matter of the contractual relationship.  Especially due to the complexity of the Covid-19 pandemic which not only concerns a natural occurring component but also the Governmental restrictions imposed.  Non-performance of contractual obligations is not easily justified, and Courts are rather strict on the matter especially in cases where an alternative solution for performance exists.  The defaulting party will need to demonstrate compelling proof to support their inability of performance or delay of performance despite all reasonable steps taken to mitigate the situation.  To begin with in order to be able to invoke a ‘force majeure’ clause it needs to exist within the contractual agreement, and it has to precisely and clearly state what the actual force majeure event the contracting parties are referring to.  Lastly, there must be a direct link between the event and the inability or delay to perform one’s contractual obligation.  The direct impact that the ‘force majeure’ event had on the party’s ability to perform must be justified and the counterparty must be notified of the invocation.

In the event that the parties neglect to include a ‘force majeure’ clause, the defaulting party may seek relief under the Common-law doctrine of ‘frustration’ as enshrined in Section 56 of the Cyprus Contract Law Cap. 149 Article 56(2).  A contract may be considered as having been ‘frustrated’ when an unexpected event occurs that the parties could not prevent or have foreseen the possibility of it occurring, and which renders the performance of the contract impossible or unlawful.  If the contract is ‘frustrated’ it is considered to be invalid.  It is important to emphasize that in order to be able to use the doctrine of ‘frustration’ the contractual agreement should not contain any ‘force majeure’ clause or any other clause that regulates what will occur in such situation as the incident should be unforeseen during the formation of the contractual agreement.  As a consequence of the restrictions imposed by the Government the defaulting party may argue that the continuance of the contract would be impossible or unlawful however, this will depend on the specific contractual obligations of the parties.  If the party is able to execute their contractual obligations but for example it is merely more expensive then it is not considered impossible and therefore cannot argue ‘frustration’ of the contract.  Nonetheless if the defaulting party successfully proves ‘frustration’, that party will not be held accountable for non-performance of their contractual obligations and no claim for compensation for damages or losses will be available as the contract is considered invalid.

To conclude, it is advised that parties carefully consider adding fact-specific clauses in their contractual agreements by incorporating pandemics.  The importance of this is to safeguard the parties’ rights in as many scenarios as possible by regulating the consequences in such outcomes.  Courts are rather strict in such occurrences and if it is left to their unbiased discretion.