COVID-19 – a force majeure event?

Many Governments all over the world have imposed very strict measures (quarantine, travel bans/restrictions, closing of businesses, malls, theatres etc.), in order to protect their countries’ populations as a result of the unexpected COVID-19 outbreak.

As it stands, it is difficult to foresee the worldwide consequences of the pandemic. Inevitably, some of the measures being taken to control the spreading of the virus will cause business disruption worldwide in almost all business sectors, the extent of which is difficult to predict at this point in time. Some businesses have already been forced to suspend their operations whereas others may continue to operate but within certain restrictions which have been imposed on them.

Many parties to commercial contracts have already become unable, and more are likely soon to become unable, to perform their duties and meet their contractual obligations. Quite naturally, they are deeply concerned, and are considering their legal options and to what extent they may be able to skip liability for not delivering what they have promised. As a result, the term force majeure has suddenly become popularagain and a matter for discussion amongst businesses and their legal advisors. The crucial question for such businesses is whether they can rely on the force majeure clause in their contract (provided there is one).

Is COVID-19 a force majeure event?

The term force majeure is French, meaning “superior force” and is used widely in commercial contracts to describe events that might happen and, that are entirely outside the control of the parties. The purpose of such a clause is to absolve the parties from liability in the event they cannot fulfill the terms of a contract for reasons which go beyond their control. The most common examples which are included in such provisions are earthquakes, floods, hurricanes, wars etc.

The level of comfort that such clauses can provide will vary from jurisdiction to jurisdiction, even within the European Union, due to the different interpretations of force majeure across legal systems. The term has been codified in some civil jurisdictions across the European Union but still the definition may vary from country to country. Hence, a lot will depend on the governing law of the contract and it is advisable for parties to such commercial transactions to seek legal advice on the matter from a competent law firm.

In common law jurisdictions, like Cyprus, no legal definition of force majeure exists, and each case is assessed on its own facts. A force majeure provision does not allow, as of right, parties to escape liability for any breach of contract. Parties will only be entitled to rely on this concept if it is expressly covered in the contractual agreement. Therefore, in order to be able to benefit from such provision a lot will depend on the actual wording of the clause. Hence, it is advisable for such clauses to be as detailed and specific as possible since the precise details of the provision will hold the parties accountable.

The above said, the existence of the terms “virus” or “pandemic” or “epidemic” in such clauses are likely to suffice especially given that the World Health Organization has recently designated COVID-19 as such. Of course, a careful review by an expert of the wording of the relevant clause is necessary.

It is important to note that in the absence of a force majeure term, the so-called doctrine of frustration may provide an alternative course available to the party in default to end the contract. A contract is frustrated when its performance has become impossible due to some unforeseen event beyond the control of the parties. In Cyprus, the matter is covered in section 56(2) of the Contract Law (Cap.149), as amended, which releases a party from liability under such circumstances (Kier v. Tenco Constructions Ltd (1981) 1 CLR 30).

For more information on this matter please contact Chrysanthos Christoforou or your usual contact at Elias Neocleous & Co. LLC