For the first time in the recent history measures were rapidly adopted by governments across the world in an attempt to control and mitigate the consequences COVID-19's outbreak has brought into light. All initiated measures such as self-isolation and forced quarantine aiming to slow the spread of the disease created vast impact on the global economy, including the disruption in most industries.
Many organizations are now on the verge of failure to complete contracts and are now seeking relief from the performance of their contractual obligation. The question arising here is whether force majeure and frustration can be invoked relieving them from liability due to incapacity of meeting their contractual obligations.
Force Majeure
In general terms, force majeure can be interpreted as superior force encompassing acts of god. The essence of force majeure doctrine is directly linked with the element of uncertainty. So, in the event the principle is enforceable, no party shall be responsible for the failure to complete a promise or an obligation within a contractual relationship due to a fortuitous event not within the control of either party, which could not be foreseen, or which were inevitable.
At this stage it must be pointed out that force majeure is a civil law concept and as a result in common law jurisdictions, like Cyprus, is not implied as a matter of law. The provisions of the contract are paramount. As a result, a party can seek relief if such provision was incorporated in the contractual agreement, with precise details as to when can kick in. The party seeking to assert the force majeure doctrine usually bears the burden of proving its applicability by presenting that: (a) an event beyond parties control has occurred; (b) causing the delay or the termination of contracts' performance; and (c)for which all reasonable measures were adopted to mitigate or avoid the fortuitus event and/or its consequences.
The legal certainty is one of the main pillars any party would expect when entering into contractual agreement. Even if a force majeure clause was contained in the contract, it is difficult to ascertain its applicability and as such that a party will be able to rely on it to protect against claims for non-performance as a result of the difficulties caused by the coronavirus outbreak. Thus, parties should upon inception of their relationship consider and incorporate the precise terms avoiding any interpretation hindering the clause inapplicable or even worse imposing massive impact on their rights and obligations.
Justifying whether COVID-19 constitutes as a force majeure event will depend on the contractual clause and careful consideration on the terms used. Nonetheless, it must be additionally proved that COVID-19 outbreak has prevented the ability of the parties to perform their obligations and consequently such performance has been affected. Mere inability is not enough to discharge the contract, alternative measures should be adopted if available.
Frustration
In the absence of a force majeure express clause, the party could consider an alternative principle that may enable the discharge of the contract by operation of law, such as the doctrine of frustration.
A contract is deemed frustrated when a substantial change in circumstance took place rendering the performance of the contract impossible. Under section 56 of the Cyprus Contract Law Cap. 149, as amended, is provided that in the event of "a contract to do 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."
Conclusively, it must be pointed out that for both force majeure and frustration to be invoked a high threshold must be met before they can be established, preserving parties' rights. In the context of the COVID-19 outbreak we may be faced with many and different scenario which must be examined in accordance with each case facts with the final verdict to be expected by the Courts.
Therefore, for the time being is more prudent to seek legal advice before proceeding unilaterally to change the terms of a contract or find alternative ways with the counter party to resolve any issue arising from the current situation by acting proactively if possible and viable to complete the contract by adopting measures for business continuity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
