The Covid-19 virus has impacted businesses of all types of industries, large and small, local and global. As it spreads, a recurring issue that businesses will encounter is whether, in all the mayhem that is currently happening, they need to meet their contractual obligations or whether their performance can be suspended or excused. A frequent query is whether the well-known, but hardly used, ‘force majeure’ clause can come into force and excuse parties from actually performing their obligations or excuse them and allow them to delay.
Despite previous events like SARS and Ebola affecting contractual obligations of many businesses, there has yet to be a reported case law in Cyprus providing a definition on the use of force majeure clauses in the context of a pandemic of this magnitude. On a global level, DHL Global Forwarding has already declared force majeure due to the COVID-19 impact, warning customers of their probable inability to fulfill sea and air freight agreements.
Every contract is different and unique in its own way, and the law can vary significantly between types of industries, we give you short-guide on what and how this clause can be used in contracts, and the impact it can have.
————————————-
The force majeure clauses are contractual clauses that modify the parties’ obligations and liabilities under a contract when an extraordinary event or situation goes beyond their control and as a result, it prevents one or all the parties from fulfilling their obligations.
Consequences of the force majeure clause to parties e.g.:
- allow the parties to not perform the contract in whole or in part,
- allow parties to delay the performance of obligations,
- allow parties to suspend or request an extension of time for their performance,
- give the affected party a right to terminate
BUT it is up to the party seeking to rely on the force majeure clause to satisfy the court or other party that the clause can be enforced.
Can the Covid-19 be a force majeure event for you?
When agreements are drafted, force majeure clauses will typically follow one of these approaches:
- Stating specific events – Clear and Unambiguous
War, terrorist acts, fires, floods, acts of government, strikes, tsunamis, earthquakes, hurricanes and of course epidemics. If the term epidemic or pandemic has been included in the agreement, this will undoubtedly cover Covid-19.
Acts of government can coincide with the epidemic/pandemic when the government imposes travel restrictions, quarantines, trade restrictions, hotel closures and store closures which is something that is currently occurring in Cyprus and in many countries abroad.
However, in situations where the epidemic/pandemic is not specifically mentioned, it is a question of clause’s interpretation whether the parties had intended that event to be covered by the clause. This means it may be difficult to claim that both parties who have already set out a list of certain events in the agreement, had intended to include an event, such as epidemic/pandemic, without it being stated in the clause.
e.g. The Contractor shall not be liable for delays or errors occurring by reason of circumstances such as acts of civil or military authority, national emergencies, work stoppages, fire, flood, acts of God, pandemic, insurrection, war, riot.
- Setting out a criterion for determination – Less Clear, Fact-Specific
Contracts may state events or circumstances that go “beyond the parties’ reasonable control”. To determine whether this type of clause can cover Covid-19 is a matter of interpretation, is based on specific facts and may be up to the courts to decide.
However, the parties may still need to show that non-performance, or possible delay, was unequivocally outside their control and could not be prevented or even mitigated.
e.g. Each Party shall be excused from liability for the failure or delay in performance of any obligation under this Agreement by reason of any event beyond such Party’s reasonable control.
- Combination of the both above – Clear but up to interpretation
Clauses may state the specific events, such as ‘epidemic, acts of God, acts of government’ but also include the general term, “or any other causes beyond the party’s control”. Interpretation of such clause is usually interpreted broadly, and this means that the clause may still be triggered even if epidemic/pandemic are not specifically stated.
e.g. The Contractor shall not be liable for delays or errors occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authority, national emergencies, work stoppages, fire, flood, acts of God, pandemic, insurrection, war, riot.
- Force majeure – Unclear & Uncertain
“Force majeure” on its own, with none of the above-mentioned terms stated in the clause, has no technical legal meaning and where stated, its definition will be a matter of interpretation.
“Force majeure”, when stated without any definition in the contract or with no reference to another contractual term for better interpretation, will give rise to ambiguity. However, if additional wording and other contract terms are added that allow for a better explanation of ‘’force majeure’’, this may mean that the clause can cover a range of matters, including epidemics.
The sheer nature of the Covid-19, the impact it’s had on all countries and businesses alike, and all the strict countermeasures implemented by governments, will increase the possibilities that Covid-19 will be considered as a ‘force majeure’ event.
How can you rely on the ‘Force Majeure’ clause?
A party looking to enforce the force majeure clause must show that:
- the ‘event’ was the reason for their inability to perform or to delay performance;
- non-performance of their obligations was because of circumstances beyond their control; and
- no reasonable steps could have taken to avoid or mitigate the event or its consequences.
This means, when a business is faced with the possibility of not meeting their obligations, for example due to cancellations because of government restrictions, no staff available because of self-isolation measures implemented by the government, no products available to sell because of supply chain issues due to freight restrictions, it is vital to consider whether your business has ‘reasonable’ alternative measures to take.
What if there is no force majeure clause?
In Cyprus, there is no legal definition of the force majeure, thus it is open to interpretation and determined on the merits of each case. If there is no force majeure clause mentioned in the contract, the party wishing to exercise the clause may consider relying on the doctrine of frustration of contract. This is where an unforeseen event outside the controls of both parties, has resulted in the contract being impossible to perform or has completely transformed the performance of the obligations into something totally different (‘frustrate’), which would be unfair to enforce both parties to continue.
Panayiotis Z. Toulouras LLC deals with a broad range of services in relation to corporate and commercial law, our specialist team is here to guide and provide further information on ‘force majeure’ clause and the impact of COVID-19 on your business:
Website: www.toulouraslaw.com
Contact: 0035724 623800
Email: [email protected]