COVID-19 and its impact on contractual obligations

Dear associates,

As a consequence of the spread of the novel coronavirus (COVID-19) which has been held to constitute a pandemic, the performance of contractual obligations may become materially impossible or onerous for one or more of the parties.

Although the common law doctrine of frustration is relevant to the current pandemic, in Cyprus the termination or cancellation of a contract which becomes impossible or radically different to perform due to unexpected circumstances beyond the control of the parties, is governed by section 56 of the Contracts’ Act Cap. 149. This provides that where the performance of the contract becomes impossible (impossibility may encompass cases where the performance contract, due to the unforeseen event, becomes radically different than the one prevailing at the time of entering into the contract) and provided the parties could not have reasonably predicted, have known of or have any fault as to the event, the contact is considered as terminated as of the time the unforeseen event arises and the parties are discharged from their contractual obligations thereafter. In cases where a contract is terminated under section 56, the principle of unjust enrichment may apply and as a result the party which obtained a benefit from the contract may be obliged to compensate the other party.

Notwithstanding the provisions of section 56 of Cap.149, it is common for commercial and other contracts to contain express “Force Majeure” provisions which are triggered on the occurrence of events which are beyond the control of the parties. Such events may include acts of god, wars, strikes, natural catastrophes as well as pandemics. Force Majeure is not a doctrine existing in isolation but its existence is solely dependent on its inclusion as a term of the contract in question. Therefore, in the absence of a Force Majeure clause in the contract determining the consequences and procedures to be followed following the occurrence of certain events, the parties cannot invoke or imply into the contract a general notion or effect of Force Majeure. A Force Majeure clause is also differentiated from the application of section 56 of Cap.149 as to its consequences. While section 56 renders the contract terminated, a force majeure clause will determine in various possible ways, the implications from the occurrence of a force majeure event, examples being that the parties are given an extension of time for the performance of their obligations and that failure to perform their obligations will not constitute a breach of the contract.

We recommend that you:

  • Assess as far as possible the financial and other impact on your contracts and transactions.
  • Take reasonable steps to avoid or mitigate the consequences of the pandemic in relation to your contracts.
  • Review your contracts to determine the existence and scope of a Force Majeure clause.

We remain at your disposal to provide you with any assistance or advice in relation to your contractual obligations and how these are affected as a result of the prevailing circumstances arising from COVID-19.

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