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Key Legal Issues arising out of the Coronavirus Pandemic and its effect on Contractual Rights and Obligations

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Europe is now experiencing the full disruptive force of the Coronavirus pandemic. Undoubtedly all business owners are in a state of high anxiety due to the inevitable business interruption that has occurred in which will most likely intensify in the coming weeks and months.

This article contains practical advice that all business owners should be aware of in order to best safeguard their businesses’ interests in light of the Coronavirus pandemic.

A first piece of advice relates to the basic terminology. As it is highly unlikely that the Coronavirus pandemic will be specifically mentioned in a force majeure clause, it is helpful to have in mind that a pandemic is an epidemic that has extended its geographic spread to a larger area of the globe. There is therefore no practical difference, in legal terms, between a pandemic and an epidemic.

The Basic Law

As impractical as it may sound in the current climate, contracts that require ongoing performance are, under law, absolute. Strictly speaking a party that is affected by the Coronavirus outbreak is still required to perform its obligations and will potentially be liable to its counterparty for a failure to do so.

The Exceptions

There are, however, two key exceptions to this rule and these are:

a) the operation of any force majeure clause in a contract and

b) the common law concept of frustration.

Force Majeure:Occurs where a contract contains a force majeure clause, it will usually deal specifically with how the parties’ obligations are affected by an event that affects one of the party’s ability to perform the contract in whole or in part. Not all force majeure clauses are the same. This means you will need to consider the one in the contract in question carefully.  

However, factors that may influence the reliance on a force majeure clause are:

  • Whether the incidence of an epidemic or a pandemic is specifically covered as a force majeure event in the contract. Note however that this is not of itself decisive. Even if a pandemic or epidemic is covered, other requirements may still need to be satisfied before a party can rely on the force majeure clause. In any event seeing whether a pandemic or epidemic is covered is a good place to start.
  • If a pandemic or epidemic are not specifically covered as a force majeure event, one should look to whether it is the type of event that would fall under general force majeure wording. Sometimes force majeure wording is broad enough to cover a number of instances. In Cyprus current measures taken by the government will undoubtedly have an effect on how force majeure clauses will be interpreted by the Courts in the aftermath of the Coronavirus outbreak. For instance, government regulations, or events beyond the control of the parties.
  • In certain contracts a test of foreseeability is also included with wording such as “any unforeseeable event which is beyond the control of the party seeking to rely on the force majeure event”. Where such wording exists the issue of whether the contract itself excludes events that could have reasonably been foreseen is raised. If so, this could require comparison with the situation after the SARS Coronavirus outbreak in 2003. Was it foreseeable that a similar event would occur seven years later? The answer to this question may depend on Geography, for instance many jurisdictions were largely unaffected by the SARS outbreak, others were affected for longer and repeatedly. The advice here is that the word “reasonably” will need to be considered objectively in this regard.
  • Another issue is whether causation has to be established. The party that is seeking to rely on a force majeure event must usually establish that the force majeure event has actually prevented or hindered it performing under the contract. This is mostly a factual but generally, force majeure clauses are not drafted so widely as to offer protection where services or goods will simply be more expensive to perform or obtain.
  • It is also important to note that even where a force majeure clause does apply a duty to mitigate exists. A party that is attempting to rely on a force majeure clause is normally under a duty to show that it has taken reasonable steps to mitigate or avoid the effects of the force majeure event. This will not be interpreted by a court to be tantamount to a full avoidance but the ability to prove that a party has taken all reasonable steps to mitigate the effects effect of a force majeure event may prove to be very important before the court.
  • Whether the contract provides for notice of a force majeure event to be given. In most contract notice is a condition precedent to relief under a force majeure clause. It is therefore important to ascertain whether notices need to be given and if so how and when.
  • The consequences of establishing force majeure are also important. Force majeure does not automatically bring the contract to an end. It is not tantamount to frustration. A contract may stipulate consequences or other actions that need to be undertaken once a force majeure event comes about or is established. Issues relating to costs that will probably arise for both parties and need careful consideration. Again, this all depends on the wording of the contract. The likely duration of the force majeure event is also a matter that needs to be addressed. The day after is relevant; when giving notice of a force majeure event a party should consider its true extent and provide for any necessary re-mobilization or preparation for the resumption of compliance with its obligations under the contract. Additionally, some contracts provide that for a termination of the contract if a force majeure event extends beyond a certain period. Therefore, it may well be in the interests of both parties to find an alternative method of alleviating any hardship caused if they both want the contract to continue.
  • The impact on the contract changes in the law. In many contracts, decisions or actions taken by governments and public authorities in response to the an epidemic or pandemic may trigger a “change in law” relief clause and give rise to rights to compensation, independently of and in addition to any compensation that may be claimed as a result of the operation of the force majeure clause. Making a claim under the correct contractual mechanism is also therefore a factor that must be taken into account.

Frustration:In the absence of a force majeure clause, parties may have recourse to the common law doctrine of frustration. This means that a party is fully discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different.

The radical nature of contractual frustration is so pronounced that the bar for proving an event of frustration before a court has been a very high one. Courts have traditionally shown a reluctance in finding that a contract has been frustrated.

A claim of frustration is not one to be made lightly, and an unjustified refusal to perform on the grounds of frustration can be expected to have catastrophic consequences on the party who has made it.

Insurance: A business that suffers a loss as a result of disruption arising from the Coronavirus outbreak should review its insurance to determine if it has cover for such events or for general business disruption. Some broad cover insurances may offer protection while others containing narrower terms will not. Insurance commonly has strict provisions requiring notification to insurers of actual or potential claims within a particular timeframe, together with duties to mitigate loss and to consult with insurers before taking action.

Those with businesses interruption clauses in their insurance contracts should review them immediately so as to ascertain which loses, if any, they have coverage for and more importantly so that they can notify their insures of potential claims.

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