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The profound impact of COVID -19 on the foundation of contractual relationships.

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THE LEGAL CONSEQUENCES OF CORONA VIRUS

The Legal Consequences of Covid-19
The advent of the coronavirus and the subsequent worldwide lockdowns have caused an unpresented disruption on businesses and legal relationships. It is safe to say that the coronavirus has touched all legal transactions and has had a profound impact on the foundation of contractual relationships.

The legal impact of Covid -19
With the implementation of lockdowns worldwide, supply chains were broken and businesses around the world were unable to deliver goods and services to their customers. In many cases, this caused companies or individuals to default on their obligations, with the cause of default being an event which was unforeseen and out of anyone’s control.

In the chaos that has ensued during the pandemic, Force Majeure clauses have become of imperative importance. 

What is Force Majeure?
Generally speaking, Force Majeure is used in contracts as a clause that describes unforeseen events that may occur which are entirely outside the control of the contracting parties. The purpose of such a clause is to absolve the parties from liability in the event that they cannot fulfill the terms of a contract for reasons which are beyond their control.

In many instances, commercial contracts will include a specific list of events which shall constitute force majeure. These are usually “acts of God”, war, riots, floods, typhoons, and governmental or regulatory prohibitions. The COVID-19 pandemic is unique not only due to the epidemiological challenges it has presented, but also because it is comprised of both a naturally occurring component—the virus itself—and an unprecedented government intervention such as quarantines, lockdowns and travel bans in an attempt to curtain the spread of the virus.

A typical force majeure clause will also include that the contracting party not directly affected by the unforeseen even must observe their obligations. Typically, the party not directly affected by the event is obliged to mitigate its own damages using its best reasonable efforts.

The question whether COVID-19 may be considered to be a force majeure event is not a straightforward one. Whether force majeure can be invoked to enable parties to temporarily or permanently be excused from their contractual obligations depends on the circumstances and the nature and content of the contract.

The concept of force majeure does not have a universally-recognised meaning under Cyprus laws. Courts must examine the wording of the contract, the intention of the parties at the time of entry into the contract and the surrounding circumstances in order to make a decision.

The simple answer to whether COVID-19 qualifies as a force majeure event is: It depends.

Under Cyprus law, may seek relief under the doctrine of frustration as enshrined in Cyprus Contract Law although this generally applies in cases of impossibility to perform the contract. This applies in cases, for example, due to destruction of the subject matter, supervening illegality, incapacity or even death. Although it is difficult to envisage how the COVID-19 outbreak may justify invocation of this provision, it remains to be seen how this will be interpreted and applied by the Cyprus courts.

Conclusion: What’s next?
The coronavirus pandemic still poses a threat for public health worldwide. From an economic perspective, the full picture of the consequences of the worldwide lockdowns appear to be dire for even the most robust economies around the world.

Lawyers and their clients alike, should adopt a more a proactive approach to handling the economic consequences of the pandemic. Force majeure clauses should be reviewed with particular care and should be redrafted so that we are better prepared for any unforeseen eventuality.