The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

Check out the FAQ of the country of your interest below and get in touch with our Coronavirus Helpdesk and to set up a free call if you need assistance.

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Cyprus

How are Force Majeure and Hardship defined in Cyprus laws?

The concept of Force Majeure has no definite meaning or context in Cyprus law (a common law jurisdiction). Rather the term is descriptive of contractual clauses which excuse performance of contractual obligations where the events giving rise to the failure to perform are outside the control of the party wishing to rely on them. Much depends on the precise language adopted in the clause at hand. Such clauses may define what the parties agree to accept as events constituting Force Majeure and their consequences e.g. automatic termination, excuse from performance, adjustment of the commercial terms etc. The concept of Hardship is also not adopted by Cyprus law. The statute, Contract Law Cap. 149, provides for the doctrine of frustration (essentially used as a plea): 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. The courts would not apply the doctrine of frustration where the parties made provision for the event e.g. an epidemic in the contract.

Is the Coronavirus an event of Force Majeure in Cyprus?

Where Coronavirus would be evaluated in the context of a Force Majeure clause, much would depend on the precise language of the clause at hand e.g. whether it expressly covers epidemics. On the other hand if Coronavirus would be evaluated in the context of the doctrine of frustration, the test would be: if the literal words of the contract were to be enforced in the changed circumstances, would this involve a significant or radical change from the obligation originally undertaken. Establishing the plea of frustration before courts is a difficult task; the courts rarely rule that a contract is void on this basis. It is important to understand that a Force Majeure clause addressing epidemics or provisions fully and completely providing for the effects of such event included in the contract deprives the parties from the plea of frustration. In that case the parties cannot claim that the contract is void but can only rely on the contractual terms expressly agreed between them as to the consequences of the Coronavirus outbreak.

What to do in case of notice of Coronavirus Force Majeure in Cyprus?

Generally the burden of proof would lie with the party claiming the application of a Force Majeure clause or alternatively frustration. Judicial notice would possibly be applied as to the occurrence of this event i.e. the Coronavirus epidemic in light of special measures adopted by the government but submission of evidence (preferably by experts) would be recommended. However, in the case of the plea of frustration that would not be enough as further elements would need to be established: (a) obligation has become incapable of being performed, (b) the new circumstances in which performance is called for, (c) significant or radical change from the obligation originally undertaken.

What is the best course of actions recommended in case either party issues a notice of Force Majeure?

Supply side: The actual wording of the term needs to be taken into consideration. Compliance with the arrangements contemplated in the contract as regards Force Majeure is recommended for the application of a Force Majeure clause. Effort to execute the contract despite the changed circumstances and collection evidence of such effort. Mitigation of damage including alternative solutions to perform the obligations. Collection of evidence proving: Force Majeure event/changed circumstances, impossibility of performance of obligation, significant or radical change from the obligation originally undertaken. Check whether covered by insurance policies.

Buy side: The actual wording of the term needs to be taken into consideration. Compliance with the arrangements contemplated in the contract as regards Force Majeure is recommended for the application of a Force Majeure clause. Effort to execute the contract despite the changed circumstances and collection evidence of such effort. Mitigation of damage including alternative solutions to perform obligations under contracts in downstream supply chain. Insist on the performance of obligations of supplier in writing. Collection of evidence proving non-performance of obligation by supplier and damages. Collection of evidence, to be used if contracts in downstream supply chain will be affected, proving: Force Majeure event/changed circumstances, impossibility of performance of obligation, significant or radical change from the obligation originally undertaken. Check whether covered by insurance policies.

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