Coronavirus as force majeure event - The impact on contracts

by George Kazoleas, Lawyer LL.M

The rapid spread of coronavirus worldwide has crucial effects in social and economic life. The regularity of transactions has been disrupted and the normal evolution of many aspects of economic and commercial activity has been reversed.

According to the World Health Organization, coronaviruses are a large family of viruses that can cause disease in animals or humans. In humans, several coronaviruses cause respiratory infections, influenza and more serious illnesses such as the Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes COVID-19.

Coronavirus as force majeure

It depends on the circumstances if the spread of the virus can be regarded as a cause of force majeure that prevents or inhibits the fulfillment of contractual obligations.

The European Commission states that there is force majeure if the incident or its non-fulfillment "is due to circumstances other than those relied upon, indefinable and unforeseeable, the consequences of which could not have been avoided despite all the diligence shown".

Furthermore, in case of an event constituting a reason of force majeure, its effects can last only for a specific period of time, i.e. during the time which is essentially necessary for an administrative authority, demonstrating ordinary care, to put an end to a crisis against its independent will.

The main characteristic of "force majeure" is that a person, in the ordinary course of action, cannot foresee such event, as opposed to a random, sticto sensu, event that can be foreseen. Some typical cases of force majeure events include events such as: war, coup d’ etat, unforeseen governmental prohibitions, sudden severe illnesses (in some cases), and/or "extreme weather conditions".

It is worth mentioning that, the EU Court of Justice has refused, in certain cases, to apply the clause of force majeure, where there were no explicit provisions to that effect and also because the purpose of certain provisions of European law do not allow, in all cases, situations to be taken into account that are characterized by what can be considered a case of force majeure. This applies especially on conditions that must be strictly observed, as failure to comply with them would jeopardize the proper implementation of the relevant clauses.

This underlines the possibility for the parties, under the principle of freedom of contract, to agree clauses of their choice, such as force majeure clauses.

Force majeure clause pertaining to coronavirus in contracts:

The contractual definition of a force majeure event includes a list of events that are not expected at the date of the conclusion of the contract, which are beyond the control of the contractual parties, and these events prevent or delay the affected party from fulfilling its contractual obligations.

Very often, but not always, 'epidemics' can be found in the relevant clauses, and in some cases 'pandemics' as events of force majeure. However, many contracts do not provide for epidemics as an event of force majeure. The wording of such clauses is important in order to cover the case of coronavirus as a force majeure event. If, regardless of the omission of explicitly stating that "epidemic" or "pandemic" constitute force majeure events in relevant clauses, the latter have been formulated in such a way as to state that any event beyond the reasonable control of the contractual parties, constitutes a force majeure event, then coronavirus may also be covered by such clauses.

It should, also, noted that as sufficient time has lapsed since the date that coronavirus emerged (in essence, since December 2019), the contractual parties are now able to foresee the consequences and to include more specific terms in the contracts, based on the known data regarding the virus until the date of signing of the contracts, in order to be able to fulfill their contractual obligations (e.g. extending the time of completion).

The spread of coronavirus results in public/governmental actions, as well as, decisions of private companies which entail bans and restrictions (e.g. traffic bans, cancellations, suspension of public services, etc.). The consequences of these measures have a direct or indirect impact on the execution of commercial contracts. The formulation of precise wording of a force majeure clause in contracts, with specific details provided, will have a positive impact on the execution of such contracts. However, re-examining and redrafting unclear and problematic force majeure clauses in existing contracts would be a clever and reasonable approach, as the spread of coronavirus is in full swing and its consequences in terms of time and impact, are still unknown and unpredictable. (photo: pixabay)

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George Kazoleas is partner lawyer at Dionysiou & Partners LLC, Cyprus
* This article is for information purposes only. For any ad hoc legal advice on the subject of contractual terms of force majeure and any other issues pertaining to contract law, please contact us at: +357 22 272360 or email us at: info@dplawcyprus.com