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Coronavirus Outbreak and Contract Drafting: force majeure clauses and the doctrine of frustration

The current outbreak of Coronavirus (COVID-19) (“Coronavirus”) was first reported from Wuhan, China on 31 December 2019. On 30 January 2020, the World Health Organisation (“WHO”) declared the outbreak of Coronavirus a global health emergency. Since then, over 100,000 cases of Coronavirus in 100 countries have been identified, as reported by the Director-General of the WHO on 10 March 2020.

As a result of this unexpected outbreak, parties to affected commercial contracts may rely on force majeure provisions stipulated in their contracts in order to justify delay or non-performance of their obligations.

The concept of force majeure is derived from French civil law and is not to the same extent recognised under common law and as such does not constitute an irrefutable legal doctrine. In English law, force majeure events must be clearly defined in a contract and as such, they are “creatures of contract”[1]. In this regard, whether an event constitutes a force majeure event will depend on the specific wording of the clause included in the contract and an objective test will be performed. Assuming the force majeure event falls within the contractual definition, it shall also need to be proven that (i) the force majeure event caused that party’s failure to perform its contractual obligations, and (ii) they have taken sufficient steps to minimise the issue caused by the force majeure event (they are often expressly required to take "reasonable steps"[2] or use "reasonable endeavours”[3].

Until recently, English courts applied a test of “unforeseeability” to force majeure events. In the recent English case of Classic Maritime Inc. v Limbungan Makmur Sdn Bhd & Anor [2018] EWHC 2389 (Comm) (13 September 2018) ("Classic Maritime"), Teare J decided that a "but for" test was appropriate to determine whether the defendant, Limbungan Makmur could rely on the force majeure clause to avoid liability to Classic Maritime[4].

Despite this recent English case, other common law jurisdictions may still impose the “unforeseeability” test. Hong Kong and Singapore courts have tended to follow the English courts' previous approach[5] and it is therefore quite possible that Cyprus courts may follow this approach also. As an EU jurisdiction, Cyprus courts shall also need to take into accountAnthony McNicholl Ltd and others v Minister for Agriculture[6] where it was held that “whilst the concept of force majeure does not presuppose absolute impossibility, it nevertheless requires the non-performance of the act in question to be due to circumstances beyond the control of the person claiming force majeure, which are abnormal and unforeseeable and of which the consequences could not have been avoided despite the exercise of all due care”.

Parties to affected contracts may have a remedy under the doctrine of frustration, which provides that, if after a contract is entered into, events occur without the fault of either party which make it impossible to physically, or commercially perform the contract, then it is automatically terminated[7]. This occurs automatically by operation of law. The consequences of this are dealt with by both common law rules and the Law Reform (Frustrated Contracts) Act 1943. However, where there is a force majeure clause in the contract in question, then the courts will give effect to it and the issue will no longer be one of frustration and the contractual provision will take precedence. Unlike in most jurisdictions, where material on force majeure and frustration are distinct, in common law, one only talks of frustration when the event is not in fact addressed by the agreement itself.

It is therefore clear that the drafting and specific wording of force majeure clauses is particularly important. For instance, if the force majeure clause is worded so that so that it must "prevent" performance, it must be demonstrated that its performance “has become legally or physically impossible and not merely more difficult or more expensive”[8]. If the words "hindering" or delaying" performance, are included, then the threshold will generally be lower[9].

The information provided in this article is for information purposes only and does not constitute legal advice.

[1] [2] Rhodia International Holdings Limited & Another v Huntsman International LLC [2007] EWHC 292 [3] [4] Classic Maritime Inc. v Limbungan Makmur Sdn Bhd & Anor [2018] EWHC 2389 (Comm) (13 September 2018) [5] [6] Judgment of the Court (Second Chamber) of 8 March 1988. - Anthony McNicholl Ltd and others v Minister for Agriculture. - Reference for a preliminary ruling: High Court - Ireland. - Beef and veal - Disposal of intervention stocks for export - Security - Force majeure. - Case 296/86. [7] Taylor vs Caldwell (1863); Davis Contractors Ltd vs Fareham Urban District Council (1956) [8] [9]

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