The rapid blow-out of the COVID-19 pandemic has meant that governments around the globe, including the government of Cyprus, were required to introduce new policy in an attempt to constrain COVID-19. The effects and time-spread of COVID-19 are currently hard to assess and will greatly depend on how effectively and at what pace the restrictive measures which have been introduced worldwide, will minimise this global shock.
Many of COVID-19’s consequences have extended, or are expected to extend, to the operation of commercial contracts and parties are already questioning their options.
Possible triggers under Cypriot security in cross-border financings
The recurring theme in cross-border financings is that inter-related contracts, share the same or equivalent protection and remedies. This means that if an event of default (EOD) occurs under the key financial instrument of the transaction (in most cases, it being the loan agreement), an EOD will also be triggered under a Cypriot security instrument of the same transaction.
In addition, the Cypriot security instrument itself might include standalone provisions that trigger default under it. This article is not meant to provide an exhaustive list of all types of contractual obligations or circumstances which might come into play under a Cypriot security instrument, facts and terms under each transaction must be reviewed separately but possible triggers at a glance are:
Force majeure and material adverse effect terms in Cypriot security instruments
Force majeure provisions (FM) and material adverse effect provisions (MAE) can be included in a Cypriot law security instrument directly.
In legal language, a ‘force majeure’ is an unforeseeable circumstance beyond the parties’ control which make a contract, or any part(s) of it, unable to be performed.
FM provisions will usually provide a list of events which are meant to qualify as FM events. The question of whether these provisions catch effects caused by COVID-19 will generally be a matter of how they have been constructed.
Aside from the construction of an FM clause, the underlying principles defining an FM are:
- the event must be one that was unforeseeable;
- there must be a causal link between its occurrence and the default that has arisen, ie the details of the circumstances must link the FM to the contractual impairment which has been caused; and
- whether the parties took reasonable steps to tackle impairment would also be examined.
MAEs provisions catch events whose effects mean parties are compromised or unable altogether from performing their obligations. The event must be one:
- that is not temporary. The answer as to whether the COVID-19 outbreak will be temporary is unknown but there can potentially be permanent consequences because of it; and
- whose consequences are material.
It might be difficult to catch the outbreak of COVID-19 itself under MAE provisions but any detriments to the financial position could be caught.
Financial covenants / Representations, warranties and undertakings
Financial covenants and representations may be set as standalone provisions under a Cypriot law security instrument.
Financial covenants are mainly designed to identify at early stages that a business is not performing and they can usually be straightforwardly interpreted.
In scope, representations, warranties and undertakings will depend on the nature of the financing for which they were drafted. Generally however, they will provide for ongoing solvency which might also be affected if key asset value or liquidity face a drop. In facing issues of this kind, obligors might need to examine whether they are required to disclose events which might have had a material effect to their prospects of dried-out liquidity or to the financial standing altogether. At the other end, representations, warranties and undertakings will give a concerned lender the right to request relevant information.
In the absence of an express default, parties might need to try relying on s. 56 (2) of Cypriot Contracts Law CAP.149 (as amended). S. 56(2) has codified the common law doctrine of frustration by providing that “a contract of carrying out an act which, after the contract has been made, becomes impossible or, due to reasons beyond the promisor’s control, becomes unlawful, becomes void when the act becomes impossible or unlawful.”
We will likely see local caselaw test s.56(2) further but in applying it this far, the Cypriot Courts have repeated the test set out by English precedent, ie whether if the literal words of the contract were to be applied in the changed circumstances, it would involve a change so significant or radical of what was originally undertaken that the carrying out of the contract has become impossible.
The doctrine is quite narrow and the general idea under Cypriot contracts law is that parties need to perform their part of the bargain regardless of there being conditions which have made performance more difficult than what contemplated when the relevant contract was drafted. However, they doctrine may be successfully called-upon in some cases. If the type of damage caused by the frustration has been expressly or impliedly dealt with in the contract, the doctrine cannot be applied.
We expect to see more financial instruments expressly covering COVID-19 and other unprecedented diseases as either an FM, a MAC or otherwise in the future and that future shocks of this type will be minimised.
If you have been affected or think that you might, please contact your team at Harneys. We are ready to advise on your concerns occurring due to COVID-19, be it in respect of consequences COVID-19 might have over ongoing performance under existing contracts, identify terms which might help clients facing or concerned of the consequences COVID-19 might have in their financing, or drafting advice in respect of covering COVID 19’s impacts in future transactions.