We are living in the time when the UAE as
many other countries around the globe fights a pandemic of coronavirus
COVID-19. The UAE Government has implemented protective measures such as
quarantines, business restrictions, travel restrictions, visa bans, etc. While
these measures are necessary, they could significantly affect the society and
private businesses. Every resident of the Emirates feels the affect of the
preventive measures on his/her life. The owners of the businesses in the UAE
feel major impact of the pandemic on finances and ability to sustain the
businesses.
My clients come up to me with a question
where COVID-19 is a Force Majeure event that would relieve the company from its
obligations to perform existing contracts. The answer to this question is not
strait forward and depends on few factors that need to be considered.
UAE legislation on Force Majeure
Force Majeure comes from a French term that literally translates
to “greater force” and are commonly included within commercial contracts. The
term Force Majeure in a legal context excuses a party from not performing its
contractual obligations that have become impossible or impracticable because of
an event that the parties have not foreseen. Force Majeure is typically
understood as either a natural event (such as natural disasters) or statutory
event (such as a change in law or a government nationalisation of an industry)
giving rise to a party being unable to perform its obligations.
The starting point for any analysis of whether COVID-19 may constitute a
Force Majeure event or exceptional circumstances is the contract in question
and, in particular, whether there is a definition that could encompass an
epidemic or pandemic scenario. It is less common to see Force Majeure clauses
in the contracts that expressly provide for a global health emergency,
pandemic or epidemic as a Force Majeure event. If terms such as "epidemic"
or "pandemic" is included, you may be in a stronger position to make
such a claim. Where such specific language is not used, Force Majeure clauses
often include a general sweep up clause which captures "any such events
which are not within the reasonable control of the parties". If contract is
silent or unclear, then it will be for the Court to determine whether the
existence and effects of an epidemic or pandemic constitute Force Majeure in
the context of the Civil Cod.
For contracts governed by UAE law a Force Majeure clause may be invoked
by a party pursuant to the federal laws of the UAE, even if not expressly
included in a contract. The main law on this subject is the UAE Civil Code (Federal
Law Number 5 of 1985) (“UAE Civil Code”).
Article 273 of the UAE Civil Code above provides that if a force majeure
event occurs that renders performance of a contract (fully or partially) impossible,
all contractual obligations will cease and the contract will be cancelled
(fully or partially). If a contract is cancelled, the parties are to be
restored to the position they were in before they entered into the contract; if
that is not possible, damages may be awarded by way of compensation to a party
that has suffered a loss as a result of the inability to unwind the
contract.
It is important to note that it is not sufficient that performance is
only obstructed by mere hardship, or uneconomic balance between parties in
order for Force Majeure to be invoked. The most important prerequisite is that
a Force Majeure event must be unforeseeable. Force Majeure may not be invoked
where any party to a contract was in a position to anticipate the Force Majeure
event. The analogy behind this is clear, as each party to a contract is under
an obligation to act in good faith and to mitigate damages where it is
reasonably foreseeable.
Timely Notification
Timely notification may be critical to the success of invoking a force
majeure clause. Force Majeure clauses in the contracts also normally include
stringent notification provisions. For instance, a party may be required to
notify the other party of the Force Majeure event within a certain timeframe
after they have become aware of the relevant event. You may also be required to
provide updates and detailed reports. A delay in notifying may prevent you from
invoking force majeure.
Performing obligations to the extent possible
Force Majeure clauses may also require that you, as the claiming party,
must continue to perform obligations unaffected by the Force Majeure event, or
use reasonable endeavours to mitigate any disruptions caused by the Force Majeure
event. It is therefore important that even where a Force Majeure is
successfully invoked by you, it may not completely relieve you from all your
contractual obligations, but rather the contract will still need to be
performed to the extent possible.
If you wish to consider a Force Majeure notice
Where your company is to consider a Force Majeure notification, you
should:
|
|
Action |
Question to consider |
|
1 |
urgently review your affected contracts and consider the Force Majeure
clauses and obligations |
Does the contract include an explicit force majeure provision (even
not be labelled 'force majeure') and, if so, is the impediment in the form of
“epidemic” or “pandemic” caught by that provision? How is the impediment
measured, how long will it last and when can it reasonably be said to have
ended? |
|
2 |
continue to perform the unaffected obligations where required |
Is the impediment due to an event under one party's control? Could one
party reasonably have mitigated or avoided the consequences of
non-performance altogether? |
|
3 |
where it is clear that a notice must be served, ensure that this is
timely filed and do not delay |
Does the contract require notice of a force majeure event to be given
and has notice been given accordingly? |
|
4 |
consider the impact and consequence of the event and the extent it
hinders performance |
Is performance of the contract impeded? Is the contract now impossible
to perform, or is it merely more difficult? |
|
5 |
acknowledge possible and reasonable endeavours that can be executed to
overcome the event |
Can the impediment be dealt with by cooperative means, including
expressly varying the contract to accommodate the change? For example,
adjusting contract value, its duration, deducting part of it, or extending
its duration if it can be implemented despite the partial impossibility.
Create appropriate contingency plan. |
|
6 |
make sure that the contract is governed by the UAE laws and the
jurisdiction is for UAE courts |
Whether or not the contract contains a force majeure clause, what is
the governing law of the contract and what does that law say about force
majeure or similar doctrines? |
|
7 |
based on the analysis above, notify the other party of your intentions
to activate the Force Majeure clause |
The affected party shall gather as many evidence as possible to
support its potential claim, such as the timing, the number of parties
impacted, how the supply chain has been affected and other evidence as deemed
appropriate. |
If you are served with a Force Majeure notice
Where your company is served with a Force Majeure notification by a
counterparty who claims they are unable to perform their obligations, you
should:
Closing remarks
The COVID-19 outbreak is rapidly evolving day-by-day and it is likely to
continue to do so for a protracted timeframe. At this stage, it is difficult to
predict how the courts in the UAEwill deal with Force Majeure and exceptional
circumstances raised by COVID-19. Much may depend on the severity of the
outbreak and whether the disruption suffered as a result goes beyond that
experienced in other recent situations. The courts will have to consider the
effect of actions taken by the UAE Government and foreign authorities on
existing contracts. It does seem likely that these legal issues will be brought
into the spotlight over the coming months and that parties will be looking
carefully at the relevant provisions of the UAE Civil Code.
The issues discussed above reflect what we consider to be the key legal
issues for businesses and organisations in the UAE during COVID-19 outbreak. The best our
clients can do is to reach an amicable understanding that will satisfy all
parties involved, without the need to resort to the court proceedings. Perhaps you should try to agree to amend the
contract in such a way as to minimize losses and expenses, in particular, by
transferring the obligations of the parties to stages that can be performed in
the future, both, in terms of time and cost of the contract, in the interests
of both parties.
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