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5 tips for managing the effects of the COVID-19 pandemic on contractual relations

Published: 29/03/2020

As the world faces the COVID-19 pandemic, markets and societies are facing unprecedented challenges. In this very challenging environment, the well-being of people, their workflow, businesses and finances, are all at risk.

Many industrial sectors around the world, including those in Egypt, are encountering instability; people and businesses are faced with high uncertainty about their next steps. In this context, the legal implications for businesses and individuals are becoming more and more important, and a widespread understanding of legal rights and obligations is required across society as a whole.

Al Tamimi & Company is taking a closer look at the challenges facing individuals and corporations in fulfilling their contractual obligations and enforcing their contractual rights in the current circumstances. Five suggestions are offered to help contractual parties consider their options and potential solutions under the overarching principles of.

Al Tamimi & Company, therefore, presents the following guidelines that everyone should take into consideration in order to overcome the current situation on the basis of fairness and reasonableness:

  1. The principle “pacta servanda sunt”, or “agreements must be kept”, is a foundation of Egyptian civil law and is reflected in Article 147 of the Civil Code. However, it is not unyielding. The second paragraph of the same Article permits a competent judge to amend a contract in the event of exceptional and unforeseen public events, granting him discretion to reduce the burden of obligations by a reasonable extent, in the “unforeseen events” or “hardship” doctrine.
  2. The “unforeseen events” or “hardship” doctrine allows a judge to act when four criteria are met: there must be a contract in existence to amend; the exceptional public events must have occurred after the contract has concluded; the events must be unforeseen; and the events must make the performance of the contractual obligation onerous, meaning that they must be excessively burdening, yet not impossible.
  3. Article 147 describes “unforeseen events” as events that cannot be foreseen by an ordinary individual. The criterion for predictability is objective and not subjective. This means that, if such exceptional events could have been foreseen, for example as in the cases of floods or fluctuations in currency exchange rates, the doctrine does not apply.
  4. The performance of the obligation becomes onerous or excessively burdening if the performance required after the event has occurred, whether or not it has actually been carried out, will case substantial harm to the affected party that would not have occurred but for as a consequence of unforeseen events. As a result, if the damages suffered were commonly occurring, or were not suffered as a result of the unforeseen events, then the affected party cannot invoke the unforeseen events or hardship doctrine. On the other hand, despite the magnitude of its budget, even the state may invoke the hardship doctrine to amend its contractual relations.
  5. Should the performance of a contractual obligation become onerous to the extent of impossibility of performance, the hardship doctrine no longer applies, the law of Force Majeure instead may be material. Hardship and Force Majeure differ in two key ways:
    1. Firstly, in the effect of the unforeseen circumstances. In the theory of hardship, the occurring event overburdens one of the parties, making performance of contractual obligations extremely difficult. On the other hand, Force Majeure overburdens one or both of the parties to make performance of contractual obligations impossible.
    2. Second, they are different in their consequences. In the hardship doctrine, the competent judge reduces the onerous obligation to a reasonable extent. In Force Majeure, the obligation for performance ceases to exist without any liability on the non-performing party.

It is conceivable that the epidemic caused by COVID-19 meets the criteria of an unforeseen event, as are the severe measures put in place to control the disease and eradicate it. The World Health Organization declared it as pandemic on March 11, 2020. To an ordinary person, pandemics of this length and severity are exceptional and do not regularly occur. It is clearly a public phenomenon, and one neither foreseen reasonably nor prevented by an ordinary person. This said, treating COVID-19 as an exceptional and unforeseen event does not automatically mean that contractual parties will be excused their performance in any way; all the mentioned conditions must be taken into consideration.

If a party to a contract proves that performance of their contractual obligations has become completely impossible as a result of the spreading of COVID-19, Force Majeure may be invoked for a competent judge to completely terminate the affected party’s obligations and terminate the contract.

 

Key Contact:

Ayman Nour
Partner, Head of Office – Egypt
a.nour@tamimi.com