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Coronavirus: can we rely on Force Majeure to terminate contractual agreements?

Published: 22/03/2020

by Essam Al Tamimi – Chairman – Private Client Servicese.tamimi@tamimi.com

The Coronavirus has become a source of fear and anxiety around the world on a personal, governmental and corporate level. Businesses are facing major challenges which are forcing them to make tough decisions and assessments of whether they are able to: keep services open; ensure the supply of goods; and fulfil their contractual obligations at this critical juncture.

As we have already witnessed, particularly in the hospitality, sporting and entertainment worlds, there is an expectation that cancellations and delays will be inevitable in certain business sectors and that, sadly, many employees will lose their jobs. All of these factors are likely to cause major interruption to businesses, make it difficult or nigh on impossible to meet contractual obligations, negatively impact service deliverables, and lead to a lack of financial liquidity, to name just a few of the many knock on effects that may arise. This, in turn, could lead to disputes arising between contractual parties including, for instance, delays and/or failure to deliver according to agreed timescales or even at all.

The situation requires a legal analysis to be undertaken by corporate establishments vis-à-vis their contractual counterparties: employers towards their employees; creditors towards their debtors; and suppliers towards customers on whether to discontinue work, refrain from payment and/or terminate contacts and, most importantly, whether COVID-19 can be used to legally justify such actions or not.

Equally important is the need to focus on keeping the lines of communication open and trying to find solutions and acceptable responses to enquiries. Take for example the case of companies, institutions, factories that and individuals who have been forced to halt all business activities as a result of directives issued by governments to stop the spread of COVID-19. One could very easily see how such instances fall into the standard interpretation of Force Majeure, although to establish the causal link the impact and the Force Majeure event remains a very high bar to clear.

From a UAE perspective, one needs to consider the criteria which are likely to be used by contracting parties in order to trigger force locally.

While nations around the world are attempting to manage the spread of the coronavirus using similar and aligned methods, the legal playing field is uneven across territorial borders bearing in mind the differing legal systems and dispute resolution forums. Most Arab countries have judicial systems based on civil law systems, whereas most Anglo-Saxon countries operate on common law systems. This article focuses on the laws applied in the United Arab Emirates.

Before delving into the legal position in the UAE, on which a party would need to fall back in the absence of an express Force Majeure clause, it is key to understand what Force Majeure provision seeks to achieve. In a contract, a Force Majeure typically excuses one or both parties from performance of the contract in some way following the occurrence of certain events. Its underlying principle is that, upon the occurrence of certain events which are wholly outside a party’s control, that party is excused from, or entitled to suspend performance of all or part of its obligations. In other words, that party will not be liable for its failure to perform the obligations, in accordance with the Force Majeure principle.

In this context, Article 273 of the Civil Transactions Law No 5 of 1985 in the United Arab Emirates stipulates the following:

(1) In contracts binding on both parties, if Force Majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled.

(2) In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware.

Applying Article 273 to situations related to COVID-19, there are four scenarios where the impact of the coronavirus might be raised as a Force Majeure event directly impacting on work or contracts, as follows:

  1. in the event the work, contracts or activities are not directly and wholly impacted by the current state of COVID-19, for example a factory that is producing and supplying plastic cups continues to be able to get the components required to make the cups as well as continue to have the labour force necessary to operate the factory – in this scenario the production of the factory has not been affected by the Force Majeure situation of COVID-19. Accordingly, the contractual obligations will continue and remain effective as the Force Majeure event does not apply to the nature of the activity and the availability of all components necessary for both parties to implement their contractual commitments;
  2. if the Force Majeure due to COVID-19 makes the execution of the contract in relation to one or both parties impossible, then the contract is automatically rescinded by law, so that the contract is considered non-existent as a result of the subsisting Force Majeure event;
  3. if the Force Majeure event is temporary, then it may be possible to perform part of the contract and not the rest of the contractual obligations. In this scenario, that part of the contract, which becomes impossible to perform, may be removed and/or suspended and the other part, which is possible to perform, shall continue provided that such performance does not cause severe difficulties to one of the parties to the agreement. Accordingly, the contractual commitments can be amended by, for example, adjusting its value, its duration, deducting part of it, or extending its duration if it can be implemented despite the partial impossibility. For example, if the impact of COVID-19 ends soon, and part of the contract can be deducted and the rest of the agreement will be executed unless in this case the implementation of the commitment is exhausting, significantly for one of the parties; and
  4. even if the contract is partially impossible to perform, it is permissible for one of the parties to the contract to request the termination of the contract on the grounds that it is impossible or very difficult to fulfil the contract or the obligations have been transformed into radically different obligations from those undertaken at the moment of entry into the contract (akin to the English law doctrine of frustration) even if the impossibility is partial or temporary due to the Force Majeure event.

The Force Majeure may be clear and evident and easily applied to certain cases whilst other cases can be much harder to argue. It is critical that each case is considered independently of others, taking into account its own and current circumstances, facts, business and sector. Changes to situations are occurring on a daily basis and these changes will also have an impact whether Force Majeure can be argued or not. An example of this is the recent directive from the Ministry of Education regarding the closure of school and educational institutions; this is not a permanent closure. The Ministry has specified start and end dates, online learning programmes are being implemented by schools, teachers and staff continue to be employed and refunds of schools fees have not been provided. Sports and entertainment events were affected later than schools and so here is an example where the exact same Force Majeure event effects some sectors and businesses later than others and perhaps with greater or lesser impacts.

Additionally, Article 249 of the UAE Civil Transactions law provides that in the event of unpredictable events arising which have made execution of the contract burdensome, if not impossible, on the debtor in a way that it threatens him or her with heavy losses, the judge has the discretion, depending on the circumstances and by comparing the interests of the parties, to reduce the burden within reasonable limits. Any agreement contrary to the judge’s decision is void.

The Coronavirus is an exceptional event which affects several sectors but for how long can one argue that it remains unpredictable and that the impact remains the same throughout its timeline and once for example, contingency plans have been implemented? Article 249 may be used by some parties where contractual obligations become impossible or burdensome and the continuation of the contract is threatened directly as a result of COVID-19 for causing a huge loss. A party may ask the judiciary to reasonably balance the interests of the parties to the contract by easing the burden of their obligations. This balance may include decreasing the value of the contract, allowing a grace period or any other remedies that a judge may, in his discretion, determine.

On the other hand, the criteria of Force Majeure and exceptional circumstances do not only apply to contracts which are binding on both parties. Their effects may even extend to harmful acts, which are usually in violation of a rule of law or a binding order, arising between parties without a contract or stipulation between them.

Article 282 of the UAE Civil Transactions Law stipulates a person shall normally be obliged, in accordance with the law, to compensate others for the harmful act or damage caused to others which is a direct consequence of his or her action. However, if the person proves that the damage was caused by a foreign cause in which he had no power whatsoever, a sudden accident, a Force Majeure, the act of another or the injured person himself, he or she will not be liable to compensate for the damage.

In line with the above, it is indisputable that COVID-19, which can be described as a Force Majeure event on a global scale (involving many countries across the world the consequences of which cannot be anticipated or prevented). In large measure, it may be legally possible for some individuals, commercial and service activities that have been directly affected, to invoke the application of Force Majeure standards as a justifiable basis for the dissolution of contracts. Other sectors or businesses not directly affected by Force Majeure but the work and activities of which were affected by the changing circumstances, cost, or time, which could justify the modification or amendment of the terms of a contract in the interest of both parties due to the changing circumstances in society resulting from the effects of COVID-19.

As for other activities that were not affected by Force Majeure or by the changing circumstances, and which continued and actively operated under completely normal circumstances in the current climate, Force Majeure cannot be relied upon. However, if the situation for COVID-19 continues for a longer period, the situation may vary as economic, commercial and related legislation for the protection of individuals and society changes which may indirectly affect some economic activities or contracts between parties.

Due to the disease spreading rapidly and globally, the best advice that may be given to stakeholders, contractors and the communities at large, is to reach an amicable understanding that will satisfy all parties involved, without the need to resort to the judiciary or judicial proceedings, and in a manner that takes into account global economic, climatic and health conditions so that, should the need arise, business relationships may be terminated in a way that minimises damages, expenses or which avoids the postponement of parties’ obligations into stages to be carried out in the future, both in terms of time and purchasing value, in the interest of the parties.

This view may apply not only to the contractor, the building owner, the buyer, the seller, the importer and the exporter, but also to the bank and its customer(s), the employer and its employees as well as the owner of the educational institution with its students and the carrier with its  passengers, in various sectors that have been affected by COVID-19 or which may be affected in the future, of course, wishing that the pandemic is at its last stage  so that peace, harmony and overall wellbeing will be restored.

 

Key Contact

Essam Al Tamimi
Chairman
e.tamimi@tamimi.com