Wednesday, April 1, 2020
Dear members and industry colleagues,
We hope you are keeping well.
We would like to share an article provided by our Legal board advisor Mark Hill, Partner for and on behalf of Charles Russell Speechlys LLP, on CoronaVirus (COVID-19) and Force Majeure in the UAE: Legal Perspective.
Authored by Lara Haidar, Senior Associate
Charles Russell Speechlys LLP, Dubai office
As the Coronavirus (Covid-19) outbreak continues to cause business disruption on a global scale, with many companies unable to meet their contractual obligations, businesses are looking at how force majeure may be interpreted in situations in which Covid-19 is impacting performance of contracts and whether the same would protect them against any claims for breach of contract.
What is force majeure?
Force majeure is an event that is outside the control of one or both contracting parties that renders the performance of their contractual obligations impossible (or impractical). Where an event of force majeure occurs, parties to a contract may rely on the same as a defense to relieve them from liability under the contract.
Whether parties may invoke force majeure in the context of the Covid -19 outbreak will depend on various factors:
1. The governing law of the contract
In common law jurisdictions there are no provisions for force majeure and the same cannot be implied into a contract. Therefore, if the contract is governed by common law, such as English law, in order to be able to rely on force majeure to excuse non-performance, the parties must include express force majeure clauses in their contracts. In the absence of such express clauses, the parties’ option would be to consider whether they could rely on the doctrine of frustration.
In civil law jurisdictions the position is different as the laws recognise the doctrine of force majeure. In the UAE specifically, the Civil Code provides that where an event of force majeure arises that makes the performance of the obligation impossible, all obligations will be cancelled and the agreement will be terminated. The law otherwise allows parties to agree their own contractual provisions.
2. The force majeure clause provisions
Force Majeure clauses vary from contract to contract and whereas some provide an exhaustive list of events, others may reference specific events, include general “all encompassing” terms (e.g. Act of God or government) or a catch-all statement (e.g. “events that are unforeseeable or beyond a party’s control”). The strength of the clause may be dependent on the specific wording used.
It is unlikely that force majeure provisions in recent times include a specific reference to “epidemic” or “pandemic”. However the Covid-19 outbreak may fall within the ambit of other general terms such as Acts of God or acts of government. Acts of God generally relate to natural occurences (floods, earthquakes etc.) and acts of government generally relate to legislative changes and executive measures taken by governments. Whether the Covid-19 outbreak would be considered a natural occurrence or whether the restrictions, lockdowns and other measures taken recently by governments and foreign authorities constitute an event of force majeure will depend on the interpretation of the Courts. There may be other wording in the clause, such as catch-all statements and these may be determined to encompass the outbreak of the virus.
3. Was the performance of the obligations rendered impossible?
The UAE Courts generally proceed on a narrow interpretation of force majeure taking three criteria into consideration:
· that the event was unforeseeable;
· that the event was beyond a party’s control;
· that performance of the party’s obligations was impossible.
It is worth noting that where an event of force majeure affects some of the obligations only (without impacting the remainder of the contract) force majeure may apply partially only in relation to those obligations and the remaining obligations will continue in force.
4. Notification requirement
Force majeure clauses can include a requirement to notify the other party where an event of force majeure has occurred that delays or prevents a party from performing their obligations, including within certain timelines. Failure to comply with this requirement may impact upon a party’s ability to support a claim or defense based on force majeure.
5. Additional measures
Other common terms of a force majeure provision include that the party invoking force majeure takes reasonable measures to mitigate the effect of the event. Failing to take such measures may impact any claim on the basis of force majeure and may give rise to a claim for a breach of contractual obligations.
Whether there may be entitlement to rely on force majeure for relief of contractual obligations in the context of the Covid-19 outbreak will depend on the terms of the relevant contract and the interpretation of the applicability and enforceability of a force majeure clause by the Courts (or arbitration panels) on a case-by-case basis.
We hope this article was beneficial to you.
For any questions reach out to us directly and we will be happy to assist.