As both the public and private sectors implement measures to curb the spread and effects of the Coronavirus, a number of businesses are facing increasing difficulties with the performance of their obligations under contracts with customers, suppliers and employees.
Whilst the long-term economic effects of the virus are not yet clear, a business' immediate ability to comply with contractual terms should be carefully considered, including whether the pandemic constitutes a force majeure event (FM Event) or gives rise to unforeseen circumstances, both in contract and in law.
Before seeking relief under the force majeure clause in a contract the following should be considered:
What is the obligation one is seeking relief from?
Parties should be mindful as to whether they are truly precluded from performance of contractual obligations as a result of the alleged FM Event. An obligation to pay may not be affected by force majeure, for example, as banking systems and payment processing platforms continue to function. However, an obligation to deliver goods may not be possible where quarantine measures have been imposed upon a sector, restricting staff from attending work. It will be important to identify whether the specific obligation a party is seeking relief from is truly made impossible or simply more burdensome to perform.
What is the FM Event?
Whether the spread of the Coronavirus itself constitutes a FM Event will depend on the contractual wording in the force majeure clause. References to "Acts of God", for example, can be ambiguous and do not necessarily include the spread of disease. However, many force majeure clauses will include “catch-all” language in respect of events which are “outside the reasonable control of the party affected” which could reasonably be argued to include a pandemic, particularly given the severity and unusual nature of recent events. It is also important to be aware that the FM Event may not be COVID-19 itself, but rather the consequences of COVID-19 and in particular its impact upon the ability of the affected party to fulfil its contractual obligations. By way of example, rather than referencing that the COVID-19 outbreak itself constitutes the FM Event, a party may be better placed to reference and rely upon consequential government regulations which mean that the performance of its obligations as contemplated by the contract would be illegal or are affected by workforce shortages. Interpreting force majeure provisions will therefore require careful consideration of the exact wording of the clause, the precise consequences on the affected party and relevant case law.
Did the FM Event actually cause a party to be unable to perform its obligations under the contract?
Whilst the Coronavirus is indeed causing disruption across industries, this does not necessarily mean that it is affecting performance of all contracts as a matter of course. It will be important to demonstrate that the spread of the virus is actually the cause of non, part or delayed performance of the contract. There needs to be a causal connection between the FM Event and the non-performance. It will also be important to consider whether the relevant force majeure clause provides that a party must be prevented or merely hindered, delayed or impeded from complying with its contractual obligations, as a party invoking a force majeure clause must demonstrate the FM Event affected the performance of the contract to the extent/in the way specified by the force majeure provision.
In particular, parties should not be searching for contracts to default on, taking advantage of the spread of COVID-19 as a means to escaping or delaying performance of their obligations. This is unlikely to satisfy courts that a FM Event has truly occurred and caused a party's inability to comply with the terms of an agreement. In particular, parties should be aware that whilst the disruption caused by COVID-19 may impact the profitability of a contract or make performance more onerous or expensive, this alone is unlikely to be sufficient for a force majeure claim under most contracts as they are not generally intended to provide relief from a general economic downturn or other general adverse business conditions.
Have other contractual formalities been complied with?
Parties seeking to rely on force majeure as a reason for non-, part, or delayed performance of a contract should ensure that the relevant processes and formalities contained within the contract are adhered to, including provision of notice in the form and timeframe stipulated. Failure to do so may result in a party breaching the contract, exposing itself to claims. Parties should also ensure that whilst the FM Event persists they continue to update counterparties in respect of developments that impact on their ability to perform contractual obligations.
A party seeking to invoke a force majeure clauses should also be aware that if this is subsequently challenged, they will typically be required to demonstrate that they have taken appropriate and reasonable steps to avoid and reduce the impact of the force majeure event on their performance. Whilst the widespread and global impact of the COVID-19 is likely to result in the availability of mitigation measures being restricted, parties should continue to actively explore alternative means of performance as the situation develops.
What is the effect of successfully invoking a force majeure clause?
Where a party to a contact is the recipient of a force majeure notice from a counterparty it should (a) carefully consider whether the counterparty has referenced a FM Event that falls within the scope of the contractual provisions and (b) actively engage with the counterparty to explore mitigation actions and proactively suggest alternative options for performance. A recipient involved in interrelated contracts or back-to-back contracts will also need to take into account the overall impact of the counterparty's reliance on force majeure on its obligations under the related contracts and consider what remedies are available to it in relation to these.
What constitutes force majeure in the UAE?
In the UAE the concept of force majeure may be enshrined in contract by parties but, equally, applies across commercial contracts as a matter of law. Consequently, even where a contract does not itself contain explicit force majeure provisions, Federal Law Number 5 of 1985 (Civil Code) will apply.
Importantly, the Civil Code differs from common law regimes in that the FM Event:
- must render performance of the contract impossible, not just more onerous; and
- once established, results in the termination of the contract (Article 273(1)) rather than suspension until the FM Event ends. Where the FM Event renders only a part of the contract impossible to perform, that part alone shall be terminated whilst the remainder of the contract continues in full effect (Article 273(2)).
As such, the Civil Code's provisions in respect of force majeure are in many ways akin to the common law concept of frustration. On termination of a contract pursuant to Article 273, parties are to be reinstated to the position they were in prior to entry into the contract, if possible. If that is not possible, damages may be awarded to the party suffering loss as a result of not being able be restored to its pre-contractual position. However, a party may not be required to pay damages where a Court determines that the damage was caused as a result of an "extraneous cause" beyond its control (Article 287).
Notably, in 2016 the Federal Supreme Court determined that for force majeure to be invoked, the FM Event should be unexpected, unforeseeable and the cause of non-performance, rather than simply incidental to non-performance.
As an alternative to force majeure, parties may seek to rely on Article 249 of the Civil Code which, instead of terminating the contract (or part of it), provides that where public, exceptional, unpredictable circumstances arise which render execution of a contractual obligation overly burdensome (if not necessarily impossible) such that they may cause the obligor heavy loss, then a judge may, after weighing the interests of both parties, reduce the burden of the obligation to a reasonable level, if justice so requires.
What are the relevant real estate considerations?
With respect to leases, COVID-19 has rendered a number of tenants unable to enjoy the use of their premises or such use and enjoyment has been significantly curtailed. Notwithstanding the exceptional circumstances, various legal provisions of the lease contract itself and the applicable codes and laws may provide relief. We will be addressing the particular impacts of COVID-19 on lease arrangements in a separate note.
How should parties be giving notice?
Understandably, with COVID-19 resulting in offices closing and employees being required to work from home, questions are arising as to how notice can be effectively given. This question would need to be considered on a case-by-case basis, but a party seeking to give notice should try to use as many channels of communication as possible, given the current circumstances. For example, whilst a contract may stipulate notice be given at a company's head office, those offices may be closed. Use of technology, such as email, should be used to help demonstrate a party's efforts to comply with the terms of a contract where the stipulated method is unavailable.
Key things to consider:
Application of force majeure clauses can be incredibly nuanced and highly fact-specific. Regard should be had for a range of factors, including:
- COVID-19's spread over the past months to the point at which it was declared a global pandemic by the World Health Organisation: This may affect questions around the foreseeability of the virus' effects for force majeure purposes;
- The sector and location that a business operates in: COVID-19 may not necessarily constitute an unusual commercial risk which affects every business across the globe; and
- When performance obligations crystallise: Particular attention should be paid to ongoing and upcoming obligations for force majeure purposes.
As always, it is important to be precise as to what does or does not constitute an FM Event in a contract. New contracts should include or exclude reference to the Coronavirus clearly if the parties wish to protect or disclaim against its effects, respectively.
If you are concerned that COVID-19 is or may soon affect your business or an ongoing transaction, please contact one of the members of our team, we would be pleased to assist.
Partner - Head of Middle East and Asia