Out-Law Guide 9 min. read
07 Apr 2020, 12:19 pm
The repercussions of the Covid-19 pandemic are unprecedented and their full impact unknown, making force majeure clauses increasingly relevant to many businesses and their legal advisers. Force majeure is a reference to an external event, outside of the parties' control, which parties cite as a reason to withhold performance of their contractual obligations. In commercial contracts, the consequences of force majeure events are often dealt with by force majeure clauses.
This article considers the operation of force majeure clauses in the three main UAE legal jurisdictions. There is no unified approach, so contracting parties should pay close attention to the terms of their contracts, the governing law and any mandatory state interventions which may cut across these factors.
Despite the legal differences, there are a number of questions that every business should be raising right now no matter the stage of contractual performance:
There is no specific definition of force majeure under UAE law. The UAE Civil Code (Federal Law No. 8 of 1985) does, however, include several provisions addressing the concept of force majeure and its consequences. The law also differentiates force majeure from events which render the performance of the contract simply onerous.
Generally speaking, a force majeure clause will be interpreted in the same way as any other clause: the wording will be given its plain and simple meaning and, if that is not possible, the intention of the parties when drafting the clause will be looked to.
Generally speaking, a force majeure clause will be interpreted in the same way as any other clause: the wording will be given its plain and simple meaning and, if that is not possible, the intention of the parties when drafting the clause will be looked to. Any contractual notice provisions should also be applied strictly and followed.
Whether or not there is a force majeure clause in the contract, certain provisions of the UAE Civil Code will come into play.
Article 273(1) of the UAE Civil Code says, in part: "if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled". So, where performance is rendered wholly impossible, the contract will no longer need to be performed and is treated as cancelled - meaning that the parties will be returned to their pre-contractual positions and damages potentially awarded to achieve this. However, in respect of continuous contracts - as opposed to instant contracts - the part of the contract that was already performed prior to the force majeure event should remain enforceable. Where the force majeure event renders only part of an obligation impossible to perform, Article 273(2) allows only that part of the contract to be extinguished. The remainder of the contract remains enforceable.
Whilst a force majeure event can be a cause for termination, it can also be a defence to liability. In this respect, Article 287 of the UAE Civil Code says: "If a person proves that the loss arose out of an extraneous cause in which he played no part such as a natural disaster, unavoidable accident, force majeure, act of a third party, or act of the person suffering loss, he shall not be bound to make it good in the absence of a legal provision or agreement to the contrary".
Similarly, and in relation to rights in general, Article 472 of the UAE Civil Code deals with impossibility, although it does not expressly refer to force majeure. It says: "The right shall expire if the obligor proves that the performance of it has become impossible for him for an extraneous cause in which he played no part".
There is no definition of a force majeure event under UAE law, although judgments have provided guidance on the application of the above provisions of the UAE Civil Code. Generally speaking, the courts have interpreted force majeure restrictively and will analyse each case on its own facts. A force majeure event must have been unforeseeable and unavoidable. The courts will therefore consider whether the event was unforeseeable when the contract was formed and whether the event was truly out of the non-performing party's control and whether that party can be said to have reasonably assumed the commercial risk for the event under the terms of the contract. The same approach is anticipated for parties raising Covid-19, and specific events arising out of the virus, as a force majeure event. One size will not fit all and each case will be assessed on its facts.
That said, parties should remember that UAE law imposes a duty to perform contracts in good faith and, although there is no express duty to mitigate, UAE courts will expect parties to refrain from compounding their losses. Therefore, every step should be taken in this respect, including providing timely notice to the other party of the nature of the event and an explanation as to why performance is now impossible, and acting quickly and reasonably to reduce a party's own losses.
The Dubai International Financial Centre (DIFC) free zone has its own dedicated contract law - the DIFC Contract Law (DIFC Law No. 6/2004) - which must be taken into account alongside a review of any force majeure provision in the contract.
Article 82(1) of the DIFC Contact Law provides: "Except with respect to a mere obligation to pay, non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences".
Putting aside a simple debt obligation, which will be unaffected under this provision, this means that a party may be excused from performance if:
The main question to consider here is: was the failure to perform because of Covid-19, or were there other intervening events which broke the chain of causation?
Take the example of a delivery company, short-staffed due to employees self-isolating. A failure to deliver occurs after one driver suffers a collision on the road. The collision is not related to the pandemic but, if the company had more drivers on the road, a surrogate driver could have been deployed to complete the delivery.
A number of questions are relevant to whether Article 82(1) applies:
This is a basic example, but it illustrates the complex questions as to reasonableness, mitigation and causation that will arise in all manner of commercial contexts.
Article 82(2) of the DIFC Contract Law provides that non-performance is excused "for such period as is reasonable, having regard to the effect of the impediment on performance of the contract".
Three questions arise here:
The more specifically a party can identify and frame an impediment, the better placed it will be. If a party can pinpoint a particular 'lockdown' measure that has impeded performance, explain as precisely as possible how and why performance has been impeded and justify the expected duration, it is more likely to have the sympathetic ear of the other party and, ultimately, a court or tribunal.
Article 82(3) of the DIFC Contract Law provides that a party must give notice to the other party of the impediment and its effect on the party's ability to perform. If notice is not received "within a reasonable time after the party who fails to perform knew or ought to have known of the impediment" then the non-performing party is liable for damages resulting from the non-receipt of notice.
When giving notice, in addition to complying with any notice provisions in the contract, we advise clearly specifying:
This provision is particularly important for parties entering into new contracts. They will be treated as knowing about the pandemic and its consequences, and to have allocated the risk of the pandemic within their contract, unless expressly stated otherwise.
Lastly, parties should remember that termination of the contract is still an available option.
Article 82(4) of the DIFC Contract Law is clear that nothing in Article 82 prevents a party from exercising a right to terminate the contract, withhold performance or request interest on money due. It is clear that force majeure events do not excuse the obligation to pay debts.
The position in the Abu Dhabi Global Market (ADGM) free zone follows the English common law. The ordinary principles of contractual interpretation apply, albeit the English courts traditionally interpret force majeure clauses restrictively. The party relying on the clause must prove its scope and application to the facts. The first step is to carefully review the words in the clause, paying attention to any express carve outs and notification requirements.
As under DIFC law, and subject to the specific wording of the clause, the English common law requires that to prove a force majeure event a party must establish that:
In the absence of a force majeure clause, the parties must rely on the English law doctrine of frustration to relieve them from the consequences of their non-performance. In short, a contract may be frustrated where an extraneous factor outside the parties' control renders performance of the contract radically different from what was agreed, and the risk of that occurring is not allocated by the parties' contract. The contract is treated as terminated, but without retrospective effect.
For more on the position of force majeure under English law, see our Out-Law Guide: Will Covid-19 trigger a force majeure clause?
Parties should be familiar with the wording of their contracts and comply with any notice requirements strictly. The courts are generally loath to allow commercial parties to get out of contracts they have freely entered into. Force majeure clauses are interpreted restrictively, and it is a very high hurdle to prove that a contract has been frustrated. Parties should therefore seek to cooperate in this difficult climate, working together on devising reasonable steps to mitigate the adverse effects caused by the pandemic while still delivering performance, even if in a different way.
Parties also remain free to vary their contract by agreement in order to adapt to the current situation.
Co-authored by Sammy Nanneh, part of the Litigation, Regulatory and Tax team at Pinsent Masons, the law firm behind Out-Law.
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