Is COVID-19 a Force Majeure Event?

Is COVID 19 a Force Majeure Event?

As the world progresses towards the brink of recession, industries such as airlines, hotels, construction and retail will likely be hard hit. As the number of bankruptcies begins to mount, one question on the minds of lawyers around the world is whether the event could trigger the ‘Force Majeure’ clause present in many contracts.

The doctrine of force majeure, first derived from the French law, has been repeatedly applied to natural disasters such as earthquakes, volcanic eruptions, heat waves, floods and other unforeseeable incidents of nature. It has also historically been applied to chaos, riots and unexpected legislations. Its underlying premise is that upon the occurrence of certain events which are wholly outside a party’s control, then the party would be excused from, or entitled to suspend the performance of all or part of its obligations.

But is all of the above enough to be classified as a Force Majeure event? We know that in previous epidemics such as SARS and Ebola, there is no reported case law on Force Majeure clauses coming into effect. Further, we know that 2008, despite the economic disruption that it caused, was not deemed a force majeure event, but rather, part of the ordinary risk associated with the business.

So, an interesting question in light of all this is to what extent is this pandemic different in the opinion of courts? We will first look at the significance of a force majeure clause in international contracts before moving to the stance of the UAE law.

The Purpose of a Force Majeure Clause in a Contract

A force majeure clause is included in most commercial contracts. The underlying concept is to enable excusing the performance when unforeseeable circumstances prevent a party from fulfilling the terms of an agreement.

The general legal position is that the event must wholly prevent performance, rather than making it difficult or more expensive. There is a high threshold as the required standard is that of impossibility. This can be either legal impossibility meaning a change in law, or physical impossibility such as a natural disaster.

Force Majeure clauses, can either generically point to an unforeseen event, and/or specifically mention events such as war, terrorism, disease and natural disaster. One of the first things to consider, therefore, is the wording of the contract.

If successful, the impact of Force Majeure is that the party relying on it is either entitled to cancel the contract, excused from the performance of the contract, or entitled to suspend or extend performance.

The UAE’s Legal Stance

For contracts operating within the UAE, there should be less reliance on the wording of your contractual clause. This is because a Force Majeure clause is not necessary to rely on the doctrine in the UAE. Rather, the principle is enshrined in the Civil Code (Federal Law Number 5 of 1985), which sets the definition and boundaries of a Force Majeure event, as well as its consequences.

Notably, Article 273 of the UAE Civil Code highlights that in order for an event to be qualified as Force Majeure, it must make the performance impossible, not just hard, and be claimed in a bilateral agreement. Moreover, it dictates that where there is a partial impossibility, the part of the contract which is impossible should be extinguished, and the same applies to the continuance of contracts which become temporarily impossible. The other party, however, must always be notified in such a case.

However, it does not set out an exhaustive list of possible qualifying events. Regardless, it is clear that mere economic imbalance would not qualify, even if it renders the contract difficult, or even impossible to perform. This is because Article 249 of the Civil Code grants judges a wide discretionary power to amend obligations and reset the economic balance in contracts. Where successful, the impact of Force Majeure under the Civil Code is to result in the termination of the corresponding obligation and the annulment of the contract.

Free zones also have their own provisions regarding Force Majeure but are largely consistent with the mainland. DIFC rules go slightly further in depth and provide guidance regarding enforcing Force Majeure where the delay is only temporary. ADGM rules, on the other hand, are more in line with common law.

Article 82(1) of DIFC Law No. 6/2004 states that “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”. Therefore, non-performance is excused if it is beyond the control of either party and not reasonably foreseeable at the time that the contract was entered into.

Article 82(2) however, sets further qualifications. For instance, if the parties are impeded for a temporary period, then the performance can only be held off for a “reasonable period”. Further, Article 82(3) imposes an obligation to give notice to the other party of the impediment and its impact on the party that fails to comply with the contract.

The guidance in ADGM Market Infrastructure Rulebook, Article 2.6.2(d) and (f) is that “A Recognised Body must have a business continuity plan, which is subjected to periodic review and scenario testing, that addresses events posing a significant risk of disrupting operations, including events that could cause a widespread or major disruption”. Therefore, under ADGM, businesses must consider Force Majeure as part of their business continuity plan.

How will the law be applied to COVID 19?

In our opinion, where the performance of a contract has been affected, the effect of force majeure shall be considered at the time where the business has begun to be affected. Where contracts regulate the termination and action in case of force majeure, this has to be applied according to the contract. Otherwise, the UAE civil law would apply.

COVID 19 could meet the “unforeseeable” threshold for a force majeure event, if the contract was entered into before the outbreak begun to be known in Wuhan in December 2019. This is because the threshold is high and the event must have been wholly outside the contemplation of both parties before they entered into the contract.

As for impossibility, this will be reviewed by the courts on a case by case basis. It may come down to whether recent measures taken by the UAE government would prevent the contract, making it either legally or physically impossible according to the effect of recent measures on each contract.

Where the force majeure event is temporary, and only part of the contractual obligation is impossible, then only part of the contract which becomes impossible to perform may be removed/suspended, while the other parts shall continue as long as it does not cause severe difficulty to either of the parties in the agreement. Therefore, where the impossibility has arisen is only partial, then the contractual commitments can be amended by adjusting the value, duration, deducting part of extending duration.

However, even where the contract is only partially impossible to perform, it would still be permissible for one of the parties under the contract to request the termination, if it is excessively onerous or difficult to fulfil one’s obligations. This is similar to the English law doctrine of frustration.

Currently, the measures taken by the UAE government have to some extent had a less drastic impact than other countries. While restaurants, malls, and cinemas have been shut, and flights suspended, supermarkets, pharmacies and hotels remain open, and construction is to a large extent still ongoing. Moreover, employees are still allowed to go to work where the task cannot be performed from home.

Therefore, lawyers must really look at the facts of each case, and how the current limitations are affecting each business separately. Going forward, we recommend that all the reasons for failing to perform under a contract are meticulously documented by the party seeking to rely on it. Documentation must also mention reports of what officials and the government are saying, reports of the exact dates when vendors, suppliers or contractors are reporting being unable to meet deadlines, and all other factors.

Application to Affected Industries

Hotels and airlines are the two industries most affected by COVID-19, and least impacted by government resolutions. A range of employment relationships have also been impacted as more and more employees face redundancy. A force majeure clause could ease their burden by excusing one or both parties from the performance.

Hotels manage the relationship between operators and owners via a hotel management agreement (HMA). This includes performance tests where the owner can terminate the HMA if the test falls below certain performance measures. A performance test clause includes a number of circumstances where a hotel can be deemed to satisfy the test despite having failed it.

Force Majeure is one of these events and can exempt the hotel operator from liability. Likewise, in Jet lines, Force Majeure can be triggered where airlines are failing to meet their supply contracts for jet fuel, as international travel suspends. In shipping, companies carrying good have been forced to reduce their vessels. In retail and restaurants, hundreds have been shut for the near future.

Regarding supply chains, force majeure is particularly relevant for sectors with long term, ongoing supply such as commodity contracts, shipbuilding contracts, supply contracts for food supplies, or medical manufacturing contracts. As emergency measures continue to impact the production of goods, workers and logistics, suppliers will be unable to abide by their contract within the prescribed time.

In the realm of employment contracts, the starting point is that employers cannot ask staff to take unpaid leave. However, having been declared a pandemic, and the UAE government imposed a 24-hour lockdown, the employer and employee rights as outlined in Federal Law no. 8 of 1980 may be subject to force majeure, given the special circumstances. The impact of force majeure, in this case, would be that an employer would be able to dismiss an employee without them being subject to arbitrary dismissal claims.

The impact on labour or employment contracts, also largely depends on the facts. For example, a school teacher, where the academic year is continuing, is able to continue his/her role through e-learning as the number of students enrolled would typically not get impacted by the situation, and overheads/costs would actually get lowered from using distance learning over presence in a school venue.

Therefore, obligations will continue as the Force Majeure event does not apply to the nature of the activity, as all components necessary for both parties to implement their contractual commitments remains enforceable. This, can, of course, be logically contrasted with the employment contract of someone who worked in the tourism or leisure sector.

At the moment, the Ministry of Human Resources and Emiratisation “MOHRE” has not explicitly stated that employers may dismiss employees on redundancy without compensation being payable. However, it has published a new Ministerial Resolution No. 279 of 2020, which has been effective since 26 March 2020.

As the aim of the resolution is to protect the interest of private employees facing redundancy, the recognition of the concept of redundancy in the resolution implies that the UAE labour courts may be more sympathetic to employers filing dismissals during the outbreak.

Again, this is all to be treated on a case by case basis, with each and every reason for failing to comply with a contract documented before the courts.

Alternatives to Force Majeure

On a final note, there have been a number of government waivers launched by the Dubai and Abu Dhabi governments, which may ease the burden on businesses without having to resort to Force Majeure. Therefore, there may be more practical, time and cost-effective alternatives to a force majeure claim.

For example, small business customers struggling with loan payments can contact their banks to receive an optimal financial solution, such as applying for repayment holidays. Other relief measures, targeted at industries most affected, such as retail, hospitality and aviation, include refinancing, payment deferrals, and lower payments where required. Further, a number of fees affecting SMEs in the UAE have been frozen or reduced.

Subsequently, there are a number of other alternatives under the UAE law whereby a contract may be effectively terminated. The starting point is Article 267 of the Civil Code which states that “If a contract is valid and binding, none of the contracting parties may revoke, modify or rescind it except by mutual consent, an order of the court or a law provision.”

If mutual consent cannot be reached, and the contract is bilateral, then Article 247 of the Civil Code states that “each of the contracting parties shall have the right to abstain from executing his obligation in case the other party does not honour his obligation.”

Conclusion

As the situation evolves, we move closer to a qualifying force majeure event. Major companies have already declared supply shortages, hotels are unable to meet their performance targets, hundreds of flights are cancelled and many stores and restaurants are closed.

The magnitude and scale of the problem have arguably been unforeseeable, as governments and officials around the world have scrambled to issue a timely response. To meet the high threshold however, the contract must ideally have been entered into before December 2019 when the virus began to be known in China.

Further, the global scale of the problem and the disruption to supply chains, demand and business can mean that performance under a range of different contracts has now become not just economically unfavourable or financially difficult, but wholly impossible.

As the standard of being impossible and unforeseeable for force majeure is high, we recommend that all other available contractual reliefs and government measures are utilised before resorting to considering a force majeure claim.

Special thanks to:

Sweta Singh | Aceptive Legal Consultants
Mohamed Noureldin | Nour Attorneys & Legal Consultants
Mazen Y. Ajjour | Al Bahar & Associates Advocates and Legal Consultancy
Abdelaziz Al Zaabi | Abdelaziz Al Zaabi Advocates & Legal Consultants

for their help in writing the article.