Covid-19 - contract management and force majeure in the UAE
As the Coronavirus pandemic continues to cause untold human loss and suffering, it is also causing disruption to business and a shock to the global economy on a scale rarely if ever previously seen.
The repercussions on the performance of contractual obligations are one of the most pressing concerns for our clients.
This article aims to set out some initial guidance for businesses with a presence in the UAE that are considering the impact of the current pandemic on their commercial dealings (whether from the perspective of enforcement or avoidance). It considers the potential issues and risk areas in a commercial contract as well as the availability of relief from delay or failure of performance.
The article is general in nature and deliberately limited in scope and should not be viewed as a substitute for specialist legal advice: we are of course available and only too happy to discuss any specific issues that you may have whether covered in this note or otherwise.
AREAS FOR CONSIDERATION IN COMMERCIAL CONTRACTS
Businesses are facing a highly disruptive and uncertain landscape, with challenges of a nature and scale that are without precedent: these include closures of borders, communication difficulties, unavailability of personnel, disruption in supply chains, challenges getting their products to market, increases in disputes, new highly draconian rules and regulations and, more broadly, the kind of sharp spikes in costs and drop-offs in revenue the effect of which are often quite disastrous for cashflow management.
We will examine some of the key aspects of a contract that may be impacted or triggered.
Core obligations: fundamentally, the supply of goods and/or services and payment obligations may have become impossible, impractical or unduly onerous.
Representations and warranties: clauses relating to delivery times and standards may be impacted by restrictions on the available workforce or access to supplies. Representations that there are no defaults under key contracts or that there is no litigation may have become incorrect.
Covenants and undertakings: similarly, certain covenants and undertakings may be breached: for example, the company may be unable to undertake that it will not dispose of any assets, incur greater indebtedness or undergo a reorganisation.
Material Adverse Change (MAC clauses): on the assumption that most MAC clauses will be broad enough to capture the effects of Covid-19, we likely need to look to applicable carve-outs. It is common in the high value commercial context for any change in conditions generally affecting the industry in which the principal "obligor" business operates to be considered to fall outside the MAC definition, which may make such a MAC clause inoperative in the current circumstances of the pandemic. Equally, it is worth bearing in mind that, for any new contracts being entered into, as Covid-19 and its effects become increasingly apparent, MAC clauses may not be the most effective means by which to give a party relief: we are seeing a greater incidence of specific Covid-19 related formulations which give a party relief if and to the extent that it is genuinely unable to meet its obligations (at least not in a commercially or financially reasonable way).
Indemnities: indemnities may be triggered as a result of counterparties' losses and third party claims due to the disruptions caused by the pandemic.
Notices: counterparties should verify whether any notice requirements may have been triggered and consider practical difficulties in complying with formal notice requirements. For example, delivery may be delayed or, in the case of delivery by hand, potentially impossible.
Termination rights: counterparties should verify whether a termination event has arisen, including due to events of default, material breaches of representations, warranties and covenants, failure to renew licenses or relevant consents, the occurrence of a material adverse change or force majeure, an illegality event (in light of the newly enacted laws and regulations in response to the crisis) or the insolvency of a party, which may be defined widely to include pre-insolvency scenarios.
FORCE MAJEURE AND SIMILAR RELIEFS
The concept of force majeure is recognised and judicially understood in the UAE. Whilst the term is not given an express definition under UAE law, it is the principle that a party may be excused from liability due to the occurrence of an unforeseen event that is outside of its control and which has, generally, rendered the relevant obligation(s) impossible to perform. We will consider whether force majeure or similar concepts may be relied upon to suspend temporarily or cancel permanently certain obligations in light of the pandemic and its fall-out.
Express force majeure provisions
If a contract includes a force majeure clause, this should be the first port of call for a party examining whether it might be able to avoid its contractual obligations. Under the UAE civil law system, parties are generally free to agree the contractual terms that will govern their relationship, and UAE courts generally uphold these, as long as there is no conflict with a mandatory provision of UAE law or any contravention of public order or morals.
The party seeking to rely on the force majeure clause would need to assess or seek legal advice as to whether the definition of force majeure includes a pandemic or epidemic (and its effects) or otherwise covers the current circumstances. Counterparties should also verify whether the scope of the force majeure provision corresponds to their circumstances: for example, if the force majeure provision only offers relief in circumstances where performance has become impossible, then they may not be able to rely on it if their performance has merely become more onerous. Further, certain provisions expressly exclude a set of obligations and circumstances from the scope of the clause: commonly, force majeure would not excuse counterparties from payment obligations or obligations which have merely become more onerous. However, parties may have included in their contracts provisions on the effect of hardship or increased costs on their dealings, which we advise them to review.
In addition, force majeure provisions may require parties to mitigate their losses and/or work towards finding a solution in the first instance. Further, there often will be notification requirements and parties are advised to check these so that they do not lose the relief due to a technical breach.
In relation to new contracts yet to be concluded, it would also need to be considered whether, similar to the MAC clause mentioned above, the pre-existence of a force majeure event would make a successful claim for relief less likely than had the event intervened after the contract was signed. To counter this risk, a party with particular concerns about the effects of Covid-19 (but who still wishes to conclude an agreement), would be well-advised to make express provision for contractual relief should certain pre-defined triggers be activated (e.g. the continuation of a lockdown beyond a date (to be defined), the change in any law as a consequence of Covid-19 the effect of which endures for longer than a particular number of business days (to be defined) or the prolonged unavailability of a particular good required in a manufacturing process due to the effects of the Covid-19 crisis).
Finally, relief provided by a force majeure provision may include suspension of the impacted obligation for as long as the impact of the force majeure is continuing, cancellation of a contract and/or adjustment of terms. It generally does not include a monetary compensation (and can in that sense be regarded as a shield rather than a sword).
In the absence of (or supplementing) express contractual force majeure provisions, Law No. 5 of 1985 of the Civil Transactions Code of the UAE (the Civil Code) provides for relief in the following circumstances (references to Articles being to articles of the Civil Code):
(a)Complete Impossibility: Article 273(1) provides for the possibility of automatic termination of a contract that has become impossible to perform due to the occurrence of a force majeure event. Notice of "impossibility of performance" must be given to the other party. In this circumstance, we understand that a UAE court would seek to place the parties in the same position as if the contract had not been entered into.
(b)Partial or Temporary Impossibility: Article 273(2) provides for the possibility to extinguish a part of a contract that has become impossible to perform (temporarily or otherwise), with the remainder of the contractual obligations capable of being performed. Article 273(2) further states that the entire contract may be cancelled by the party for whose benefit the relevant obligation is to be performed further to notice to the other party.
(c)In the context of contracts for work, Articles 893 and 894 provide the opportunity for a party to cancel a contract if a cause arises that prevents it from performing its obligations and for the contractor to be paid for work done up to such cancellation.
(d)The above provisions relating to contracts that have become impossible to perform are, to a certain extent, similar to the doctrine of frustration, relief for which may exist under English law and other common law governed contracts.
Increased costs/burden: Article 249 provides that a court may adjust obligation(s) that have become extremely burdensome on a certain party or parties as a result of exceptional circumstances of a public nature not reasonably foreseeable. This article may not be contracted out of, and any agreement to the contrary will be void.
Relief from liability to compensate damages: in addition to providing reliefs with respect to performance, the Civil Code in Article 287 relieves a party from liability for damages provided such party can prove that losses arose as a result of causes beyond its control, except to the extent this is contrary to any applicable law or contractual provision.
Force majeure provisions may vary widely. We strongly advise parties to:
(a) review their relevant contract(s);
(b) seek advice where in doubt;
(c) document relevant evidence where possible;
(d) take steps to mitigate any losses;
(e) serve appropriate and timely notices;
(f) maintain a line of communication with their counterparties; and
(g) where possible in light of the current difficult circumstances which are causing contracts to be renegotiated the world over, attempt to resolve the matter amicably prior to bringing a claim.
In the absence of, or in addition to a force majeure clause, the
Civil Code will apply to a UAE law-governed contract.
Demonstrating force majeure is generally a difficult burden to overcome; however, in our opinion, it seems likely that a court would conclude that the pandemic is an exceptional circumstance the effects of which (obviously) were beyond the control of the parties. However, whether a claim for force majeure will be successful will depend on the specific facts of the matter: it will remain necessary for the parties to consider these facts (eg whether the virus outbreak had started when they entered into their contract), their effect on contractual performance (eg whether performance has become impossible, more onerous or simply inconvenient), whether they qualify for a relief and the steps that need to be taken prior to claiming such reliefs.
As the global situation of the pandemic and the resulting fall-out continues to evolve, we recommend that counterparties stay up-to-date with the relevant changes of law and commercial realities and the impact of such changes on their contractual position.