The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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United Arab Emirates

How is Force Majeure regulated in the UAE?

Force Majeure is regulated in Article 273 of UAE Federal Law No. 5 of 1985 (known as the UAE Civil Code).

Article 273 reads as follows:

  1. In bilateral contracts, if a Force Majeure arises that makes the performance of the obligation impossible, the corresponding obligation shall, be extinguished and the contract ipso facto rescinded.
  2. If the impossibility is partial, the consideration for the impossible part shall be extinguished. This shall also apply on the provisional impossibility in continuous contracts. In both instances the creditor may rescind the contract provided the debtor has knowledge thereof.

UAE Courts’ jurisprudence requires the events leading to the application of Force Majeure to be unforeseeable, extraneous and must render the obligation impossible to perform rather than more onerous.

Dubai Court of Cassation, 188/2009: It is well established in the precedents of this court in the case of Force Majeure negating liability for compensation for damage for breach of an obligation, it is a prerequisite for being allowed to rely on Force Majeure that it should be the result of an unforeseen event that could not have been averted, namely that the results thereof could not have been guarded against or prevented, in such a way as to make performance of the obligation impossible. The assessment of whether the facts alleged amount to Force Majeure is a matter of fact for the trial court.

Dubai Court of Cassation, 730/2015 It is well established in the precedents of this court that the Force Majeure requires lack of connection between that parties and the accident, and that the accident to be unpredictable and impossible to be averted, and that what should be impossible to anticipate or stop is what the accident causes, such as wars, earthquake, fire, drowning or theft or floods, droughts, storms, and so on. If the Force Majeure is the only reason for the damage, then the causal relationship does not materialize and the responsibility does not materialize.

Pursuant to Article 273 of the UAE Civil Code and UAE jurisprudence, Force Majeure is a mandatory safeguard offered by the UAE legislation. Contractual parties could claim Force Majeure even if not reflected under the underlying contracts. Conversely parties cannot define as Force Majeure anything they wish as an attempt to safeguard delays. Force Majeure has the characteristics  defined by the UAE Courts, currently requiring that the events are unforeseeable, extraneous and that render the obligation impossible.

This differs from common law jurisdictions where the application of Force Majeure will depend on the wording used by the Parties in the contract.

In case the Force Majeure events lead to termination of the contract, the parties will need to be resorted to the pre-contract position or damages will be awarded in furtherance of Article 274 of the UAE Civil Code:

“When a contract is or shall be rescinded, the two contracting parties shall be reinstated to their former position, prior to contracting, and in case this is impossible, the Court may award damages.”

However, when an obligation is not impossible but rather burdensome in such a manner as to threatening him with heavy loss, Article 273 of the UAE Civil Code will not apply and parties will need to seek recourse to Article 249 of the UAE Civil Code, which reads as follows:

If public exceptional unpredictable circumstances shall arise, and their happening has resulted in making the execution of the contracted obligation, if not impossible, has become burdensome to the debtor in such a manner as to threatening him with heavy loss, the judge may, according to circumstances and by comparing the interests of both parties, reduce the burdensome obligation to reasonable limits, if justice so requires. Any agreement to the contrary is void

Will Covid-19 qualify as Force Majeure? Or Hardship?

There’s uncertainty as to whether the Covid-19 will be treated under Article 273 or Article 249 of the UAE Civil Code.

The key aspect will be whether the outspread of Coronavirus could be (a) foreseen at the time of signing the underlying contract or (b) merely uneconomic rather than impossible.

In the event of (b), Article 249 would allow for a reasonable adjustment in the parties’ obligations.

Although we may all expect the impact and spread of Coronavirus to have been unforeseeable, Courts may view the World Health Organization’s declaration that the outbreak constituted a public health emergency of international concern of 30 January 2020 as a heads up that would render the subsequent world developments foreseeable.

Contracts entered into before this date will need to look into whether the execution of the obligations is impossible or merely more burdensome.

What is the best course of action in the face of obstacles out of Covid-19?
  1. Undertake a revision of the underlying contract particularly Force Majeure clauses, governing law and jurisdiction;
  2. Even if Article 273 and 249 do not require the submission of notices raising the application of Force Majeure contentions we would recommend that a notice is sent in order to comply with good faith requirements under Article 246 of the UAE Civil Code.
  3. Negotiate, negotiate, negotiate. Any mid-term solution may be better than a positive judgment or award that may come too late.
  4. Evidently negotiations should be documented in writing to ensure transparency and back up in the event of future breaches of the agreements reached.
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