The recent global outbreak of Coronavirus (COVID-19) has resulted to various challenges for many suppliers and counterparties to deliver on their contractual obligations and has prompted an increasing number of claims and notifications to contracting companies. Now more than ever, companies need guidance on the recourses and forms of relief available to them during these unprecedented times. This article provides high level guidance on citing to Force Majeure provisions in contracts as applicable under UAE laws and regulations.
The provisions of Force Majeure under the UAE Civil Transactions Code
Force Majeure exists as a doctrine under the UAE Civil Transactions Code. The principle applies automatically to commercial contracts governed by UAE law, especially where the contract does not contains provisions on Force Majeure.
The UAE Civil Transactions Code stipulates that, in mutually binding contracts, if a Force Majeure event took place and rendered the performance of the contractual obligations impossible, the corresponding obligation ceases and the contract is automatically cancelled.
As per the provisions of the law, the party claiming the occurrence of a Force Majeure event should establish that:
- the event rendered the performance of the obligation impossible;
- it was unforeseeable at the time of entering into the contract; and
- unavoidable in terms of occurrence or impact.
The effect of the Force Majeure event is that the contract is discharged by frustration. The obligations of the parties are cancelled without awarding damages for the non-performance of the obligations. The occurrence of a Force Majeure event does not entitle the parties to an extension of time or postponing the due date of the performance.
The UAE law recognizes and differentiates between partial and total impossibility of performing a contractual obligation for citing to a Force Majeure event. If your business is partially affected by the Force Majeure event, the impossible part of the performance shall cease to exist. If the impossibility of performance is partial, the affected party has the option to terminate the contract and must notify the other party of such termination. The same principle applies to temporary impossibility.
The UAE courts take a restrictive approach in applying Force Majeure clauses/rules due to the effects of Force Majeure on the contract, which are:
- the defaulting party claiming force majeure is released from their obligation;
- the corresponding obligation(s) cease(s) to exist; and
- the contract is automatically discharged by frustration (i.e. cancelled).
Other options – Exceptional Circumstances Event
Noting the restrictive approach of the courts in applying Force Majeure events, the affected party can rely on a less restrictive provisions of the law, which is the application of Exceptional Circumstances Event. If the Exceptional Circumstances event rendered the performance of the obligation onerous or economically oppressive to the extent that it threatens the affected party with grave loss, the affected party can seek the court to bring back the economic balance to the contract. The affected party does not need to prove that their performance is impossible. The Exceptional Circumstance claimed should be of a public nature, unforeseeable at the time of entering into the contract, and lead the performance to be extremely onerous.
The effect of an Exceptional Circumstances event is not to award damages but to reduce the oppressive obligation to a reasonable level and return the economic balance to the contract and without the contract being automatically terminated.
In principle, parties should abide by the terms of their agreement and perform their contractual obligations in good faith. Whether the COVID-19 pandemic would be considered a Force Majeure event or an Exceptional Circumstances event should be examined on a case-by-case basis. This examination will take into consideration the parties’ agreement on Force Majeure clauses, if any, and the impact of COVID-19 on the performance of the contractual obligations. With the full impact of the pandemic likely to play out for some months yet, this is an issue seemingly becoming more important by the week.