The COVID-19 pandemic apart from being a public health crisis, continues to have an unprecedented financial impact across global business and industries. The indefinite lockdowns all over the world as a result of the virus have brought business to a grinding halt and rendered parties unable to perform their obligation under contracts, for no particular fault of their own.
In such a scenario, it would be inevitable for the parties to seek to exonerate themselves of their contractual obligations which they would have otherwise performed, by pleading the doctrine of force majeure. Therefore, the force majeure clause which is usually found as a standard boiler plate clause towards the end of a commercial contract has gained paramount relevance.
This Article provides a brief understanding of the concept of force majeure under the UAE legal framework, discusses whether COVID-19 can be an effective ground for invoking force majeure and further provides a non-exhaustive list of factors to be considered while drafting force majeure clauses.
Force Majeure under UAE law
Force Majeure is a French derived concept and is referred to as an ‘act of God’ which is beyond a party’s reasonable control and renders impossible the performance of its obligations under a contract. A party’s reliance upon force majeure and the consequent steps to be taken by it shall primarily depend on particular terms of the contract and its governing law.
Parties ‘freedom to contract’ is recognized by the UAE subject to public policy considerations and statutory provisions. Although there is no specific definition of force majeure under UAE law, its interpretation will depend on the proper construction of the wordings of the clause and in particular, its definition provided in the contract.
The Court / Tribunal will interpret the clause with respect to the provisions of the Federal Law No.5/1985 (UAE Civil Code) and follow the procedure laid out in such clause, as applicable. However, in contracts where there is no such specific clause, force majeure shall de jure be applicable and can be pursued by a party as a matter of law subject to the conditions mentioned below.
Article 273 of the UAE Civil Code provides that if a force majeure event interrupts the performance of a contract in such a way that it is impossible for the contract to be performed, in whole or in part, then the contract or its relevant part, if applicable, will be terminated or may be treated as suspended. There is no provision in respect to serving a notice specified in the article creating a natural presumption under law regarding extinguishing the said impossible obligation and returning the parties to their pre-contractual position. Note the word ‘impossible’ here which is distinct from lack of commercial viability, mere difficulty, hardship, risk or additional expense which would not qualify as grounds for invoking force majeure.
Additionally,Article287 of the Code provides that if a loss arose out of circumstances and events which are beyond the control of parties, including force majeure, it shall not be required to remedy the loss in the absence of an agreement to the contrary.
TheCourt / Tribunal is however, provided discretion under Article 249 to reduce the liability of a party to a reasonable level in cases of exceptional events which were incapable of being foreseen or made the performance of the contract oppressive but not impossible. It is pertinent to mention that for the reduction of liability under this Article, the test is that of foreseeability i.e. whether either of the parties were capable of foreseeing the potential effects caused due to the event which possibly could have been mitigated.
Also, in adhesion contracts where one party is required to enter into a contract on the standard terms and conditions of the other without having any room for negotiation, Article 248 allows the Court / Tribunal to choose to not give complete effect to such a provision or perhaps, not apply it entirely to render justice.
Can the force majeure clause be invoked due to the COVID-19 outbreak?
The force majeure clause in a majority of commercial contracts may refer to general boiler plate terms such as ‘acts of God’, ‘intervention by government’, ‘natural disaster’, ‘epidemics’, ‘pandemics’, ‘disease’, ‘lockdowns’, ‘quarantines’ etc. which were most probably incorporated into the contract at a time when the current pandemic was unfathomable.
The answer to the above question will depend upon the interpretation of such terms and most importantly, the actual reason / basis for non-performance of the contract i.e. whether it is COVID-19 itself or any consequential action undertaken to mitigate the effects of the virus by the government. Foreseeability will also become a vital consideration here for reduction of liability for contracts entered prior to the outbreak than the ones being entered post virus outbreak.
Since the COVID-19 is a unique event and includes naturally occurring events caused by the virus outbreak itself and the consequent actions by the governments, the defaulting party shall have a greater burden to demonstrate whether the actual loss was caused due to the former or latter and whether any steps were undertaken to mitigate such loss.
For standard contracts confining themselves to references of ‘acts of God’ relating to natural causes devoid of any human intervention, the peculiarities of the commercial contract, conduct of the defaulting party in mitigating the loss and most importantly, the interpretation of the term ‘acts of God’ under the governing law of the contract shall be examined.
Factors to be considered while drafting Force Majeure clauses
In such unprecedented times, leave alone the COVID-19 outbreak, it is difficult to contemplate all such potential factors which might render contracts impossible to be performed. However, the parties can be more pragmatic on this front and keep the following considerations in mind while drafting their force majeure clauses:
- Define the force majeure clause with specific events, which can potentially make performance of the contractual obligations impossible and are not within the control of the parties as opposed to events which the party can possibly control and mitigate. It is important to decide whether such definition is to be kept broad and unqualified or narrow.
- Carefully consider in advance (if possible), the obligations which may not be capable of being performed should there be a future force majeure event and prescribe alternative ways in which such obligations can be fulfilled and risks can be mitigated.
- Instead of straightforward termination, a contract can have provisions for temporary suspension or extension to provide an opportunity to the defaulting party to resume its obligation once the force majeure event is over.
- Having a proper procedure in place for invocation of the force majeure clause by way of service of notice within a prescribed period of time to enable the defaulting party to opt for temporary suspension or extension of the contract, if so required.
- The Courts / Tribunals will interpret the contract as a whole therefore, it is imperative that the procedure and timelines put in place in the contract do not contradict other corresponding commercial timelines or provisions of the contract.
- Applicable insurance coverage should be provided in the contract to cover or mitigate the losses caused by the force majeure event.
- Parties can seek to re-negotiate certain clauses which are likely to render the performance of the contract impossible. It’s always better to keep things in perspective rather than litigate in the future.
- Incorporation of compulsory mediation clauses should be considered by parties while drafting their contracts with a view to resolve their potential disputes amicably and only upon failure of mediation should arbitration or court interference be resorted to.
- In case the parties include an arbitration clause, it is advisable to choose the arbitration rules of an institution that provide for emergency arbitration procedures.
About the Author Siddhanth Kochhar is a Principal Associate with Kadernani and Company Legal Consultants where he is primarily involved with disputes before the DIFC and ADGM Courts, arbitration under the DIAC, DIFC-LCIA and ICC Rules and instrumental in drafting commercial contracts.