Coronavirus and its impact on the performance of commercial contracts from a UAE legal perspective by Taha Sharaf

  1. Introduction:

The ongoing pandemic of Coronavirus (COVID-19) is having an unprecedented impact on global trade and commerce. Various countries across the globe have implemented protective measures such as quarantines, travel restrictions and visa bans. While these measures are necessary, they have begun to significantly affect global industries including manufacturing, transport and construction, etc, and their respective supply chains. Due to this, many businesses may seek to rely on Force Majeure as a remedy to discharge their contractual liability. This article will consider the threshold for Force Majeure and whether such remedy sought is valid under UAE law.

 

Force Majeure comes from a French term that literally translates to “greater force” and are commonly included within commercial contracts. The term Force Majeure in a legal context excuses a party from not performing its contractual obligations that have become impossible or impracticable because of an event that the parties have not foreseen. Force Majeure clauses may set out various events such as wars, riots, “acts of God” and or natural disasters. In the instance that one of these events occurs, the clause will usually prescribe what the parties must do next.  For example,  a party claiming Force Majeure will have to notify its counterparty and take reasonable steps to ease the damage that has occurred to the contractual performance.

 

  1. Application of Force Majeure clause  according to UAE courts:

The Definition of Force Majeure has a broad interpretation In UAE that in most cases requires court discretion to examine the mertis of each case and the surrounding circumstances, Article, 273 of the Civil Transaction Code defined force majeure In bilateral contracts, as event that arises which makes the performance of the obligation impossible, the corresponding obligation shall, be extinguished and the contract ipso facto rescinded. Considering that 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.

On the other hand, The Cassation court of Dubai has established a principle in case number 494/2017 ( real estate )  in whish it discharges the contracting party to be responsible for any damages that have resulted from non-performance of a contract. This principle will apply if such party proves that the damages resulted from an unexpected or unforeseeable accident that rendered it impossible to fulfill the contractual obligations. The onus is on the party seeking to rely on the Force Majeure clause to prove that the Force Majeure event has significantly prevented, delayed and or affected the performance of the contract. It is also mandatory for the contracting party who relies  on the Force Majeure clause to prove that it was not their fault to not perform the contract obligation, and that the failure to perform is caused directly due to a Force Majeure event.

 

  1. Implementation of Force Majeure Clause with respect to the Coronavirus outbreak:

Although the Court may consider the current circumstances and its impact on a contractual relationship, the contracting party that claims the applicability of the Force Majeure clause must provide a detailed description of the merits and analysis of the events. The party must also demonstrate its effect on the contract in order to establish the credibility of the case. The party claiming Force Majeure would be required to prove that the inability to perform was due to an incident beyond its control and has rendered the contractual obligations impossible or significantly impractical to perform.

For example, the UAE government has recently issued a decree that declares all UAE residents who are currently abroad can no longer enter the UAE until Further notice. However, the decree does not apply to the participants of the Dubai EXPO. Therefore, it is clear that the participants of the EXPO can not argue they could not perform their duties due to the travel restrictions in the UAE. However, it may be accepted that they could not perform their contractual duties if they can prove that they were not able to travel from their own country due to government-issued travel restrictions.

On the other hand, in the event that the EXPO participant was obligated under the contract to supply workers to the EXPO, it can not be argued that it’s impossible to supply the workers based on the abovementioned decree, as the said decree is only limited to those who are existing UAE residents.

However, if the government of the UAE issued a second decision that orders to close its borders against some nationals, and the contract does not specify the workers to be supplied, the participant must act in good faith in order to execute his obligations. For example, the party can supply workers from other nationalities who are not listed within the ban in order to establish good faith. unless the government decision is considering the closure of  borders against the entire world.

  1. Conclusion:

The court of the UAE has the full discretion to interpret the contractual terms and determine that in the instance a party has failed to perform his contractual duties, such party shall be liable to compensate the other party unless that liable party proved that the failure to perform was directly caused due to the Force Majeure event. Bearing in mind that to determine whether the a spesfic event should be considered as a Force Majeure or not is subject to court discretion .

MHLF (Mahmood Hussain Law Firm) and Mora & Associati are proud of this alliance since it will allow both law firms to offer our clients a seamless assistance for their international operations in the Emirates and Italy. We intend to offer an added value in the commercial relationship between Italian and Emirati Companies.