COVID-19: Force Majeure Clauses In Your Contracts
The onset of the COVID-19 outbreak has led individuals and businesses to reconsider their positions under certain contracts and assess whether such contracts may be capable of being terminated or suspended by relying on force majeure clauses.
The concept of force majeure is widely recognised and operated broadly across common law jurisdictions and the Middle East. A force majeure is an event beyond a party’s control, which prevents the party from fulfilling its obligations under a contract.
The expression “force majeure clause” is generally used to describe a contractual term whereby a party is usually:
- entitled to terminate the contract; or
- has the right to be excused from performance of the contract (in whole or in part) indefinitely; or
- has the right to suspend performance for a period of time,
- upon the occurrence of a specified event or events beyond their control.
Pursuant to the laws of the UAE, Article 273 and Article 287 of Federal Law No. 5/1985 on the Civil Transactions Law (the “Civil Code”) states:
(1) In contracts binding on both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically canceled.
(2) In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases, it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware.
If a person proves that the loss arose out of an extraneous cause in which he played no part such as a natural disaster, unavoidable accident, force majeure, act of a third party, or act of the person suffering loss, he shall not be bound to make it good in the absence of a legal provision or agreement to the contrary.
The protection offered by a force majeure clause is generally triggered when a party is unable to perform its obligations (as opposed to being unable to perform merely as a matter of convenience).
It is useful to note that if a party would not have been able to perform even in the absence of the COVID-19 outbreak, it is unlikely that the party would have grounds to rely on the force majeure clause as relief from performing its obligations (in whole or in part).
In order to determine whether a party could argue that COVID-19 is catered for by a force majeure clause, it is important to consider whether the force majeure clause includes an appropriate trigger under which a party is able to invoke rights of suspension or termination (such as references to epidemics, pandemics, quarantines or government intervention as a result);
The trigger may in fact be UAE government action that causes the parties to no longer be able to perform the contract. Therefore, it is worthwhile checking whether the basis for non-performance is due to the virus itself or the resulting government action to limit the impact of COVID-19 (e.g. travel bans, limitations on business activity, quarantines).
Most importantly, the parties must take into account and be mindful of the nature and context of their specific contract, the text of the force majeure clause contained therein and the general terms of the contract itself.
This article should not be treated nor relied upon as formal legal advice. Nor should it, in any circumstances, be treated as or regarded as being a binding legal opinion provided by Davidson & Co. It is intended to be used for informational purposes only. Any information provided has been prepared in line with what we understand to be current practice and such information is subject to change in accordance with the laws, rules, and regulations of the UAE. Please contact us for specific legal advice in relation to the subject matter of this article or if you wish to discuss your other legal requirements.