April 15, 2020

Covid-19 UAE: Business resilience - force majeure

Current circumstances are impacting businesses and supply chains in an extraordinary manner. Securing resilience in business operations is more important for many companies now than it has been in recent times. An aspect of business resilience involves managing contract risk in supply chains. We shall set out below some observations on force majeure in a UAE law context which will hopefully be helpful.

It is important for companies to audit their key contracts to identify those which may be impacted by the coronavirus pandemic or the financial disruption resulting from international shutdowns, where risks may arise and how those risks may be mitigated. Contractual risk can arise in a number of circumstances, including counterpart risk (such as the risk that a contractual counterpart will default on payment, not perform its obligations (for example, delivering critical components or supplies) or not survive market headwinds, to the detriment of your business) and legal risk (such as breach of contract). Force majeure and frustration are aspects legal risk on which clients are asking us to comment with increasing frequency.

Below some observations on force majeure in a UAE law context. 

Practical observations

Whether a party may rely on force majeure and what action it may take as a consequence will depend on the particular facts and the terms of the contract.  In response to the effects of the coronavirus pandemic, it would be prudent to:

  • Consider whether the event was within the parties' contemplation when the contract was formed.  Was it before the virus was declared a Public Health Emergency of International Concern on 30 January 2020, or before it was declared a pandemic on 12 March 2020?
  • Ask what is the true cause of the inability to perform and exactly what obligation(s) cannot be performed. Are there multiple causes?
  • Explore alternative ways in which the relevant obligation can be fulfilled and what steps can be taken to mitigate the effects of the force majeure event.
  • Give notice in accordance with the relevant contractual provisions (if relevant).  Given the speed at which businesses are having to respond this can be easily overlooked.

If you are in the process of negotiating contracts with counterparts, look to the terms of the draft contract and consider including clauses which deal with the consequences of the coronavirus pandemic and the measures taken to contain it.

Legal provisions

Article 273 of the UAE Civil Code is the provision which relates to force majeure – although there are other similar provisions in the Civil Code related to extraneous events and specific contract types.

In order for a creditor to invoke Article 273 in order to cancel a contract for temporary or partial force majeure, it will need to prove that performance has become impossible. Previous cases in the UAE have demonstrated that the courts require that the event was unforeseeable and unavoidable.  Note that there is a related provision in Article 472 which states that a right is extinguished if the debtor can prove that performance of it has become impossible due to an extraneous cause in which he played no part. 

In addition to force majeure, Article 249 on oppressive performance may be relevant.  This applies if an unforeseeable, exceptional circumstance of a public nature occurs, which could not have been foreseen and as a result of which performance becomes oppressive for the debtor so as to threaten him with loss. In such circumstances, a judge may at their discretion, rebalance the contract to reduce the oppressive obligation to a reasonable level.

There is at present no case law to demonstrate the approach of the UAE courts to the availability of these provisions in the context of the coronavirus pandemic.