Force Majeure and Commercial Contracts from a UAE and English Law perspective

23 March 2020

With the current global issues caused by "COVID-19" including the closure of certain borders, we thought it would be helpful to outline the key differences in approach under UAE and English Law to force majeure (FM) clauses. We will highlight some considerations for companies in or doing business in the UAE, as these are the laws commonly used in commercial contracts here.



English Law Perspective

Definition and Language

Under English law, FM clauses operate by being expressly written in a contract (rather than being implied by federal laws). As such, it is important to consider the language of the definition in your contract as incorrectly declaring an FM event may result in a contracting party repudiating the contract and a claim for damages. FM is typically invoked on the grounds of either a natural event (such as natural disasters) or statutory event (such as a change in law or a government nationalisation of an industry) giving rise to a party being unable to perform its obligations.

It is less common to see FM clauses that expressly provide for a global health emergency, pandemic or epidemic as a FM event. If terms such as "epidemic" or "plague" is included, you may be in a stronger position to make such a claim. Where such language is not used, FM clauses often include a general sweep up clause which captures "any such events which are not within the reasonable control of the parties".

However, a catch all clause does not necessarily mean the COVID-19 outbreak will fall within the definition. Often FM clauses also state that the event must prevent or hinder the affected party from performing its obligations under the contract. Furthermore, a "financial recession" or "economic downturn" is often excluded from the definition of FM clauses. Therefore you may need to demonstrate how the outbreak itself has rendered performance impossible (such as the inability to make a payment to a lender on time) rather than as a result of any fallout coming from a financial recession due to the outbreak. The burden of proof is on you, the affected party, seeking to rely on an FM event to prove that the outbreak has caused non-performance.

The Doctrine of Frustration

Where your contract is governed by English law but does not include an FM clause, in rare circumstances it may be possible for the contract to be discharged pursuant to the doctrine of frustration, where an event or circumstance arises which renders the performance of the contract physically or commercially impossible (or transforms the obligation into a completely different obligation). Note that an FM event is mutually exclusive from frustration, and an invoking an FM clause cannot be used to frustrate a contract.

Frustration has previously been successfully claimed where relevant goods were destroyed prior to legal title passing[1], where a change in law has taken place causing the contract to be rendered illegal[2] and where a contract was unable to be performed due to death or incapacity[3]. As the COVID-19 pandemic continues to cause governments to react in unprecedented ways, it is possible that contracts may be frustrated as a result. Seeking legal advice is very much encouraged in this instance.

UAE Law Perspective

For contracts governed by UAE law a FM clause may be invoked by a party pursuant to the federal laws of the UAE, even if not expressly included in a contract. UAE law[4] sets out that in order to invoke FM, a party must: (a) make a claim in relation to a bilateral agreement; and (b) the relevant event must render the performance of the obligation under that contract impossible. The UAE does not provide an exhaustive list of FM events, however as in the UK, FM clauses (for instance in precedent power and water purchase agreements) are typically invoked in cases of natural disasters, industrial actions or changes in law which give rise to the inability to perform an obligation.

Whilst the UAE Civil Code applies to both the mainland and free zones, it is noteworthy that some free zones, being independent jurisdictions, have implemented their own regulations surrounding FM clauses. The Dubai International Financial Centre[5] (DIFC), for example, permits non-performance, temporary postponement or absolute termination of contractual obligations due to uncontrollable circumstances. The requirement to provide notice without undue delay as soon as a party becomes aware of a FM event remain as a prerequisite for the activation such clauses.

It is important to note that it is not sufficient that performance is only obstructed by mere hardship, or uneconomic balance between parties in order for FM to be invoked. Other requirements have also been set through case law from the UAE's Court of Cassation. The most important prerequisite is that an FM event must be unforeseeable. FM may not be invoked where any party to a contract was in a position to anticipate the FM event. The analogy behind this is clear, as each party to a contract is under an obligation to act in good faith and to mitigate damages where it is reasonably foreseeable. The UAE courts have tended to interpret the FM clauses narrowly, arguing that the underlying events must make performance of the contract literally impossible, unforeseeable and uncontrollable. Should a situation arise wherein a FM event deems only a part of the contract performance impossible, the remainder of the contract that can reasonably be performed shall continue to be effective. This can be seen in a case before the Dubai Court of Cassation[6] where a contractor was awarded a value for part-completion of the work, and the remainder of the work affected by FM terminated.

General Observations

Timely Notification

Timely notification may be critical to the success of invoking a force majeure clause. FM clauses also normally include stringent notification provisions. For instance, a party may be required to notify the other party of the FM event within a certain timeframe after they have become aware of the relevant event. You may also be required to provide updates and detailed reports. A delay in notifying may prevent you from invoking force majeure.

Performing obligations to the extent possible

FM clauses may also require that you, as the claiming party, must continue to perform obligations unaffected by the FM event, or use reasonable endeavours to mitigate any disruptions caused by the FM event. It is therefore important that even where an FM is successfully invoked by you, it may not completely relieve you from all your contractual obligations, but rather the contract will still need to be performed to the extent possible.

If you wish to consider an FM notice

Where your company is to consider an FM notification, you should:

  • urgently review your affected contracts and consider the FM clauses and obligations, ensuring you continue to perform the unaffected obligations where required;
  • where it is clear that a notice must be served, ensure that this is timely filed and do not delay;
  • consider the impact and consequence of the event and the extent it hinders performance;
  • acknowledge possible and reasonable endeavours that can be executed to overcome the event; and
  • notify the other party of your intentions to activate the FM clause.

If you are served with an FM notice

Where your company is served with an FM notification by a counterparty who claims they are unable to perform their obligations, you should:

  • examine the exact language of the FM clause in your contract and ensuring that the event (i.e. the COVID-19 pandemic and for example closure of borders) qualifies as an FM event;
  • confirm there is a causal link between the FM event and the assertion by the counterparty regarding their inability to perform obligations;
  • request updates and evidence from the party claiming the FM event; and
  • in extreme cases, consider renegotiating the relevant contract, so as to amend the legal position of each party in a commercially viable way. Note that this could be a challenging approach given that all parties would need to agree to the amendments.

Closing remarks

The COVID-19 outbreak is rapidly evolving day-by-day and it is likely to continue to do so for a protracted timeframe. Therefore the issues discussed in this briefing reflect what we consider to be a key legal issue for businesses and organisations in the Middle East, or those operating with businesses in this region, and worldwide. If any of these issues apply to you, please do not hesitate to reach out to us for a discussion on how we can help you resolve it, so we can help you get your business or organisation running smoothly again.

Additionally, David Lowe and Rachel Pennell of our UK offices, have written an extensive step-by-step guideline on exercising FM clauses in UK law-governed contracts. It is however prudent to mention that even if a contract is governed by UK law but is UAE-focussed, and a claim is filed to the UAE courts, UAE courts may assume jurisdiction and apply its local laws. Therefore, please be mindful of the possibility that UAE laws may supersede the choice of governing law in your specific contract.

Footnotes

[1] Taylor v Caldwell
[2] Denny, Mott & Dickinson v James Fraser
[3] Robinson v Davison
[4] The UAE Civil Code (Federal Law Number 5 of 1985), Art. 273
[5] DIFC Law Number 6 of 2004, Art. 82
[6] Dubai Court of Cassation, 213/2003 (195)


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