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COVID-19: Excusable Event From Contractual Obligations?

19/4/2020

The Courts are reluctant to apply the principle of ‘exceptional circumstances’ in events that generally can be predicted/ foreseen at the time of contracting.

The growing increase in international travel and trade has led to a parallel emergence of global threats such as disease and other health risks. The Public Health Emergencies of International Concern (PHEIC) have also raised questions regarding fulfillment of contractual obligations in domestic and international contracts. PHEIC have only been implemented five times in the last 15 years. More specifically, for SWINE FLU (2009); POLIO (2014); ZIKA (2016); EBOLA (2014 and 2019) and now for COVID-19 (Coronavirus).

Most countries are announcing, almost, daily new serious concerns and worries about the rapid widespread of the virus resulting in full or partial lockdowns which, undoubtedly, have caused severe disruptions to both inbound and outbound travel and trade. This has led to severe business and operational chaos on a global scale.

Now, the question is: which party should bear the burden of the risk of loss, especially, when officially characterized by WHO on 11 March 2020 as a pandemic? This is where ‘force majeure’ comes into play.

This article describes the impact of public health crisis on cross border transactions and contracts while examining the rights of the parties to invoke the ‘force majeure’ event.

What is ‘force majeure’?

‘force majeure’ is a French term and literally translates to mean a ‘superior or greater force’. This concept is derived from the ‘French’ civil law system (e.g. France, Germany, Italy, Greece, Spain, Egypt, UAE) and is not fully recognized under English common law system (e.g. UK, US, Hong Kong, Singapore, India).

Civil law clearly defines and regulates ‘force majeure’ events which may be invoked without any express provision in the contract. Under common law, no ‘force majeure’ event will be implied in the absence of an express written provision in the contract which must specifically list the events of ‘force majeure’ such as for example an earthquake, hurricane (or other natural disaster), acts of terrorism, labor strikes etc.

Under the civil law system jurisdictions, a ‘force majeure’ event constitutes an absolute excuse on the part of the debtor of all liability for non-performance of its obligations and without any compensation, to the extent that it even operates as a discharge from that obligation even without any express provision in the contract.

When is the event considered a ‘force majeure’ under the UAE Civil Code?

Article 273 (1) reads "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 cancelled."

Accordingly, an event of ‘force majeure’ automatically cancels a contract provided that the event was unforeseeable at the time of contracting, cannot be prevented and rendering the contract impossible to perform.

In this respect, the Dubai Court of Cassation has ruled “… if an event of force majeure has been established according to Article 273 (1), the obligation will be terminated in its entirety without any compensation for damage resulting from such non-performance, …”.  (49/2014, real estate cassation – Dubai Court).  

However, another equally important question would be raised: what if the performance becomes excessively onerous but not impossible?

This is where the principal of ‘exceptional circumstances’ comes into play.

What is the principal of the ‘exceptional circumstances’?

‘Exceptional circumstances’ is another principal under the civil law system which would allow for either the reduction of the obligation or the suspension of the performance of the contract during such ‘exceptional circumstances’.

In order to invoke the ‘exceptional circumstances’ event, it must be 1. of public nature and not only affecting the debtor or limited group of people, 2. could not have been foreseen at the time of contracting, 3. the debtor was unable to avoid the consequences by exercising reasonable efforts, and 4. even if not impossible, the performance of the contract becomes oppressive so as to threaten the debtor of grave loss.

Article 249 (1) of the UAE Civil Code reads “If exceptional circumstances of public nature, which could not have been foreseen, occur as a result of which the performance of the contractual obligation, even if not impossible, becomes oppressive for the debtor so as to threaten him with grave loss, it shall be permissible for the judge, under the circumstances and after weighing up the interests of each party, to reduce the oppressive obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void.”

In this respect, the Dubai Court of Cassation has ruled “… as for the exceptional circumstances of public nature, although it doesn’t make the performance impossible which would justify the automatic cancelation, it becomes burdensome for the debtor that would threaten of grave loss, and requires the interference of the judge to reduce such onerous obligation to reasonable limits, without justifying the cancelation or termination of the contract.” (374/2011, commercial cassation – Dubai Court).

However, in practice, the Courts are reluctant to apply the principle of ‘exceptional circumstances’ in events that generally can be predicted/ foreseen at the time of contracting (e.g. changes in prices, delays in obtaining permits and licenses, market fluctuation, etc.).

Conclusion

In view of the above, under the circumstances, where manufacturing plants are closing, conferences and events are postponed, travel and hotel bookings are canceled, it is essential to initially establish the following:

  1. Understand which legal system (civil/ common) is governing the contract;
  2. If the contract is governed by civil law - where there is no requirement for express ‘force majeure’ provision in the contract - it is important to distinguish between the principle of ‘force majeure’ which makes the performance of the contract impossible and allows for automatic termination with no compensation, and the principle of ‘exceptional circumstances’ which doesn’t make the performance impossible but oppressive and would allow for the revision of the contractual obligations of the parties; and  
  3. If the contract is governed by common law - where an express ‘force majeure’ provision clearly specifying/ listing the events of ‘force majeure’ is required - certainly, creative arguments and innovative interpretation of the event in question would be required.

I must say, part of the challenge lies with the fact that there is no universal standard definition for ‘force majeure’ events which they often vary across diverse types of industries. No doubt, it is expected that many disputes will arise in the coming weeks and months, as some parties would attempt to evade contractual obligations while others would seek performance or recourse.

For more information about this article, please contact Ashraf El Motei at a.motei@motei.com

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