By Danielle O'Brien, Junior Associate
Due to the unprecedented repercussions caused by the Covid-19 pandemic, many businesses seek reprieve from their contractual obligations. The classic boilerplate clause referring to force majeure, is one that many depend on now. This article explores the applicability and enforceability of such a clause within the UAE.
A force majeure clause is a contractual provision excusing a party’s breach due to an unforeseeable, extraordinary event wholly beyond the control of either, or both, of the contracting parties. It is a distinguished concept that is recognised in UAE contractual and tort law.
While literature on the applicability and effect of force majeure clauses on contractual obligations in light of the outbreak of Covid-19 is currently extremely topical, it can only be theoretical at this stage, as cases addressing this issue are only now being filed with courts and arbitral tribunals.
Therefore, in order to analyse whether Covid-19 classifies as a force majeure in the UAE, one can only turn to the applicable legislation and industry practices.
Interpretation
Before delving into force majeure clauses, one must first understand the canons of contractual interpretation. Articles 265 and 266 of the Federal Law 5 of 1985 (the “Civil Code”) state the following:
“Article 265
1-When the wording of a contract is clear, it cannot be deviated from in order to ascertain by means of interpretation the intention of the contracting parties.
2- Where the contract has to be construed, it is necessary to ascertain the common intention of the contracting parties and to go beyond the literal meaning of the words, taking into account the nature of the transaction as well as that loyalty and confidence which should exist between the parties in accordance with commercial usage.
Article 266
1-In cases of doubt, the construction shall be in favour of the debtor.
2-The construction, however, of obscure expressions in adhesion contracts must not be detrimental to the adhering party.”
As such, if a contractual clause is clear, its interpretation is to follow the literal meaning. Alternatively, if there is ambiguity as to the contractual clause, a court may look to the parties’ mutual intention and conduct to decipher the true meaning of the clause.
Accordingly, parties should turn to their contract before commencing any discussion pertaining to the consequences of the COVID-19 pandemic.
Force Majeure
The Civil Code does not provide a definition of force majeure, however, the UAE Federal Courts have attempted to shed some light on the definition:
“[F]or force majeure to be invoked, the act should be unexpected and impossible to see coming, e.g. a war, earthquake, fire, drowning, theft, floods, droughts, storms and that sort of thing. If the force majeure was the only reason the damage occurred then the causational link disappears and there is no responsibility.”
UAE Federal Court 730/2015
Accordingly, courts will consider whether (i) the parties could have foreseen the event when negotiating, and entering into, the contract, (ii) whether the event was truly out of the parties’ control, and (iii) whether the non-performance was caused by the event.
Although the Civil Code does not provide for the definition of the term, the concept of force majeure is incorporated in Article 273 of the Civil Code, which states:
“1-In bilateral contracts, if a force majeure arises that makes the performance of the obligation impossible, the corresponding obligation shall, be extinguished and the contract ipso facto rescinded.
2-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.” (emphasis added)
2-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.” (emphasis added)
Accordingly, to the extent that a party’s performance is rendered impossible (as opposed to more difficult or more expensive), the obligation shall be rescinded.
Force Majeure in the Construction Industry
Construction contracts are frequently based off of standardised clauses stemming from the Fédération Internationale Des Ingénieurs – Conseils (“FIDIC”).
Clause 19 of the 1999 FIDIC Red, Yellow and Silver Books (which is used for contracts for building and engineering works designed by the Employer) defines force majeure as an exceptional event or circumstance:
a) which is beyond a Party’s control;
b) which such Party could not have reasonably provided against before entering into the Contract;
c) which, having arisen, such Party could not reasonably have avoided or overcome; and
d) which is not substantially attributable to the other Party.
Sub-clause 19.1 provides a non-exhaustive of list events which might amount to a force majeure. A global pandemic is, however, not included in this list.
Raising Force Majeure as a Defence
When raising force majeure as a defence to non-performance, a party must first ensure compliance with any “triggers” in the contractual clause.
For example, any explicit reference to an epidemic, quarantines, pandemic, or even governmental intervention may amount to an applicable trigger. It is worth noting that while a contract may not explicitly refer to a pandemic, the governmental actions surrounding the Covid-19 pandemic may be the underlying cause that rendered performance impossible.
In the event that there is no explicit reference amounting to a trigger, one must, objectively, analyse whether Covid-19 amounts to a force majeure, using the definition provided above:
1. Was Covid-19 (and surrounding governmental regulations) unforeseen when negotiating, and entering into, the contract?
2. Was Covid-19 (and surrounding governmental regulations) truly out of the parties’ control?
3. Was it impossible to perform due to Covid-19 (and surrounding governmental regulations)?
Furthermore, certain contractual clauses will require the non-performing party to timely serve notice on the counterparty. Under standard FIDIC forms, a contractor affected by a force majeure must give notice to the employer of the impossibility within 14 days upon becoming aware of the relevant force majeure. Additionally, the 2017 FIDIC regulations add an additional condition, requiring the non-performing party to give further notices every 28 days if the force majeure has a continuing effect. When performance is impossible for lengthy periods (84 days or more) either party is permitted to terminate the contract entirely. Strict compliance with these provisions is of utmost importance.
Accordingly, when deciphering whether non-performance can be excused due to force majeure, the courts are likely to ask the following questions:
- Does the contract contain a clear clause excusing performance due to a pandemic and/or increased governmental restrictions?
- Is performance impossible, or merely more burdensome?
- Did the defaulting party inform the other party of the impossibility within any contractually stipulated period?
- Could the parties have foreseen the pandemic/restrictions when negotiating the contract?
- Is there any way in which the impact of the pandemic/restrictions could be mitigated?
- Is there any clause accepting liability due to a force majeure?
Limiting Liability
In the event that Covid-19 is not strictly classified as force majeure, the Civil Code allows for some limitation of liability due to non-performance.
“Article 249
1-If public exceptional unpredictable circumstances shall arise, and their happening has resulted in making the execution of the contracted obligation, if not impossible, has become burdensome to the debtor in such a manner as to threatening him with heavy loss, the judge may, according to circumstances and by comparing the interests of both parties, reduce the burdensome obligation to reasonable limits, if justice so requires. Any agreement to the contrary is void.
[…]
Article 287
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.
[…]
Article 472
A right is extinguished if the debtor establishes that its performance has become impossible by reason of a cause beyond his control.”
Accordingly, if Covid-19 has made performance unduly burdensome or expensive, a Court may, reasonably, limit the obligation. Practically speaking, this may result in the Judge granting extensions of time and/or prolongation costs to a defaulting party.
Conclusion
Covid-19 and/or the surrounding governmental regulations is likely to satisfy the “unforeseeable event” condition of a force majeure, as long as the parties have entered into the contract with sufficient time before the news of the pandemic (and its ramifications) became well-known.
However, in order to successfully raise force majeure as a defence, the defaulting party must show that performance was impossible. At least within the UAE, this proves difficult as construction was one of the few sectors that was never completely shut down, even at the peak of the pandemic. However, a contractor may be able to limit its liability by leaning on Articles 249 and 472 of the Civil Code, showing that the governmental restrictions were an exceptional unpredictable circumstance which rendered performance unduly burdensome and/or significantly more expensive.
Finally, the Civil Code places an obligation on contracting parties to act in good faith. Therefore, while there is no obligation on a party to mitigate its damages, this concept may be encapsulated in the obligation to act in good faith.