Compensation in a Force Majeure Event
Before considering any remedies, contractors might have steps, they may take to mitigate costs, it is necessary to first understand the definition of force majeure as defined by UAE jurisprudence and the different elements attached to it.
When it comes to force majeure, there is a major contrast between civil law and common law customs. While the doctrine of rebus sic stantibus is specifically incorporated into the UAE Civil Transactions Code (Civil Code), there is no general principle of force majeure in common law systems, especially in English law.
A tripod is used in UAE law to define contractual or tortious liability. The three elements needed to determine any sort of liability are the harmful act, the injury, and causation. When an external act not attributable to the obligor is thought to have caused the harm incurred by another, the causal relationship is considered to be non-existent, and the obligor is released from any obligation to pay for the damage.
Force majeure is a shield used by the obligor to disprove any causal connection between a negative incident triggered by the obligor and the damages incurred. Articles 273 and 287 of the Civil Code describe force majeure in a wider context. Other clauses of the Civil Code that are explicitly or indirectly relevant to force majeure include:
Articles of civil code
Given that tortious liability often occurs during the execution of a construction contract understanding the application of force majeure in tort is equally relevant. Apart from slight differences that do not negate the effect of such protection on the execution of contractual obligations, the criterion of force majeure is the same in both provisions.
Since force majeure legal requirements are not obligatory or in the public interest, the parties' agreement will be considered before agreeing on any force majeure entitlement. In other terms, in the event of force majeure, the contract remains the primary source of obligations between the parties as to what the parties intended. The rule only comes into play when the contract is silent or vague.
In most construction contracts, the parties define the events that they consider to be acts of force majeure, as well as the effects that these events have on the contract's results. On this occasion, the parties may intend to use a more restrictive or broader definition than the courts normally use. Despite this, the contractual terms remain intact, and the parties' settlements are usually upheld by the courts.
As a result, courts may consider the occurrence of the event dependent on the substance of any contractual clause when applying force majeure. The following are the conditions for force majeure as specified in Articles 273 and 287, as well as by UAE jurisprudence:
The concept of "force majeure"
As previously stated, the unavoidability of the case is inadequate to constitute force majeure under contracts. It should be unpredictable as well. However, in tort, the avoidance of an event should be considered force majeure, absolving the obligor of any responsibility, provided that the obligor has taken all necessary precautions to prevent the event or minimize its effect.
Clause 19, FIDIC, which is commonly used by construction practitioners in the UAE, mirrors the same legislative requirements. Force majeure, according to Clause 19.1, is described as an extraordinary occurrence or situation that meets the following four criteria:
- Uncontrollable by a political party.
- From which such party could not fairly have secured itself prior to entering into the contract.
- Which such group could not fairly have prevented or resolved until it emerged.
- Is not attributable in any way to the other group.
Clause 19.1 includes a non-exhaustive list of "exceptional incidents" or situations that may qualify as force majeure if they meet the requirements outlined above. Interestingly, unlike COVID-19, the list makes no requirement that force majeure be of a public nature and have a widespread and indiscriminate effect. Clause 19.1 applies a cumulative exam that is in accordance with the Civil Code. The term "force majeure" has been replaced with "exceptional events" in the 2017 version of the FIDIC Red Book, but the criterion for force majeure remains the same as in the 1999 edition. The latest version of the term, however, does not include the qualifier "exceptional." It is, therefore, up to the parties to amend Clause 19 (Clause 18 of the second edition) in a way that is fair in the circumstances, and courts generally uphold the parties' agreement.
Conversely, even though a contract does not explicitly state that an incident is a case of force majeure, the courts still examine if the event is, in the court's view, a case of force majeure. This is how the UAE's inquisitorial legal system operates.
Distinguishing force majeure from unforeseen circumstances
Lessons learned from the 2008 financial crisis show that the defence of force majeure is only valid when the performance becomes difficult, not just onerous. The Abu Dhabi Court of Cassation has thus stated that "both inflation and recession were natural risks of the industry" and that "unforeseen circumstances" would be the only protection possible against the performance of an otherwise onerous duty. This helps the courts to change the scope of the debtor's performance obligation in accordance with Article 249's provisions.
Article 249 states that "in the case of extraordinary circumstances that are public and unforeseeable, which have resulted in making the execution of the contracted obligation, where it has not become impossible, has become onerous to the debtor in such a way as to threaten her with heavy loss, the judge can, if justice so requires, and according to circumstances and by balancing the interests, order the debtor to execute the contracted obligation." Any arrangement that violates this is null and void.
In certain cases, unforeseeable situations, which are analogous to the French definition of improvision, vary from force majeure. The UAE Ministry of Justice's Commentary on Article 249 separates the two principles in two main areas:
- The event's impact: Though force majeure prevents the contract from being fulfilled, unexpected circumstances make it burdensome for the obligor. In other words, if the obligor is compelled to specifically fulfil the exorbitant obligations, unexpected circumstances threaten the obligor with exorbitant failure.
- Case Remedies: The Civil Code has an "objective" qualifier (if justice so requires) that must be met in the eyes of the judge before the courts can interfere in reducing a duty whose performance has become onerous. When it comes to declaring a remedy dependent on force majeure, there is no such objective qualifier. As previously mentioned, courts will recognize the contractor's circumstances and willingness to bear the effects of force majeure at the time of contract signing when evaluating the foreseeability test.
It's a common blunder to mix up force majeure and unexpected events. When it comes to the pandemic COVID-19 and its effect on various projects across the UAE, there is likely to be some uncertainty. Unlike unforeseen situations, which are subject to overriding mandatory legislation, force majeure is not, and contracting parties may opt-out of the law's requirements.
In the absence of UAE government legislation treating the pandemic as a force majeure case, much would hinge on the impact of COVID-19 on each individual contract and whether the parties anticipated the implications when they signed the contract. In this regard, courts will assess force majeure based on the facts of each case, rather than when "justice so requires." This is particularly true given that the effect of COVID-19 on trade and business varies from country to country, at least as of the writing of this report. Indeed, it could be argued that the UAE's effect on companies has been less severe than in other European or Asian countries.
Depending on whether the contractor is local or foreign or whether the contractor is reliant on an international supply chain to complete the project, the courts can take a different approach. They can also refuse to maintain a force majeure defence if the majority of the obligations, such as testing and commissioning, have been met, as well as the (near) expiration of the defects liability period.
In this case, it is up to the courts to decide if the elements of force majeure are met before the debtor is released from its obligations. This brings us to the legal recourse available in the event of force majeure in the UAE.
What if my contract doesn't have a force majeure clause?
Even if the contract does not contain a force majeure clause, you might be entitled to additional relief as a result of COVID-19's effect.
Changes to the law
Change-of-law provisions are used in certain contracts to protect the parties if a change in the law makes success unlawful, impossible, or more difficult. Relief could be possible under a change of law clause, as many governments and other jurisdictions have implemented emergency legislation in response to COVID-19.
If the contract does not provide for force majeure relief, the common law doctrine of annoyance can apply. A contract may be frustrated if a subsequent incident renders performance impossible, immoral, or significantly different from what was agreed upon when the contract was signed. Frustration has the effect of immediately terminating the contract (i.e., without either party taking any further action), which can be a very harsh outcome.
Some contracts, such as long-term product selling and purchase agreements, allow for price renegotiation at either fixed milestone during the contract's existence or when a significant shift in the market occurs, causing the contract price to become "out of step" with the market.
clauses can give the parties the right to end a contract under some situations or at their discretion.
COVID-19 has had an unprecedented effect on human lives and foreign trade. It has brought whole cities to a halt and could have long-term consequences on how businesses are conducted. Although the coronavirus may be argued to be an unforeseeable and inevitable phenomenon, whether or not it qualifies as force majeure will be determined by the facts of each argument, namely:
- If the parties have already settled to a force majeure clause.
- Whether the contractor may prevent or minimize the consequences of force majeure. If the effect is solely economic, it will simply make fulfilling the duty more difficult.
Finally, parties may not be interested in terminating their contract but instead pursue other relief options offered in the contract.