The Consideration of Coronavirus as a Force Majeure Event
As it continues to spread globally, coronavirus (COVID-19) has effectively ensnared the world’s attention and concern by bringing it to a standstill. As of 28th March 2020, the World Health Organization has confirmed 512,701 cases of the virus worldwide and a total of 23,495 deaths. The virus has been detected in a total of 202 countries. As a result of the unprecedented spread and impact of COVID-19, governments and other public bodies have imposed a plethora of containment restrictions and suspensions to movement, travel and supply of goods and services. This has been causative of a slow-down in business operations, and a subsequent increase in focus on the contractual obligations of businesses and their likely inability to perform these obligations.
A force majeure clause operates to excuse a party’s non-performance of its contractual obligations on account of extraordinary, unforeseeable circumstances. Essentially, Force Majeure is an event that is beyond the control and scope of all parties to a contract. Natural disasters, the likes of storms or hurricanes, major political events like war, and grave public health crises like a pandemic, all fall under the purview of Force Majeure.
Force Majeure is a civil law concept – one that translates to “greater force.” Specific force majeure clauses in commercial contracts determine how the risk is allocated, and what the remedies are in the event such a calamity occurs.
The concept of force majeure has attained universal recognition as a principle of international law, and domestically varies in its application. If the contract happens to be governed by common law, e.g. English law, the parties must come within the express wording of the clause to be able to rely on the force majeure provision. It is vital to note that, in the absence of an explicit force majeure provision, the courts would not imply one into the contract by default; in this event, the only recourse that would stay available to the parties would be the consideration of reliance on the narrow doctrine of frustration. Frustration, an English contract law doctrine, is meant to be implemented to set aside contracts where an unforeseen event "either renders contractual obligations impossible or radically changes the party's principal purpose for entering into the contract."
On the other hand, in countries like China, force majeure happens to be an implied term in any contract; accordingly, the Chinese government has been issuing Force Majeure certificates to companies that have been rendered incapable of fulfilling their contractual obligations in a diligent effort to indemnify them from breach of contract claims.
Similarly, in the UAE, the doctrine of Force Majeure is recognized at law, and parties would be able to depend upon the same even if the contract is silent concerning the clause. It is a mandatory rule of law that de jure applies even without explicit mention in a contract.
Force Majeure in the UAE
The Civil Transactions Law (Federal Law Number 5 of 1985), the "UAE Civil Code" is what deals with the doctrine of force majeure in the UAE. Article 273 of the UAE Civil Code states that in contracts binding on both parties, if force majeure supervenes which makes the performance of the contractual obligations impossible, then the corresponding obligations shall be cancelled, and the contract terminated. Furthermore, Article 273 further specifies that, if the impossibility is only partial, only that part of the contract which is impossible shall be void; the same is to apply in the case of a temporary inability in continuing contracts. In both cases, the Civil Code permits the obligor to cancel the contract provided that the obligee has been made aware of the same.
While the UAE Civil Code is not possessive of a comprehensive definition of what constitutes a “force majeure” event, the consensus is that the umbrella is limited to “unforeseeable events". On account of its unprecedented nature, in the context of its geographical setting in the United Arab Emirates, it remains to be seen if the COVID-19 outbreak would be considered a “force majeure event”; it is likely to be dependent on the specific circumstances of each case. However, there is definite exploratory scope in the statement that the outbreak could be considered a force majeure event.
As per the UAE Civil Code, the law permits the total and partial exoneration from contractual obligations depending on the circumstances. Furthermore, exceptional circumstances empower a judge or an arbitrator to modify the contractual obligations to a “reasonable level” as per Article 249 of the UAE Civil Code.
As per the aforementioned article, if exceptional, unforeseeable circumstances of a public nature occur, and cause the performance of the contractual obligation to become so harshly overbearing to the obligor to threaten him with grave loss, the judge may reduce the scope of the obligations “to a reasonable level” in accordance with the circumstances, upon weighing the interests of each party.
The distinction that deserves highlighting is between the effect of the two Articles mentioned above – Article 273 and Article 249. On the one hand, the application of Article 273 results in the cancellation of the obligation, while Article 249 allows for the contractual obligations to be subjectively modified.
With regard to muqawala contracts (a popular contract in the construction domain, to make a thing or perform a task), Article 893 of the Civil Code specifies that if any cause arises, that curtails performance of the obligations of a contract, any of the parties may require that the contract be terminated. If a contractor is rendered incapable of satisfying a muqawala contract on account of an unforeseeable cause (in which they played no part), the contractor will be entitled to the value of the completed work and the incurred expenses; this entitlement should match the total value that its counterparty derived from the incomplete performance.
It is important to note that the Civil Code’s Articles 273(1) and 273(2) does not mandate that notice be given to effect the cancellation of a contract. That being said, a party relying on the Civil Code in force majeure circumstances would be well-advised to provide notice of cancellation to its counterparty prudently; such a far-sighted act could evade any allegation of breach of the general obligation of good faith under the Article 246 of the Civil Code.
The UAE Civil Code, under Article 287 also provides that if a person can prove that a loss arose on account of an external cause in which they played no part, including but not limited to natural disasters, accidents, force majeure, and the act of a third party, they shall not be obliged to make good the loss.
Force Majeure in the UAE: Implementation
As mentioned earlier, while the Civil Code references force majeure and ascertains that there exist exceptional circumstances which form the basis for relief from the performance of contractual obligations, it fails to provide a clear-cut definition of force majeure, and what it constitutes. Therefore, an analysis of whether coronavirus may constitute a force majeure event should make the contract in question the starting point; it should be scoured for any definitions that could account for a pandemic scenario. If the contract is silent with regard to the same, the issue falls into the jurisdiction of the court or arbitral tribunal; they become responsible for the determination of whether the effects of a pandemic constitute force majeure or exceptional circumstances in the context of the Civil Code.
To the extent that the effects of coronavirus can be likened to be normal commercial risks that are oft caused by other, more commonplace circumstances, a finding of force majeure might be unlikely. Conversely, if the ramifications of the pandemic are of a distinct, particularly severe nature, the basis of force majeure may be more readily found. For the affected party to trigger the force majeure clause, the party has to satisfy all procedural requirements to display that COVID-19 was the sole cause of their inability to perform, that they could not reasonably mitigate its consequences and their non-performance was due to circumstances beyond their control
At this stage, the critical issue that is being faced in the assessment of the applicability of this clause is that the future impact of COVID-19 is shrouded in uncertainty. Furthermore, it is unclear how the courts in the UAE and the arbitrators would deal with force majeure and exceptional issues raised by COVID-19. Much hinges on whether the severity of the outbreak, and whether the hurdles to business suffered, as a result, go beyond those experienced in new situations. With the COVID-19 pandemic continuously developing and magnifying in dimension, businesses could proactively protect themselves by obtaining business interruption insurance, or any other insurance policies.
The Public Health Emergencies of International Concern (PHEIC) recently raised questions regarding the fulfilment of contractual obligations in domestic and international contracts. In the last 15 years, PHEIC has been implemented a total of five times; for the SWINE FLU (2009); POLIO (2014); ZIKA (2016); EBOLA (2014 and 2019) and now for COVID-19 (Coronavirus).
Countries are announcing grave concerns about the rapid widespread of this insidious virus on the daily, and full or partial lockdowns have been implemented almost universally. Not only have these caused severe disruptions to travel and trade, but also operational chaos on a global scale.
Especially since the WHO officially characterized COVID-19 as a pandemic on the 11th of March 2020, the question of which party should bear the burden of the risk of loss has become more germane than ever. To all, “force majeure” has been the answer on the tip of the tongue. Given that there is no standard universal definition for force majeure events, COVID-19 will inevitably transform the force majeure landscape in evaluating its applicability to this situation.
The initial point for contracts governed by the UAE law, and any contract for that matter, would be to consider the force majeure provision in the contract meticulously. In the absence of the same, the provisions of the Civil Code mentioned above could apply to regulate the allocation of risk and the consequences of a force majeure event.