The COVID-19 pandemic and the concomitant drop in oil prices, have significantly affected the global economy. The United Arab Emirates, whose phenomenal growth over the past 20 years has been driven by the development of a tourism destination, a financial hub and endless construction projects and was, in part, funded by oil revenues is obviously no exception.
In the time of the COVID-19, many seek relief from their contractual obligations. This has resulted in an unprecedented wave of terminations, contractual renegotiations, restructurings and disputes. In this article, we will briefly discuss how UAE law may provide potential solutions to contractual parties suffering from the effects of the global pandemic and subsequent economic crisis.
Freedom of Contract
Under UAE law, parties are generally free to agree the contractual terms that will govern their relationship as long as their contractual bargain does not contradict public policy or a mandatory provision of UAE law. Like those in many other civil law jurisdictions, the UAE Civil Code (Federal UAE Law No. 5 of 1985 concerning the issuance of the civil transactions law) endorses the classic dualism developed by French law between the doctrines of force majeure and imprévision.
Broadly speaking, the UAE Civil Code provides that the "basic principle in contracts is the consent of the contracting parties and that which they have undertaken to do in the contract" (Article 257). The UAE Civil Code also provides canons of contracts' interpretation. If the wording of a contract is clear, the interpretation of its terms shall be in accordance with its plain and simple meaning (UAE Civil Code Article 265(1)). Alternatively, an enquiry of the parties' mutual intention beyond the literal meaning of the contract's word takes place if there is scope for an interpretative construction of the contract (UAE Civil Code Article 265(2)). Accordingly, any discussion regarding the consequences of the COVID-19 pandemic in a contractual relationship should start with the terms of the applicable contract.
Parties may agree to force majeure clauses, which excuse a party's non-performance of its obligation when exceptional events or circumstances (also called "acts of God") prevent a party from fulfilling its contractual obligations. A party affected by such an "act of God" will typically be relieved from performing the obligation affected for the duration and to the extent affected.
Force majeure clauses are often found in long-term contractual relationships, such as those governing construction and infrastructure projects. For example, "Force Majeure" is defined in the FIDIC Red Book 1999 (Clause 19.1) to be an exceptional event or circumstance which:
- is beyond a party's control;
- a party could not reasonably have provided against before entering into the contract;
- having arisen, a party could not reasonably have avoided or overcome; and
- is not substantially attributable to the other party.
Similar language is used in the FIDIC Red Book 2017 although the term "Exceptional Event" is used instead of "Force Majeure". Importantly, simply establishing that a force majeure event has occurred will not, in itself, entitle a party to relief under the FIDIC regime. A claiming party will need to demonstrate that it has been prevented from performance – an undefined and, therefore, nebulous concept under the FIDIC regime. In addition, the FIDIC regime contains strict notice requirements which must be complied with in order to claim relief.
Further, the FIDIC Red Book 1999 states that a contractor shall be entitled to an extension of time if completion is delayed by "[u]nforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions". Although the term "epidemic" is not defined, it is likely that COVID-19 will fall within this cause. Similar language is used in the FIDIC Red Book 2017.
Doctrine of Force Majeure under UAE Law
Even without a force majeure clause, the concept of force majeure is recognized in the UAE Civil Code and judicially well-understood.
Articles 273 and 287 of the UAE Civil Code are the codified versions of force majeure under UAE law:
(1) 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.
(2) In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware.
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.
Imprévision under UAE law
Article 249 of the UAE Civil Code provides a further method for contractual parties to be protected from an "exceptional circumstance of a public nature". This is the doctrine of changed circumstances (imprévision). Although there is no clear definition for situations or circumstances that would fall under the classification of "exceptional circumstances of a public nature which could not have been foreseen", UAE judges have discretion after considering the facts of the case to reduce an oppressive obligation and minimize the magnitude of loss in reliance on the doctrine of imprévision.
DIFC and ADGM law
DIFC Contract Law effectively applies force majeure into DIFC law-governed contracts. Article 82(1) provides:
Except with respect to a mere obligation to pay, non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.
The burden is on the party seeking to rely on the impact of COVID-19 to prove that performance was not possible. Article 82(2) refers to the length of time that performance may be excused. Moreover, article 83(3) states that the party affected by the force majeure event must notify the other party of non-performance.
The ADGM free zone follows the English common law. The English courts traditionally apply force majeure clauses restrictively. It is therefore preferable for parties to spell out what they mean when they refer to force majeure in their contracts. This is usually the case and so parties can rely on such provisions to obtain relief from their contractual obligations. It remains to be seen whether the English Courts (and the ADGM Courts) will adopt a more flexible and generous approach to issues involving COVID-19.
Parties facing economic difficulties resulting from the COVID-19 pandemic will continue to attempt to renegotiate and/or terminate their existing contractual obligations. The contractual and statutory provisions relating to force majeure will give them a good starting point under UAE law. It is fundamental to understand these concepts under UAE law and establish a sound strategy for renegotiation, termination or dispute resolution. If you wish to further discuss your options in renegotiating or terminating existing contracts, or need assistance in avoiding or resolving a dispute in these difficult times, please feel free to reach out to the Mayer Brown team in Dubai.