As the world deals with the outbreak of the novel coronavirus and its implications on the economy, there is increased attention from the business and legal community on the application of force majeure on a range of commercial contracts and obligations.
While contracting parties may specify remedies and outcomes in the event of a force majeure, in the absence of any such provisions, the Article 273 of the United Arab Emirates Civil Code (Federal Law No. 5 of the Year 1985), shall be applied.
- 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of the obligation impossible, the corresponding obligation shall be extinguished, and the contract ipso facto(is) rescinded
- If the impossibility is partial, the consideration for the impossible part shall be extinguished. This shall also apply to the provisional impossibility in continuous contracts. In both instances, the creditor may rescind the contract provided the debtor has knowledge thereof.
Contracts of supply, between buyers and sellers or vendors and clients, are likely affected by the coronavirus, and contracting parties may be evaluating the potential applications of force majeure and its relief on their respective agreements.
How is the occurrence of force majeure determined?
The UAE courts will ultimately determine what constitutes force majeure, its impact on the ability of the contracting parties to perform their contractual obligations, and the determination of fair relief to any aggrieved parties. Therefore, parties in supply contracts must be able to establish how the coronavirus has rendered it impossible for them to either fulfil fully or partially their contractual obligations. Allowing any party to a contract to avoid liability shall be the sole discretion of the court as settled in a 2011 case at the Dubai Court of Cassation.
What should I do if I cannot fulfil my obligation under the contract, or where I do not receive the expected goods or services due to the impact of coronavirus (such as borders closing, movement or travel restrictions or event cancellations)?
The first step would be to review your existing contract and establish if there are any provisions for relief in the event of a force majeure. Should you find your contract is silent, the provisions of Article 273 of the UAE Civil Code may apply and the determination of the existence of force majeure, its impact on the parties and the corresponding relief shall be at the sole discretion of the courts.
What remedies are available to me where I have paid for goods or services and due to force majeure, I do not receive my goods or services?
In the absence of any contractual provisions, above Article 273 (1) and (2) will come into force and the parties will be restored to the position they were in before entering into the contract. In the event that this is not feasible (such as where part of the services or goods have been rendered), then the party which has suffered loss, as a result of being unable to unwind the contract, maybe awarded compensatory damages. Article 287 of the UAE Civil Code provides that if it is proven that a loss arose out of an extraneous cause in which a party played no part, such party will not be obliged to make good on the loss. So long as the Courts determine that force majeure has occurred, it shall prescribe the remedy it sees fit.
I am a small business, and the coronavirus situation is hugely impacting my business. Are there any relief packages I can access?
In anticipation of the economic impact of the coronavirus pandemic on Dubai’s business climate, the Government of Dubai has been proactive and unveiled a 1.5-billion-dirham economic stimulus package to support companies and the business sector. The stimulus package was launched under the directives of Vice President and Prime Minister of the UAE and Ruler of Dubai His Highness Sheikh Mohammed bin Rashid Al Maktoum and Crown Prince of Dubai and Chairman of The Executive Council of Dubai Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum to support citizens, residents and investors in these exceptional circumstances.
The stimulus package includes 15 initiatives to reduce the cost of doing business and simplify business procedures and includes initiatives related to the reduction in commercial fees, bank guarantees, electricity bills, payments for obtaining and renewing licenses, municipality fees and exemption from cancellation fees. Full details are provided by the Government of Dubai and this stimulus is expected to help cushion the impact of the coronavirus pandemic on the business sector of Dubai.
As the full extent of the pandemic unfolds, Al Suwaidi & Company shall be monitoring the developments in the UAE on the application and relief that may be provided by the courts with respect to force majeure provisions on supply contracts.
Should you have any inquiries related to force majeure or the impact of COVID19 on your business, please get in touch with Vida Grace on +971 4321 1000 or by email at vida@alsuwaidi.ae.