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COVID-19: A valid reason to avoid contractual obligations?

On 11th of March 2020, World Health Organization (WHO) declared COVID-19 or corona virus outbreak as a pandemic. A few days later, business and travel restrictions were imposed by governments across the globe. 

As the virus spread rapidly, disrupting supply chains and markets all around the world, it has left businesses at risk of having the inability to perform contractual obligations. Starting January 2020, more than 5,000 force majeure certificates were issued in China to businesses that have failed in complying with contract obligations to international companies due to the pandemic. 

In this article, we’ll try to assess whether COVID-19 is a valid reason in UAE to avoid contractual obligations, as well as actions companies are to perform in order to resolve disputes related to inability to perform obligations due to the virus. 

Force Majeure clauses in Contracts

Most commercial agreements offer parties an excuse from contractual obligations when serious unforeseen circumstances occur. The excuse is in the clause, force majeure, in which a contracting party is discharged when an event that is beyond its control makes the performance of obligations impossible. Although force majeure classes can differ when it comes to terms, there’s a common thread that runs through them and that’s the occurrence of an event that’s beyond human foresight.

In UAE common law jurisdictions, force majeure can be invoked if provided for by an agreement. Its effect and application both can be determined by contractual interpretation. 

A party that is seeking to utilize the force majeure clause in avoiding contractual obligations in UAE first need to establish the intervening event is within the definition of the agreement for force majeure. Most clauses on force majeure provides a list of triggering events. “Disease,” “epidemic,” and “pandemic” are terms that apply to corona virus. Where the outbreak of COVID-19 isn’t captured by an analogous term, the pandemic may still be covered by a contract’s open-ended language.

For instance, in case the government responds to corona virus pandemic by closing its borders for trading and declaring state of emergency, such actions can fall under force majeure which includes administrative or government action ordering or preventing performance. 

There are even broader catch-all provisions in contracts like “other events that are beyond contractual parties’ reasonable skill and control,” which can certainly include coronavirus outbreak. 

However, the assessments are to be made on a case-by-case basis. It will entirely depend on a contract’s language and factual circumstances. As such, it is advised that you talk to commercial lawyers in UAE for a more in-depth look at your specific situation and the contract in question. 

Take note: an event which is considered as force majeure won’t provide contractual parties the freedom or excuse in performing contractual obligations. Party that invokes force majeure should establish the event has sufficiently made an impact on its performance. A clause for force majeure sets a degree of impact which can range from “prevented” to “delayed” or “hindered.” if the impact isn’t specified in the contract, courts can be called upon and they can apply a high threshold, excusing only performance where it’s rendered impossible. In addition, the fact that a pandemic event made performance unprofitable or expensive is insufficient in triggering the clause of force majeure.

Mitigating Damages

In any situation in which losses are to be incurred, the parties to an agreement have the duty in mitigating the damages. Being a last resort, force majeure won’t apply if the parties haven’t exhausted all options that are available in performing obligations laid in the contract. If a party invokes the force majeure clause, it has to show that there isn’t any reasonable alternative which could have mitigated an event’s effect and impact on the party. The duty in mitigating damages include duty in minimizing or avoiding not just losses but also the occurrence of the catastrophic event.

Similarly, contractual parties that stand to lose benefits of an agreement because of the failure of the other side in performing obligations are required in mitigating damages as well. Breach of contract damages may only be recoverable when the claimant took reasonable steps in preventing further losses. 

There are other possible implications of the coronavirus pandemic to contract which should be carefully considered by parties. Many contracts contain clauses of material adverse change or material adverse event that can be triggered with events such as the outbreak, depending on the contract’s language and clause’s language. Parties can renegotiate terms as well as raise prices from the increasing costs, largely depending on the specific situation. 

Commercial Lawyers in UAE

Businesses in UAE are to review contracts and agreements in detail in order to assess unique ways the pandemic has affected their contractual relationships. If you want to seek the assistance of commercial lawyers in UAE in carrying out contractual obligations, Call HHS Lawyers today! 

Hazim Darwish

Hazim Darwish, is a Senior Partner of HHS Lawyers in UAE. Practicing law for almost a decade, he has in-depth knowledge on UAE legislation with particular expertise on legal drafting, contract drafting, labor disputes, family law, and regulatory compliance for business organizations. Hazim Darwish also provides counsel on legal rights and obligations in the UAE to clients, including individuals and businesses subject to investigation or prosecution under Criminal Law by major regulators.