Material adverse change (MAC) clauses, force majeure, and the doctrine of frustration in contracts can relieve parties of contractual obligations because of the COVID-19 or coronavirus pandemic. But, there’s also the potential liability in breaching a contract due to non-performance when a contracting party mistakes a contract to be frustrated or thinks a MAC or force majeure clause has been applied.
Commercial contracts in UAE that are affected include:
- Supply agreements
- Distribution arrangements
- Transport agreements
- Manufacturing agreements
- Insurance contracts
- Tourism and travel agreements
- Other agreements that have cross border applications
If you’re concerned that your obligations in a contract can’t be met or satisfied due to the current situation in a global scale, then it’s best for you to seek the avenues that are available for you. It's possible a contract is frustrated. The MAC clause or force majeure may also be included in a commercial contract and will excuse a party from any of its obligations.
Doctrine of Frustration
A commercial contract in AE is discharged due to frustration when the law recognizes an unforeseen circumstance makes the contract’s performance impossible and neither of the contracting parties is at fault. Frustration arises not because of the contents of the written contract but due to the operation of law. It will depend on a much closer analysis of a contract, which is why it is always recommended to have a corporate lawyer in UAE check a relevant contract.
Take note: frustration is more difficult to provide as an event must have very extreme consequences that resulted in radical changes. When performance has become expensive or more difficult, obligations of the parties are not discharged due to frustration. When the COVID-19 pandemic causes increased costs or delays to either the delivery or receiving of goods, then a contract isn’t frustrated as it’s merely harder instead of impossible to perform. Whether a contract is considered to be frustrated will depend on specific circumstances of parties, the collective ability to contract parties to perform and the nature of the agreement.
Grounds that may support claims of frustration due to the COVID-19 pandemic can include:
- Unavailability of essential persons to an agreement
- The inability in fulfilling essential time conditions
- Indefinite delay of contractual performance
- The method to perform contractual obligations is impossible
- Failure in supplying or getting from a specific source
Bear in mind frustration doctrine will terminate a written contract automatically. This will only prove to be advantageous for contracting parties to a short-term contract rather than a long-term one.
Material Adverse Change
Some contracts contain material adverse change or MAC clauses that relieve a party of its contractual obligations. Contracts with MAC clauses often involve funding arrangements, or mergers and acquisitions. For instance, when it comes to financing, lenders may no longer be obligated in lending if the borrower is suffering a MAC. This will depend on the events that are defined constituting a MAC clause.
Force Majeure Clause
Where performing contractual obligations becomes a problem due to the COVID-19n pandemic, the contract would be reviewed in case force majeure provisions exist. Force majeure in contracts provides an excuse to parties for not performing their contractual obligations should a defined event happens e.g. strikes, pandemics, epidemics, civil commotions, war, or act of God. A force majeure can discharge parties or relieve them of their contractual obligations or liability when an event happens that’s out of the control of the parties involved.
Keys to a force majeure’s operations are:
- Definitions – the specific events which activate the clause of force majeure
- Impact on obligations – how the obligations of contracting parties are affected due to a force majeure event e.g. a contract is terminated or there’s an obligation in taking steps to mitigate possible disputes when a specific event arises
- Requirements in machinery – steps that are specified e.g. notice that has to be provided
Force majeure clauses can vary from one agreement to another. The wording of a specific contractual provision is going to determine whether or not a coronavirus pandemic is an event that’s going to enliven the force majeure clause. In general, the party that seeks to rely on the force majeure clause has the burden or responsibility in providing the clause is triggered.
Clauses that specifically extend to epidemics, pandemics, and work stoppages activate the current situation we are facing which is the outbreak of COVID-19.
Provisions that only refer to the words, force majeure, and there’s no defining effects or scope for force majeure can be void due to uncertainty. Common law jurisdictions like the UAE don’t recognize force majeure to be a legal, standalone doctrine.
When it comes to doubts or concerns regarding contractual obligations, it is always best to seek the legal advice of a seasoned corporate lawyer in UAE.
To know more about breaches of contracts in UAE, call us here in HHS Lawyers today!