United Arab Emirates
United Arab Emirates
As COVID-19 restrictions cause widespread disruption to trade and industry, commercial contracts are being breached and businesses are asking where the liability lies.
A well-drafted contract should contain provisions for unforeseen circumstances together with details of how the parties should proceed if those circumstances arise. A force majeure clause is an example of this and applies when one party to a contract cannot fulfil its obligations because it is impossible, inadvisable, impractical or illegal to do so.
Events which will trigger the force majeure may be listed in the clause, which could include a reference to an epidemic or pandemic. Alternatively, there may be more general wording referring to something beyond the parties’ control which prevents the contract from being complied with.
The clause will also include details of how the parties should serve notification if they are relying on force majeure as well as the consequences, such as abandonment of the contract or delay. It is important to comply with these criteria precisely.
Force majeure applies in UAE law, even where it is not expressly referred to in a contract. For an event to be classed as a force majeure, the UAE Civil Code requires that it should be claimed in a bilateral agreement and make the performance of the contract impossible, not just difficult.
If force majeure is held to be applicable, then the obligation ceases and the contract is automatically cancelled. This can apply to part of the contract; if only part is impossible to carry out then that part is considered to be cancelled.
Other jurisdictions, including England, require a contract to specifically include a force majeure clause for it to be relied on. If such a clause is not written into the agreement, English courts will not imply one, so it is important to take into account other jurisdictions which may apply to any international agreement.
If force majeure cannot be relied upon, then it may still be possible to claim frustration of contract. Frustration occurs when a change in circumstances which is beyond the control of the parties makes it impossible to comply with the contract terms or has a substantial effect on the main purpose of the contract. This does not include cases where it is simply more difficult or more expensive to carry out contractual obligations.
It is important that any new contracts are carefully drafted to take into account possible future problems. This means including clear criteria for ending a contract as well as explicit instructions as to how this should be carried out, including notice periods and method of serving notice.
It is recommended that contracts should be prepared by legal professionals to ensure enforceability. In respect of COVID-19, courts will be looking particularly hard at contracts signed after the World Health Organisation declared the virus to be a threat on 31st December 2019. It is likely that any agreements made after this date will be assumed to have been signed with knowledge of the possible disruption.
Our UAE-based legal consultants offer independent legal advice to companies operating and generating income within the UAE. We have a breadth of experience and the specialist knowledge to help our clients plan and build successful businesses.
We also help businesses ensure that they are structured in compliance with the Economic Substance Regulations in the UAE introduced in 2019.
To speak to one of our business experts, please ring us on +971 (0) 56 678 5251 or +971 (0) 58 587 9663.