Kennedys’ legal advice on Force Majeure amid COVID-19
In the wake of COVID-19, the law firm explores what impact the pandemic will have on UAE projects
Force Majeure is a notion that is common to most legal systems and applies as a defence available to a party that can claim the impossibility to perform a duty or a lawful obligation.
The defence of Force Majeure is recognised under UAE law in both contract and tort. The question of whether the outbreak of COVID-19 amounts to Force Majeure is a matter of fact that ought to be analysed in the light of the obligation/duty in question and the circumstances of the obligor.
The difficulty arises in that Force Majeure is not defined in the law and was left for the courts to develop its criteria and conditions of its application.
The absence of the doctrine of stare decisis in the UAE presents additional difficulties when considering Force Majeure, as courts will always have to decide based on the facts of each case before determining whether Force Majeure is available for an obligor.
In this note, Kennedys’ partner Celine Abi Habib Kanakri and senior associate Khalil Mechantaf address the defence of Force Majeure in construction contracts taking into account the ever evolving disruption caused by the outbreak of COVID-19 and the resulting rules and regulations imposed by governments, causing business interruptions and delays to projects in the UAE.
Risk is a very common concept amongst construction practitioners.
After all, in undertaking to construct and deliver massive projects, usually in remote locations, such as deserts, off-shore drillings and excavations, international contractors face a multitude of risks including, potential political and economic instability, skilled workforce, supply chain, weather conditions, uncommon form of diseases, harsh government regulations and the like.
The spectrum of risks is predominant in projects executed abroad.
Therefore, it is very common for parties to a construction project to agree on the allocation of project risks. The owner thereof, usually the contractor, undertakes to develop a risk mitigation strategy.
Much thoughts will therefore be given as to whether owners of projects’ risks are complying with their duty of mitigation to minimise costs and damages to projects.
This will especially be the case of COVID-19, where the outbreak was progressive rather than instant, such as an earthquake, and started in China before progressively spreading to other countries across the globe.
Therefore, contractors in the UAE may be asked to demonstrate that, despite they have foreseen the event, they were unable to avoid it or mitigate the risks.
It is important at first to understand the concept of Force Majeure, as developed by the UAE jurisprudence and the various elements attached to it before considering any remedies contractors have and actions they should take to minimise costs.
There is a significant difference between the civil law and common law traditions when it comes to Force Majeure.
Whilst the doctrine of rebus sic stantibus is expressly incorporated into the UAE Civil Transactions Code (Civil Code), in the common law systems and notably in English law there is no general theory of Force Majeure.
Under UAE law, contractual or tortious liability is established by way of a tripod. The harmful act, the damage and causation are the three elements required to establish any form of liability.
When an external act that is not attributed to the obligor, is believed to have caused the damage suffered by another, the causal link is deemed to be inexistent and the obligor becomes absolved of any duty to compensate for such damage suffered.
Force Majeure is a defence usually raised by the obligor to challenge any causal relationship between a harmful event attributable to the obligor and the damages suffered.
More generally, Force Majeure is set out in Articles 273 and 287 of the Civil Code. The Civil Code also contains other provisions which are directly or indirectly related to Force Majeure.
Article 273: 1-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 rescinded. 2-If the impossibility is partial, the consideration for the impossible part shall be extinguished. This shall also apply on the provisional impossibility in continuous contracts. In both instances the creditor may rescind the contract provided the debtor has knowledge thereof. [Emphasis added]
Article 287: A person shall not be liable for reparation if she proves that the prejudice resulted from an external cause beyond her control such as a heavenly blight, unforeseen circumstances, force majeure, the act of others or that of the victim, unless stipulated otherwise in statute or agreement. [Emphasis added]
Whilst Article 273 applies to contracts, however Article 287 more generally applies in tort and contracts.
Understanding the application of Force Majeure in tort is equally important given that tortious liability frequently arises during the performance of a construction contract.
The criterion of Force Majeure under both provisions is the same, apart from minor nuances which do not defeat the impact such defence has on the performance of contractual obligations.
Given that Force Majeure legal provisions are not of mandatory or public order nature, consideration will be given to the parties’ agreement before deciding on any entitlement as a result of Force Majeure.
In other words, the contract remains the primary source of obligations between the parties with respect of what the parties had intended in the event of Force Majeure. It is only when the contract is silent or unclear that application of the law comes into play.
In most construction contracts, the parties themselves designate the events which they consider to constitute Force Majeure and the consequences which these have on the performance of the contract.
On this occasion, the parties may decide to adopt a more restrictive or broader concept than that usually implemented by the courts. In spite thereof, these contractual provisions remain valid and the courts generally uphold the parties’ agreements.
Thus, in applying Force majeure, courts can consider the occurrence of the event based on the content of any contractual provision.
The criteria of Force Majeure depicted in Articles 273 and 287, as well as applied by UAE jurisprudence are the following:
1- Unforeseeability is something that cannot be foreseen to occur under normal circumstances. The test of foreseeability is that of a reasonable bystander, as well as the circumstances of the obligor, its readiness and the duration of the event. The test does not mean that Force Majeure only exists when faced with an event that the parties could not have imagined. In fact, a risk averse approach aids in the prediction of the unthinkable: natural catastrophes, strikes, riots, terrorist attacks, et cetera. What unforeseeability actually means is that Force Majeure would not occur but for an event that the parties, at the time of signing the contract, have not foreseen that the obligor can assume the consequences thereof. This test is consistent with the definition of unforeseeability pursuant to Clause 184.108.40.206, FIDIC Conditions of Contract for Construction [Red Book, 1999], which refers to an event that was “not reasonably foreseeable by an experienced contractor by the date of submission of the Tender”. Therefore, the outcome of the test depends on the contract, but also the risks that the parties have agreed to assume.
2- Unavoidance of Force Majeure event is assessed after signing the contract, inter alia during its performance. Pursuant to Article 878, which applies to construction contracts, the contractor shall not be liable from damage arising from an event that could not have been avoided. In other words, the event should constitute, for the obligor, an unavoidable impediment, rendering the performance of the contract/obligation impossible, and not simply making it onerous, which is otherwise a characteristic of Unforeseen Circumstances rather than Force Majeure.
3- External: The event must be completely external to the obligor and not within its control. Otherwise, causation will be presumed to exist between the contractor’s acts and the damages suffered.
4- Impossible: The event must render the performance of the obligation impossible.
As seen above, under contracts, the unavoidance of the event is insufficient to amount to Force Majeure. It should also be unforeseeable.
However, under tort the avoidance of an event should amount in and of itself to Force Majeure, absolving the obligor of any obligation, subject of course to the obligor having taken all required measures to avoid the occurrence of the event or minimise its impact.
The same statutory criteria are mirrored in Clause 19, FIDIC, which is widely used amongst construction practitioners in the UAE.
Clause 19.1 provides that Force Majeure means an exceptional event or circumstance satisfying the following four criteria: (1) beyond a party’s control, (2) which such party could not have reasonably provided against before entering into the contract, (3) which, having arisen, such party could not reasonably have avoided or overcome, and (4) which is not substantially attributable to the other party. Clause 19.1 provides a non-exhaustive list of “exceptional events” or circumstances that may amount to Force Majeure subject to the aforementioned criteria.
Interestingly, such list does not include any requirement that Force Majeure is of public nature and has a widespread and indiscriminate impact, much like the COVID-19 is.
The test applied under Clause 19.1 is a cumulative test and is consistent with the Civil Code. In the second edition of the FIDIC Red Book, 2017, Force Majeure has been swapped with “Exceptional Events” but endorses the same criterion for Force Majeure in the 1999 edition.
The new version lacks though an “exceptional” qualifier in the definition. It remains therefore for the parties to amend Clause 19 (Clause 18 of the second edition) in a manner that is convenient in the circumstances and the courts usually uphold the parties’ agreement in this regard.
Contractors should therefore consider the terms of their contracts and cater for any uncovered risks.
Conversely, however, it can be considered that just because an event is not expressly set out in a contract as being one of Force Majeure, the courts may still investigate whether such event constitutes, in the court’s opinion, a case of Force Majeure. This is the UAE’s inquisitorial legal system put in practice.
The Theory of Risks
In bilateral contracts, it is important to determine whether the cause of the absolved obligation of one of the contracting parties is correlatively the obligation of the other, thus leading to its disappearance.
For example, if the performance of certain works is halted what would be the fate of Performance Security?
The theory of risks permits to determine the party who should bear the consequences of the impossibility of performance thereof.
That is the warranty of contract, which should be distinguished from contractual liability arising from one’s failure to perform its obligations.
The warranty of contract lies with the party who bears the risks if the contract is terminated.
The theory attributes the burden of risks on the obligor res perit debitori. Hence, when the performance of an obligation becomes impossible as a result of Force Majeure, the obligor is no longer permitted to request from its contractual counter-party the performance of the correlated obligation.
The UAE Civil Code expressly sets out the theory of risks in Articles 273(2) and 894, whereby the contractor is only entitled to compensation for works actually performed.
In this case, the cost of works and materials supplied or the value thereof, whichever is lesser, as derived from the employer will be payable.
However, if the obligor had performed all the essentials, but excluding the secondary obligations, the contract is likely to survive the impossible performance and the obligor becomes entitled to request the obligee its performance of the correlated obligation, given the risks thereof are likely considered to have switched to the creditor as a result of the obligor’s performance of its essential obligations.
It is noteworthy that what constitutes essential obligation will be considered in the like of each case and the terms of the contract.
The application of the theory of risks differs when it comes to tort. In the absence of contract, the obligor has no warranty of contract, unless the event is attributed to the obligor itself, as otherwise established by causation.
Impact of Force Majeure on the performance of the obligation
The defence of Force Majeure has the effect of releasing the obligor from its duty to perform, without there being any obligation to pay damages.
This applies to those obligations the performance of which were rendered impossible by virtue of the Force Majeure.
If the remaining obligations remain enforceable and justify by themselves the survival of the contract, they continue to apply on the obligor.
This is specifically the case when the impossibility is temporary. In this case, the obligor is no longer fully absolved of its duty to perform, but the performance of the obligation in question is suspended until the time when the impossibility ceases to exist, provided its discontinuity can be ascertained in reasonable time.
In this regard, Clause 19.6, FIDIC, considers reasonable time to be a continuous period of 84 days from the date of notification by reason of Force Majeure, or for multiple periods which total more than 140 days due to the same notified Force Majeure.
Otherwise, the contract or obligation that has become permanently impossible, or the performance of which has become impossible for longer periods, shall be automatically terminated within the meaning of Article 273.
As stated above, in contracts, the will of the parties is an essential indicator for determining whether the parties have (or could have) foreseen that the obligor should assume the consequences of the impossibility of performing a contractual obligation.
In fact, contracting parties may disregard the provisions of Articles 273 and 287 and agree that the obligor should assume the risks of its failure to perform a contractual obligation as a result of a Force Majeure.
Hence, if a Force Majeure Clause does not include epidemics or pandemics, in the absence of any government regulations, COVID-19 would not then absolve the contractor from its duty to perform.
It would also be possible to argue that past novel viruses, such as SARS, Swine Flu and MERS, are sufficient indicators of the foreseeability of such viruses.
On the other hand, not every pandemic could have the same effect on the supply chain, provision of resources and materials, in the same way COVID-19 has.
In fact, recent history does not contain a precedent comparable to the effects of COVID-19 on international trade the way it operates in modern world.
Therefore, it can be argued that the provision of epidemics or pandemics in a Force Majeure clause can only be interpreted in the light of the meaning thereof and foreseeability of its impact as understood by a reasonable person prior to COVID-19.
However, there is no room to claim the defence of Force Majeure when the obligor, as a result of its own action/negligence, has caused the impossibility to occur or to increase, even if it has not contributed to the event.
In this case, the obligor remains bound by the obligation in question. For example, if a contractor in the UAE was procuring equipment and materials from highly affected countries, such as China, its failure to adjust in reasonable time the supply chain to other countries that are less affected by COVID-19, provided this is possible, may be considered as having contributed to the impossibility in question.
The adjustment of any procurement arrangement is obviously subject to the availability of the same equipment or materials in other countries.
If a construction contract requires the contractor to procure materials from certain factories that are now closed, the contractor would be entitled to a variation order issued by the engineer.
In the absence of such variation order, the contractor would be considered to have satisfied its duty of mitigation.
In any event, Force Majeure only applies to the extent of the impossibility in question, the scope of which is a matter of fact.
Distinguishing Force Majeure from Unforeseen Circumstances
Lessons from the financial crisis of 2008 confirm that the defence of Force Majeure is only upheld when the performance becomes impossible and not simply onerous.
The Abu Dhabi Court of Cassation has thus confirmed that “both inflation and recession were normal risks of business”, and any defence available against the performance of an obligation that has otherwise become onerous, would be that of Unforeseen Circumstances.
This allows the courts pursuant to the provisions of Article 249, to adjust the extent of the duty to perform to the benefit of the debtor.
Article 249 provides: In the case of exceptional circumstances that are public and were unforeseeable, which has resulted in making the execution of the contracted obligation, where it has not become impossible, has become onerous to the debtor in such a manner as to threatening her with heavy loss, the judge may, if justice so requires, and according to circumstances and by balancing the interests of both parties, reduce the burdensome obligation to reasonable limits. Any agreement to the contrary is void. [Emphasis added]
Unforeseen Circumstances – which is similar to the French concept of imprévision – differs from Force Majeure in many ways. The Commentary of the UAE Ministry of Justice on Article 249 distinguishes the two concepts in two main areas:
1- Impact of the event: Whilst Force Majeure renders the performance of the contract impossible, however Unforeseen Circumstances makes it only onerous on the obligor. In other words, Unforeseen Circumstances threaten the obligor with exorbitant loss, if forced to specifically perform the exorbitant obligations.
2- Remedies of the event: The Civil Code has stipulated an “objective” qualifier (if justice so requires) that, in the eyes of the judge, should be satisfied before the courts can intervene in reducing the obligation the performance of which has become onerous. No such objective qualifier exists when it comes to declaring a remedy based on Force Majeure. As noted above, when assessing the foreseeability test, courts will look at the circumstances of the contractor and its readiness to bear the consequences of Force Majeure at the time of signing the contract.
It is a common mistake to confuse Force Majeure with Unforeseen Circumstances. The confusion is likely to become prevalent when considering the pandemic COVID-19 and its impact on various projects across the UAE.
However, unlike Unforeseen Circumstances, which is subject to an overriding mandatory legislation, Force Majeure is not and parties to a contract can derogate from the requirements of the law.
Therefore, in the absence of UAE government legislations considering the pandemic as Force Majeure, much will depend on the consequences of COVID-19 on each individual contract and whether the parties have foreseen the consequences thereof at the time of entering into the contract.
In this regard, courts will decide on Force Majeure in the light of circumstances of each case and not when ‘justice so requires’.
This is specifically the case given that the impact of COVID-19 on trade and businesses, at least until the date of writing this article, differs from one country to another.
Indeed, it can be argued that the impact on businesses in the UAE has not been as significant like in other European or Asian countries.
The courts may also have different views depending on whether the contractor is local or international, or if the contractor is dependent on an international supply chain to complete the project.
The courts may also refuse to uphold a defence of Force Majeure if most of the obligations have been performed, such as testing and commissioning and the (near) elapse of the defects liability period.
In any event, it falls upon the courts to determine whether the necessary elements of Force Majeure are satisfied, before absolving the debtor from its obligations. This now take us to the remedies available under UAE law in the event of Force Majeure.
The remedies for Force Majeure depend on the scope and extent of the impossibility in performing the contract.
These range from the extinguishment of the obligation to the suspension in performance in the case of temporary impossibility.
Pursuant to Article 472, “a right is extinguished if the debtor establishes that her performance has become impossible by reason of a cause beyond her control”. The extinguishment of the impossible obligation is also stipulated under Article 273(1) and various courts’ decisions.
However, contractors may not want to immediately cancel their contracts and will likely seek extensions of time and owner’s variations to mitigate costs.
In the circumstances, contractors may even want to consider value engineering to identify and eliminate unwanted costs while satisfying any performance requirements at the lowest costs.
The possibility of such alternative to extinguishment will depend on the parties’ agreement and circumstances of each case.
In the exercise of the remedy of termination, it is preferable that the obligor notifies the obligee of its failure to perform as a result of Force Majeure.
The obligation of notification is prescribed in Clause 19.2, FIDIC, according to which the obligor must give notice to the other party within 14 days of when it did, or should have, become aware of the impossibility in question.
As the event of Force Majeure affects either or both parties, the notice requirement under Clause 19.2 is in lieu of that set out in Sub-Clause 20.1, i.e. Contractor’s Claims, limited to the contractor only and to claims for extension of time and/or payment.
Although the risks of failing to serve a notice are not specified, however, in the absence of a notice, the party prevented from performing its obligations runs the risk of having the right to claim Force Majeure forfeited if it is demonstrated that, by failing to serve a notice, it has acted in bad faith.
While Clause 19.4, FIDIC, allows the contractor to claim for extension of time and payment of cost suffered as a result of Force Majeure [sub-clause 20.1], in practice, construction contracts generally allocate cost-related risks of Force Majeure events to contractors.
It is worth noting that, under FIDIC, an extension of time can be granted for temporary impossibility as a result of Force Majeure of any kind.
In contrast, an entitlement to payment of cost arises only for the types of Force Majeure set out in Clause 19.1, to the exclusion of natural catastrophes.
This is due to the exceptionally adverse effects natural catastrophes, such as earthquakes and hurricanes, or even COVID-19, could have on the performance of the contract.
However, if the works are damaged as a result of natural catastrophes, the contractor may nevertheless be entitled to recover costs pursuant to Clause 17.4 [Employer’s Risks], provided that the natural catastrophe is also described as an operation of the forces of nature within the meaning of Clause 17.3(h).
A disagreement may arise between the employer and the contractor as to the events that are otherwise an unforeseeable operation of the forces of nature.
Again, while pandemics such as COVID-19, have previously occurred in the past, therefore are foreseeable, the time as to when these can occur and their impact on international trade is not.
If the outbreak of COVID-19 is considered an operation of the forces of nature, the contractor will likely be entitled to claim costs.
In order to be entitled to claim Force Majeure, Clause 19.3 requires the debtor to mitigate any delay arising from Force Majeure, also in accordance with Articles 292 and 389 of the Civil Code.
The Commentary of the UAE Ministry of Justice provides in clear terms that “the damage is considered a natural result [of Force Majeure] if the debtor was incapable of avoiding it by applying a reasonable effort to that effect”.
The remedy arising from a defence of Force Majeure in case of permanent impossibility to perform has been summarised by the Abu Dhabi Court of Cassation: “The rescission by operation of law shall not be applicable unless it is impossible to perform the obligations of the contract, specifically by reason of Force Majeure or unavoidable accident that makes the performance of the obligations absolutely impossible. (…) A causal relationship between the external cause of default and the impossibility of the performance shall be present whenever the external cause of default has occurred during the term of the performance of the contract”. [Emphasis added]
This is also mirrored in Clause 19.6, FIDIC, granting either party the option to serve the other with a notice of termination of the contract.
In this event, the termination shall take effect 7 days after the notice is given. Upon such termination, the engineer shall determine the value of the work done and issue a Payment Certificate.
Whilst the employer’s duty to return the Performance Security, pursuant to Clause 4.2, is triggered upon the receipt of the Performance Certificate, no such duty exist by which the contractor secures the release of the Performance Security in the event of termination for Force Majeure.
The limited circumstances in which the employer is entitled to call the Performance Security under Clause 4.2, mitigates the contractor’s risks in this respect.
The COVID-19 has impacted human lives, international trades in an unprecedented manner. It has paralysed entire cities and may have lasting effects on the way business is done.
While COVID-19 may likely be argued to be an unforeseeable and unavoidable event, its qualification as Force Majeure would turn on the specific facts of each claim, namely:
1- Whether the parties have previously agreed on a Force Majeure Clause;
2- If the effects of Force Majeure could be avoided, mitigated, by the contractor;
3- If the impact is purely economical, merely rendering the performance of the obligation onerous.
Finally, parties may not be interested in the termination of their agreement, but simply seek other options for relief provided in the contract.