Articles

Managing the Corona Crisis – Contract Management in the United Arab Emirates

06 April 2020

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By: Dr. Constantin Frank-Fahle, LL.M.

The Coronavirus, also known as the COVID-19 virus, has had a tremendous impact on the global economy. The pandemic significantly disrupted domestic and international trade, stock markets, and tourism. This article provides an overview of measures businesses can take to safeguard their interests and limit their liability.

 

1. What has happened so far?

Supply chains around the world are continuing to feel the effects of the COVID-19 pandemic. City-wide lock-downs and quarantine measures have triggered labour and supply shortages. The virus also had effects on oil prices, economic growth, and real estate prices.

The United Arab Emirates’ (UAE) fight to curb the spread of COVID-19 has been progressive since the beginning of March 2020. Developments have been very rapid and new legislation has come into effect towards the end of March 2020.

On 26 March 2020, the Ministry of Human Resources and Emiratisation (MOHRE) issued Ministerial Resolution No. 279 of 2020 regarding the stability of employment in private sector companies. The resolution is valid for the duration of applicable preventive measures taken by the government to contain the spread of the COVID-19 virus. Following this, MOHRE issued Resolution No. 281 of 2020 regarding remote working in private sector companies on 29 March 2020. This resolution requires that only thirty percent (30%) of the workforce of private entities is allowed to be physically present in an office at any given time.

Most recently, the Government of Dubai announced a two-week lock-down on 4 April 2020, valid from 8.00 pm on Saturday, 4 April 2020. The new order aims to enforce strict restrictions on movement across the emirate. Individuals are allowed to leave their house only to buy groceries, medicine or for COVID-19 testing. The restrictions, however, do not apply to vital sectors. All individuals leaving their homes are, however, requested to register online: https://dxbpermit.gov.ae/permits.

 

2. What are the essential contractual clauses relevant to the COVID-19 crisis?

Due to the lock-down measures adopted by governments around the world, a party’s ability to meet its contractual obligations may be severely affected. As a result of these constraints, businesses are reviewing their contractual agreements and in particular, force majeure and hardship clauses to determine their options to limit or exclude their liability resulting from the hindrance in the performance of their obligations.

Force Majeure

Force majeure typically relates to unexpected external circumstances such as natural disasters particularly, storms, earthquakes, flood, volcanic eruptions. Force majeure also includes riots, terrorism, revolution, sabotage, strike, and fire. These circumstances must be unpredictable and irresistible and must prevent a party to a contract from meeting their obligations.

Force majeure clauses are typically mutual. However, the mere presence of a force majeure clause may not be sufficient for a party that wishes to rely on it. Parties would typically also need to show that the force majeure event caused the non-performance (causal link). Besides, the party relying on force majeure would have had to take reasonable steps to mitigate the event or its aftermaths.

The manifestation of a force majeure event often results in a temporary deferral of the performance of the obligations of both parties. Alternatively, the contract may also be terminated. Each party has to endure the undesirable outcomes of default or the delay in fulfillment of the obligations. As a result, the liability will be set aside, and the other party is unable to seek compensation.

Under UAE law, force majeure is not defined but included as a legal concept in Art. 273 of the UAE Civil Code. According to the provision, the force majeure event must make the performance of the contract impossible. The Court of Cassation developed an additional criterion and required that the force majeure event must be unforeseeable. Once an event meets the requirements above, the contract is deemed rescinded by the statement of law. The parties revert to their pre-contractual positions, and if possible, damages are to be awarded to restore the parties’ positions.

Regardless of this, it should be noted that courts in the UAE typically interpret force majeure clauses narrowly.

Hardship

Hardship is described as an incident of legal, technical, political or financial nature arising after the parties have entered into an agreement, which was unanticipated at the time the contract had been drafted. Typically, due to hardship, the performance of an obligation is not rendered impossible. However, performance is hindered.

Hardship provisions usually include that parties to a contract must fulfill their obligations even though circumstances may cause fulfillment more arduous than one would have realistically comprehended at the time of the entering into the agreement. Nevertheless, if the prolonged fulfillment of obligations turns out to be unreasonably onerous and economically unfeasible due to circumstances beyond a party’s reasonable control, a hardship clause can necessitate the parties to agree to alternative contractual terms. The essence behind a hardship clause is to stipulate a greater level of flexibility and to equalise the risk between the parties.

The doctrine of hardship is referred to as “exceptional circumstances” under the UAE law. Article 249 of the UAE Civil Code provides that if there are exceptional circumstances of a public nature, due to which execution of a contract becomes immensely arduous for a party, the court may reduce such obligations to a reasonable level, keeping in consideration the interests of both the parties.

Regardless of the above, parties should also explore other clauses such as termination for convenience.

 

3. Can you make use of retention rights?

Making use of retention rights can help to secure contractual counterclaims. A right of retention is the creditor’s right to retain a movable asset that belongs to the debtor, and which is in the creditor’s possession until the debt has been fully paid. A retention right is a resourceful tool to safeguard payment claims. Business owners should, therefore, review their contracts to ascertain if their contracts provide provisions related to retention rights.

In the absence of contractual retention rights expressly mentioned in the agreement, the parties must rely on the governing law of their contracts. In the UAE, retention rights are governed by Articles 414 et seq. Article 415 of the UAE Civil Code stipulates that either party to a contract can retain movable assets until they receive the consideration due. A party that retains movable assets must preserve them.

 

4. Can you offset claims?

Parties should also determine if their contract provides for any set-off provisions. Set-off provisions allow a debtor to offset clams due to it by the claimant. Care must be taken since some contracts exclude set-off altogether. Barring any express provisions dealing with set-off in a contract, parties should refer to the governing law of their contract.

Article 368 of the UAE Civil Code defines set-off as the satisfaction of an obligation of the obligee by an obligation to be performed by the obligor. The UAE Civil Code, further provides in Article 369 that set-off may either be mandatory, occurring by operation of law, or voluntary, occurring by agreement between the parties, or judicial, occurring by order of the court.

 

5. Conclusion

Considering the increased lock-downs in the United Arab Emirates, in particular in the emirate of Dubai, it is likely that a party’s ability to perform its contractual obligations is hindered. As a result, parties should:

  • assess their contractual rights and obligations;
  • assess whether they can make use of force majeure or hardship clauses;
  • review contractual and statutory retention rights;
  • review contractual and statutory rights to offset claims; and
  • negotiate the postponement of deadlines including but not limited to payment deadlines as well as deadlines for the fulfillment of other obligations.

 

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Dr. Constantin Frank-Fahle, LL.M.
Managing Partner | Attorney at Law
+971 (0)2 694 8562 | frank-fahle@germela.law | www.germela.law
GERMELA LAW LLP | Al Sila Tower, 24th Floor | Abu Dhabi Global Market Square | Abu Dhabi | UAE

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