As a result of the unprecedented spread and impact of COVID-19, governments and other public authorities have imposed various containment restrictions to movement, travel and supply of goods and services. This has resulted in a slow-down in business operations and an increased focus on the contractual obligations of businesses and their likely inability to perform these obligations.
A force majeure clause operates to excuse a party’s non-performance of its contractual obligations due to extraordinary events. These clauses vary depending on the contract but usually set a high bar to invoke and are broadly drafted. The question here is whether businesses can rely on this clause to excuse their non-performance due to COVID-19.
WHO has classified COVID-19 as a “pandemic” which will trigger any force majeure clause that expressly accounts for pandemics but as for contracts that are silent on this, the parties will have to rely on the law and subsequent interpretation of the courts. Although, the UAE Civil Code refers to force majeure and exceptional circumstances as a basis for relief from performance of contractual obligations, it does not provide any definition of what defines force majeure or exceptional circumstances.
Moreover, for the affected party to trigger the force majeure clause, the party has to satisfy all procedural requirements to show that COVID-19 was the cause of their inability to perform, their non-performance was due to circumstances beyond their control and they could not reasonably mitigate its consequences.
The critical issue we face in assessing the applicability of such clauses is that the future impact of COVID-19 is shrouded in uncertainty and it is further unclear how the UAE courts or arbitrators will deal with the applicability of force majeure in this situation.
Alternatively, if a force majeure claim cannot be sustained, the parties can also rely on any material adverse change/effect clauses or the doctrine of frustration, as applicable in certain jurisdictions such as the UK.
With the COVID-19 pandemic continuously developing, businesses can additionally protect themselves by obtaining business interruption insurance or any other applicable insurance policies. COVID-19 will inevitably transform the force majeure landscape in evaluating its applicability to this situation.
To act proactively, if a business is aware of their inability to perform, they should seek immediate legal advice to review their on-going contracts to identify possible routes of recourse to effectively maintain a sustainable level of business operations.
INSURING AGAINST COVID-19?
The unprecedented spread and impact of COVID-19 has led government authorities to initiate various containment restrictions impacting business operations and interrupting supply chains. Business can protect themselves by obtaining or reviewing their insurance coverages to include:
- Business Interruption Insurance (BI): covers losses from direct interruptions to a business’s operation
- Contingent Business Interruptions Insurance: covers loss of income related to an issue associated with a supplier, vendor or major partner
- Events Cancellation Insurance: covers defined losses for cancelled or postponed events (ECI).
The extent of the coverage depends on the policy. For example, to benefit from BI, the interruption usually must be proximately caused by the physical damage and hence losses due to quarantine might not be covered. BI is more likely to be triggered as a result of COVID-19 where the policy specifies a non-damage extension for infectious diseases or requires legal notification. Under UAE law, any infectious disease is legally reportable. Not all insurance policies are equal in the coverage they provide, hence businesses should seek legal advice for a policy review to identify the best routes for protection and to maintain a sustainable level of business operations.
It’s essential for entities to ensure protection and defences under the force majeure and insurance provisions in these unprecedented circumstances.
KARM LEGAL CONSULTANTS