By Raza Mithani and Richard Dupay
What impact will the coronavirus have on GCC commercial contracts, whose supply chain has been adversely impacted?
When China confirmed the first cases of Coronavirus, most GCC countries, including the UAE, restricted direct travel to and from China (with the exception of Beijing). In just a few months, the virus has a name - Covid-19- and over 110 countries have recorded cases, including most countries in the Middle East with Iran probably the worst hit in the region.
As the virus has spread and reported cases increase so too have the region’s travel restrictions. On Monday, Saudi Arabia introduced travel bans from five new countries increasing the total number of travel bans to 14 countries. The UAE Ministry of Health has advised all citizens and residents to avoid travelling abroad unless absolutely necessary or risk being home-quarantined on return to the UAE.
Many businesses based in the GCC have been effected by COVID-19 whether by reason of supply chains from severely hit countries, such as China or Italy, having been cut off or due to key members of staff being unable to travel to the GCC. In some cases, the restrictions on transporting people and goods have caused business to fail to fulfil orders or meet deadlines. Whether those business are excused from liability for failing to comply with their contractual obligations boils down to three main factors: the governing law of the contractual arrangements; the terms of the contract; and the real cause of prevention.
All GCC countries recognise the legal doctrine of ‘force majeure’ in some form. Generally, where an obligation under a contract is rendered impossible to perform, due to an external event, the non-performing party may be excused from liability. Broadly, a party is entitled to rely on the concept where the event is exceptional and performance is made impossible.
So, for instance, if the closure of a port or travel restrictions have made performing a contract more difficult, but still possible (even if more expensive), it is unlikely the restrictions will qualify as a force majeure event. However, if the restrictions mean that specialist equipment, which can only be manufactured in, say, China cannot be supplied to the GCC due to the closure of Chinse ports, that may qualify as a force majeure event which excuses a party from any liability for non-performance.
In certain circumstances, even where an event is not a force majeure event, the laws of most GCC countries may permit the court to reduce (but not necessarily fully excuse) a parties’ liability where the imposition of a contractual obligation would be onerous due to unforeseen circumstances. The scope of such reduction differs in each GCC country. In the UAE, for instance, the reduction is triggered on the occurrence of “exceptional circumstances of a public nature.” Arguably, COVID-19, and the resulting travel restrictions, are exceptional circumstances of a public nature. However, whether a non-performing party may avail themselves of a reduction in liability will depend on the connection between COVID-19 and the non-performance, the relative loss the party would suffer from enforcement of the contractual obligation and a balancing exercise which the court would have to undertake in relation to the interests of each party.
For a party to take advantage of the legal doctrine of force majeure (or, separately, the reduction in liability outlined in the paragraph above) its commercial relationship must be governed by a law which recognises the concept. If the substantive or underlying law governing the contract does not recognise it, the terms of the contract itself may excuse liability for exceptional events.
Confusingly, such clauses are often called force majeure clauses but whether they operate in the same way as the legal doctrine of the same name, depends on the precise wording of the clause. For example, the effect of the clause will depend on what has been agreed between the parties and may range from a reduction in liability, an entitlement to suspend obligations or even termination.
Many force majeure clauses will list the type of events which trigger the clause which often includes “epidemic” or “disease”. Whether COVID-19 falls within such categories is a matter of contractual interpretation. During the SARS outbreak in 2003, courts around the world took varying approaches to whether it constituted an “epidemic” or “disease”, resulting in inconsistent outcomes.
Where the event has been identified and falls within the type envisaged by the contract, very often, force majeure clauses contain a requirement that the non-performing party must notify the other party of the event within a prescribed period. In this regard, identifying the event which causes non-performance is important – whether it is the COVID-19 outbreak itself, which was declared a “public health emergency of international concern” by the World Health Organisation on 30 January 2020, or the closure of travel routes and ports which occurred much later, might matter for the purposes of notifying in time.
Businesses which have been adversely effected by the COVID-19 outbreak should check the governing law clause of all relevant contracts and also review whether there are any specific force majeure clauses which may be relied upon. If such clauses exist, it is important to ensure that any notice provisions are complied with.
Businesses should also be careful when entering into supply contracts during the midst of the outbreak. The application of the remedies outlined in this article is often assessed by reference to the parties’ knowledge at the time of entering into the contract. Seeking relief for non-performance caused by COVID-19 may be much more challenging in relation to contracts which have been entered into after both the outbreak and its implications have been well publicised.
Finally, as is often the way with these things, obtaining early legal advice, can frequently save parties time, money and frustration in the future.