COVID -19 and Force Majeure – Focus on Logistics Industry
April 22, 2020
By Shani Salim
In the midst of the global COVID-19 pandemic varies advisories and protocols have been issued to contain further spread of the virus, including the closure of ports and borders. Social distancing and quarantining have become the norm and the way businesses are being run is undergoing a radical transformation.
The Impact of COVID -19
The logistics industry, which is the backbone of the global supply chain, is facing one of its toughest tests and its resilience may even determine the future of globalisation. The industry has been particularly hit by restrictions at borders and ports causing extended transit periods due to shipments being held in quarantine zones resulting in delay and deterioration of cargo. The increase in demand of certain items including food and medicine has created chaos in many parts of the world whilst other commodities face extreme reduction in demand as people are advised to stay away from public places.
Further, it has become particularly onerous on businesses to meet their contractual obligations as employees are either unable to attend to work due to restrictions or prefer to self-isolate to contain the spread of the virus. This has paved way to increased focus on the availability of relief under force majeure to logistics businesses, either through their contracts or applicable laws, to overcome the current crisis.
Entities in the UAE who are seriously affected by COVID-19 are mulling the possibility of citing it as a force majeure event to avoid contractual obligations in light of various restrictions that have been imposed, or, they are considering renegotiation of their existing contracts to preserve the business and protect their cashflow.
Can COVID-19 be cited as ‘Force Majeure’
Force majeure is a reference to an external event, outside of the control of contracting parties, which they cite as a reason to withhold performance of their contractual obligation. Though there is no specific definition of force majeure under UAE Law, it provides for automatic cancellation of a contract, if an unforeseeable and unavoidable force majeure event render the contract impossible to perform. However, if the performance of the contract is only partially impossible, only the terms that cannot be performed will be cancelled subject to a notice from the party affected by force majeure event.
In the UAE, subject to statutory provisions and public policy, parties are generally free to agree the contractual terms that will govern their relationship including a force majeure clause. Even in the absence of express contractual force majeure provisions in their contract, the parties can rely on several articles addressing the concept of force majeure and its consequences provided in UAE Federal Law No. 5 of 1985 (“Civil Code”).
The most relevant provision of the Civil Code the parties can fall back on is Article 273 to invoke force majeure. The Article states –
“(1) In contracts binding on both parties, if force majeure supervenes which makes the performance of the obligation impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled.
(2) In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware.”
The trigger to invoke the above clause is impossibility of performance or partial impossibility. The precedents of the courts show that UAE courts have often applied the test of foreseeability before validating any claim under force majeure. Even force majeure clauses in the contract are interpreted narrowly and often ruled that the supervening force majeure event must be unforeseeable, uncontrollable and make the performance of the contract literally impossible in order to automatically rescind the contract. If foreseeable, the parties are required to act in good faith to mitigate the damage caused by the extraneous event.
It is undoubted that there is potential to argue that the current Covid-19 pandemic is a force majeure event under Article 273. It remains to been seen how the courts approach the issue of foreseeability, especially on contracts that were entered after the threat of Covid-19 was declared by the World Health Organisation. Further, it shall also be up to the party claiming the relief to establish the particular circumstances that rendered the performance impossible.
If a party is unable to establish Force Majeure under Article 273, another option that may be considered is Article 249 of the Civil Code that provides for the doctrine of Exceptional Circumstances. This article provides that if exceptional circumstances of a public nature which could not have been foreseen occur as a result of which the performance of the contractual obligation, even if not impossible, becomes oppressive for the obligor so as to threaten him with grave loss, it shall be permissible for the judge, in accordance with the circumstances and after weighing up the interests of each party, to reduce the oppressive obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void.
The difference between the effect of the two articles is that Article 273 provides for termination of the obligation, whilst Article 249 allows for only a modification of contractual obligations.
The UAE Civil Code, pursuant to Article 287, also allows parties to be exempt from making good a loss another party has suffered if that loss was caused by force majeure unless there is a legal agreement to the contrary or a particular legal provision provides otherwise. This clause provides for force majeure as a defence to claims of liability.
The UAE courts have been reluctant to apply Article 273 and 249 on mere claims of force majeure by parties that failed to perform their contractual obligations unless they satisfy the strict tests. A party will not, for example, be allowed to seek shelter under these articles simply because it turns out that the contract becomes economically unattractive to them.
In a logistics and forwarding environment, the restrictions on movement of goods may result in increased costs of operating thereby affecting the profitability of the business or forcing them into losses. This will not satisfy the test of impossibility or claim of force majeure. However, if regions become completely shut off or borders close due to Covid-19 and this prevents any delivery, that may well constitute an impossibility.
If the force majeure event or impossibility to perform is brought about by a party’s negligence, the courts are unlikely to uphold any attempt to rescind the obligations. Sending consignment through a restricted area when alternatives are available or failing to avoid ports or areas in which restrictions are in place, may result in the forwarder being unable to rely on a force majeure clause.
In case of loss or damage to cargo, the parties may need to look into limitation of liability and exclusions available under the law or the terms agreed. Article 308 of the Federal Law No. 18 of 1993 on the Commercial Transaction Law provides for exoneration of a carrier from liability regarding the perishing or deterioration of the item, or the delay in delivering it, if it establishes that it was caused due to force majeure or an act of the Government. However, a forwarder or carrier seeking to avoid liability for loss or delay caused by a government’s reaction to COVID-19 may very well have to establish that it took all reasonable care despite events which were outside its control. Even if cargo is caught up in delays, quarantine or other such issues, the forwarder may still have an ongoing duty of care towards the cargo and cannot relieve from contractual obligations by just citing force majeure.
There are also various provisions in the UAE Maritime Law (Federal Law No 26 of 1981) which set out in some detail how force majeure events impact maritime activities
Requirement of Notice
A party seeking to rely on the Civil Code in force majeure circumstances would be well advised to provide notice of cancellation to its counterparty, to avoid any allegation of breach of the general obligation under Article 246 of the Civil Code to perform the contract consistent with the requirements of good faith. Article 273 (2) dealing with partial impossibility, also mandates a notice by the affected party to trigger the clause. UAE law imposes a duty to perform contracts in good faith and UAE courts will expect parties to refrain from compounding their losses. Therefore, providing timely notice to the other party of the nature of the event and an explanation as to why performance is now impossible and acting quickly and reasonably to reduce a party’s own losses are always advised.
If a force majeure clause contains a notice provision, the UAE courts will expect a party to adhere to this carefully before seeking exemptions available under the said clause. Therefore, it is recommended to duly serve notice, before waiting until the cargo has suffered loss or damage, if problems arising from COVID-19 crisis or related government restrictions that may give rise to an event covered by the force majeure clause are anticipated.
Whilst the issues created by COVID-19 are commercially challenging, UAE law does not see this as relieving a party of its contractual obligations. The force majeure clause in contracts can provide the parties with an opportunity to be excused from obligations that become oppressive during the current Covid-19 crisis. However, UAE courts will apply a strict interpretation to such clauses and will require the parties to act in good faith.
It is recommended to review any force majeure clauses carefully in the contracts to ensure familiarity with notice provisions and any other requirements before invoking force majeure. Prudent steps should also be taken to minimize losses if invoking force majeure is inevitable.