Reda Hegazy, Senior Associate

The question which many in the construction industry are asking during this time, is whether the current pandemic can be deemed a force majeure event. If so, what impact does this have on construction contracts? Should parties be in agreement, is it acceptable for them to continue with an existing contract irrespective of the force majeure?

It is worth mentioning that this article relates only to the effect of the pandemic on construction contracts, and in the UAE, such contracts are treated differently from others, whose interpretation may take direction from the judiciary.   In construction contracts for example, the exemption of liability is considered valid, but considered invalid in transport contracts.

WHAT IS FORCE MAJEURE?

According to the law of the United Arab Emirates and its established jurisprudence, force majeure is the result of an unexpected public accident or exceptional circumstance, at the time of contracting and it is impossible to prevent its occurrence or stave off its results, therefore, the fulfilment of the obligation of the contract becomes difficult or impossible.  Article 273 of the UAE Civil Transaction Code stipulates the following:

“In contracts binding both parties, if force majeure supervenes, and which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled.

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 provisions of the Egyptian Court of Cassation has established that to consider the “sudden accident” or “exceptional circumstances” as a force majeure, two conditions must apply:

It cannot be expected, and

It is impossible to prevent it.

Should one of these two conditions not be met, the status of force majeure shall cease (Appeal No. 4932/Judicial 81 issued on December 22, 2018).

CORONAVIRUS IMPACT ON CONSTRUCTION CONTRACTS: 

Construction contracts are regulated by Articles 872 to 896 of the UAE Civil Transactions Code which provides that in construction contracts, the obligations of each party and the conditions of termination or revocation must be specified terms in the contract. Therefore, in the matter of force majeure where contractual terms have not provided for force majeure, the determination and remedy shall be applied in accordance with the general rules stipulated in this Article 273 of the UAE Civil Transactions Code.

Construction contracts, as with all types of contracts, impose rights and obligations on both parties. If any force majeure occurs that makes the fulfilling contractual obligations impossible, the obligation falls away, and the contract is revoked. In such instances, neither party can compel the other for compensation, because the reason of revoking the contract is not due to the default of any of the contracting parties, but rather a result of exceptional circumstances that could neither be anticipated nor prevented at the time of contracting. Notably, up to the point of the force majeure, the obligations that have been fulfilled, or what the contractor has done to date shall remain in force and thus due.

Circumstances that may have been foreseeable at the time of the contracting would not constitute a force majeure. Consequently, if the contract was agreed upon or after the knowledge of Coronavirus reached pandemic, then parties were aware of the Coronavirus and thus any negative impact which may prevent any party from fulfilling their contractual obligation would not meet the requirements of force majeure, and their obligation would be enforceable or potentially give rise to remedies.

PARTIAL OR TEMPORARY IMPOSSIBILITY

In the case of partial or temporary impossibility, then the obligation falls during the period in which the implementation of the obligations becomes impossible. For example, should the authorities imposed a curfew which bans gatherings and prevents business activities for a period of time, such would prevent a contractor from carrying out their contractual obligations then provisions that would impose fines for delay would not be enforceable during the curfew period because the contractor’s delay in carrying out their obligation was not in their control (Article 273 Paragraph 2 of the UAE Civil Transactions Code).

Where the performance of any obligations by any party to a construction contract becomes cumbersome or costly as a result of a force majeure, then the courts may, upon the request of the committed and affected party, mitigate such commitment or postpone its implementation until the end of these exceptional circumstances. (Article 267 of the UAE Civil Transactions Code).

Such measures take into account the balance of the relationship between the two parties, the idea of continuity of contract and an effort to mitigate adverse impact on contractors. For example, if the contractor has entered into a construction contract, whereby providing works and supplying necessary materials for installation (supply and installation), and it was agreed that imported materials would be used, and such materials become difficult to source in the market due to the Coronavirus, (this may be due to a suspension of their import and thus their supply has become too expensive), in such an instance, the court may either suspend the obligation until the import of such goods is reopened or mitigate the obligation in its entirety. To obligate the contracting party to supply at a higher cost, would harm one of the parties, and in accordance with Article 42 of the UAE Civil Transactions Code, no harm shall be done, nor harm done in return to any contracting party.

IS IT PERMISSIBLE TO AGREE NOT TO REVOKE THE CONSTRUCTION CONTRACT AS A RESULT OF FORCE MAJEURE?

It is acceptable to agree contractual terms which provide that where the implementation of a contract becomes impossible, then the contract and all obligations of the parties shall be suspended until such circumstances end; and at the end of these circumstances the contract shall continue to be implemented and shall not be revoked, in accordance with the dominance of will and the exemption of liability established by law (Article 383 of the UAE Civil transactions Code).

CORONAVIRUS PANDEMIC AND EVADING OBLIGATIONS:

Finally, it is worth mentioning that there must be a causal link shown between the force majeure event and the impact on contractual obligations. For example, where the coronavirus pandemic, despite giving rise to a force majeure, has no effect on the deployment of a construction contract, the contractor would not be able to cite the coronavirus pandemic as a reason to evade the fulfillment of his obligations.

The law seeks to provide fair and balanced remediation to protect adversely effected parties when events that are outside of their control impact their ability to perform under a contract. Essentially, the implementation of the contract should not be impossible or burdensome in such a way that the balance in the contractual relationship is lost. Therefore, neither party shall evade fulfilling their obligations by misusing the concept of force majeure, but rather, may use force majeure as a mechanism to rebalance the contract when an unforeseen event occurs that may burden one party adversely.

Should you have any inquiries or wish to discuss the impact of COVID19 on your construction contracts, please get in touch with Reda Hegazy on +971 4321 1000 or by email at reda@alsuwaidi.ae