08 Jul 2021

Is Covid-19 to be regarded as a Force Majeure Event in Construction Contracts subject to UAE Law?

Authored by: John Smy

In brief:

  1. Construction disputes related to Covid-19 and Force Majuere in Construction Contracts have increased in the UAE.

  2. We assess the normal position under International Federation of Consulting Engineers (“FIDIC”) and related issues.

  3. Careful consideration should be given to the impact Covid-19 has on the legal and practical considerations associated with Force Majuere in Construction Contracts.  There is no one-size-fits-all solution. As such, each claim must be assessed on a case-by-case basis.

In construction disputes that we have been handling, increasingly we have seen that Clients have either been claiming or asking for our advice on whether Covid-19 and its associated restrictions can be regarded as a Force Majeure event.

Generally, Force Majeure (or Act of God, as it was traditionally known) relates to an event or effect that can neither be anticipated nor controlled and which would lead to the parties being unable and ultimately excused from performing their respective contractual obligations.

What does the Contract say?

The starting point would be to look at what the contract terms say in order to see whether they provide specifically for Force Majeure.

Many construction contracts in the UAE are based on the FIDIC suite of contracts.

By way of an example, Clause 19.1 of the FIDIC 1999 Red Book, defines Force Majeure as follows:

“In this Clause, “Force Majeure” means an exceptional event or circumstance:

(a)   which is beyond a Party’s control,

(b)   which such Party could not reasonably have provided against before entering into the Contract,

(c)   which, having arisen, such Party could not reasonably have avoided or overcome, and

(d)   which is not substantially attributable to the other Party.”

 

Clause 19.1 then goes on to provide a non-exhaustive list of exceptional events or circumstances (such as war, terrorism, riot, munitions of war etc.) which would be deemed as being a Force Majeure event.

That non-exhaustive list does not specifically include pandemics. It does however refer to “natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity” and we note that some legal commentators have suggested that a pandemic could be classified as a “natural disaster”. However, such classification does not sit neatly with the examples given and we have not seen or heard of any instances where this argument has been successful. 

Notwithstanding, it is not inconceivable that Covid-19 could fall within the FIDIC Clause 19.1 (a) to (d) definition referred to above but would depend on the specific facts of the case and, as such, there is no blanket right or wrong answer.

What does the UAE Law say?

Whilst the starting point would be to look at the contract terms, if those terms do not assist then a party can seek to rely on the UAE law and, specifically, Article 273 of the UAE Civil Code which states in translation:

(1)   In contracts binding on both parties, if force majeure supervenes which makes performance of the contract 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 obligee to cancel the contract provided that the obligor is so aware.”  

Our experience is that the local Courts interpret the meaning of Force Majeure very narrowly, irrespective of what the contract terms say.

Therefore it must be shown that performance of obligations is “impossible” rather than just difficult and, in addition, the local Courts have determined that the Force Majeure event has to be “unforeseeable and unavoidable”.

Whilst the lockdowns and other relevant restrictions in the UAE may have delayed performance or the delivery of materials, particularly from abroad, it is unlikely (save for perhaps specific short term construction contracts) that such delays would render performance or delivery of materials “impossible”.

To that extent, most Covid-19 delays are unlikely to be regarded as Force Majeure events, pursuant to Article 273 of the UAE Civil Code. 

UAE Cases relating to Covid-19 and Force Majeure

We have not seen any specific cases before the local Courts relating to construction contracts where Covid-19 has been determined as being a Force Majeure event.

There have, however, been numerous non-construction contract cases, some where the Court has determined a Force Majeure event in relation to Covid-19.

We refer to two of those cases below, in order to illustrate how the Court treats each case on its specific facts and to show when the Court is likely to deem such an event or circumstance as being Force Majeure.

Our view is that for cases relating to construction contracts, the Court will take a similar approach as it has done with other cases, including those two referred to below.

Case No. 121/2021 Dubai Civil Court of Appeal, dated 15 April 2021

The Claimant sought cancellation of a contract for catering at a wedding signed 21 January 2020 and refund of the sums paid to the Defendant.

The wedding was scheduled for 16 March 2020. The Dubai Department of Tourism and Commerce Marketing placed a ban on weddings for one month from 15 March 2020. The Claimant argued that due to a Force Majeure event, it was impossible to hold the wedding on the planned date.

The Court of First Instance (“CFI”) cancelled the contract and ordered the refund of half of the sums paid to the Defendant.

Both parties appealed. The Defendant argued that performance had been completed on 13 March 2020 in preparation for the wedding on 16 March 2020.

The Court of Appeal cancelled the Judgment of the CFI and ordered the Defendant to repay the sums paid to the Defendant in full. The Court of Appeal confirmed that Force Majeure events must be unpredicted and not anticipated at the time of entry into the contract.

Case No. 512/2021 Abu Dhabi Commercial Cassation, dated 25 May 2021

The Claimant sought dissolution of a contract on the basis of Force Majeure from 1 March 2020 and the refund of the value of works installed and return of a guarantee cheque. There was also a prior investment contract whereby the Claimant leased a restaurant from the Defendant on Al Hudayriat Island in Abu Dhabi.

The Claimant argued that fulfilling the contract became impossible as a result of the unexpected Covid-19 epidemic and Government restrictions on businesses. The CFI held that the contract had been dissolved on 25 March 2020. Both parties appealed the CFI Judgment. The Court of Appeal denied the appeals and affirmed the CFI Judgment. The case was appealed to the Court of Cassation.

In its Judgment in Case No. 512-2021, the Court of Cassation dismissed the Appeal and held that:

This contention is invalid as it is decided by Article 273 of the Civil Transactions Law with respect to contracts binding to both parties that if a Force Majeure arises that makes performance of the obligation impossible, the corresponding obligation shall be extinguished and the contract ipso facto rescinded. It is also decided that in order to be exempted from liability due to Force Majeure, such Force Majeure must be the sole reason for the damage to occur and the standard is a subjective one for the average person, which is subject to the scope of the discretionary authority of the trial court whenever it establishes its ruling on plausible reasons that have a support in the documents and leads to the outcome concluded.

This epidemic is considered a foreign reason, a Force Majeure and an urgent event that cannot be avoided and its consequences cannot be excluded. It is an unexpected event that makes the performance of the contract absolutely impossible. This requires the terminations of the obligation and the contract is dissolved by the force of law.

The Defendant had appealed to the Court of Cassation on the basis of a misapplication of the law, citing Article 273 of the UAE Civil Code, and arguing that Article 273 did not apply as performance had not become impossible.

The Court of Cassation disagreed and relied on:

  • Circular No. 34/2020, dated 18 June 2020, issued by the Abu Dhabi Department of Economic Development in respect of restrictions and closures of restaurants.
  • The fact that the owner closed the island from 25 March 2020.
  • The fact that the Island was still, at the date of Judgment, closed.

Conclusions  

Whether the impact of Covid-19 is to be regarded as a Force Majeure event in construction contracts will depend on the particular facts of a matter. There is no one-size-fits-all solution. As such, each claim must be assessed on a case-by-case basis.

Whilst the terms of the contract, and in particular any Force Majeure clause, is the starting point for analysis, a party can also rely on Article 273 of the UAE Civil Code, but which Article is interpreted narrowly by the local Courts in that performance by a party must be “impossible…unforeseeable and unavoidable”.

The few cases where the local Courts have determined Covid-19 as being a Force Majeure event, are testament to this narrow interpretation approach.

Should you have any questions on COVID-19 as a Force Majeure Event in Construction, or on Engineering & Construction in the UAE generally, please get in touch with John Smy, Partner, Head of Engineering & Construction j.smy@hadefpartners.com or your usual Hadef & Partners contact - https://www.hadefpartners.com/Expertise/6/Engineering---Construction

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.