08 April 2020

Covid-19 and commercial contracts: a practical guide for UAE businesses

As the number of confirmed Covid-19 cases continues to rise globally, the UAE government has taken several precautionary steps and preventative measures to ensure public health and safety, including implementing restrictions on travel and social gatherings.

This alert explains the key issues for businesses with operations in the UAE to consider in relation to their commercial contracts.

Current UAE Guidelines

Precautionary measures are in place to limit the movement of people. Malls, restaurants, gyms and fitness centres and other entertainment venues such as cinemas, nightclubs, bars, pools and beaches have been closed in Dubai from mid-March 2020.

Recently, a National Disinfection Programme was implemented, which will remain in effect until 5 April 2020 and which imposes a nationwide restriction of movement outside the home, between 8 pm and 6 am, in order to allow for the disinfection of public spaces, with limited exceptions for emergencies. Outside of these hours, members of the public have been asked to stay at home unless they need to leave for essential reasons such as grocery shopping or visiting a pharmacy or unless they work in a vital sector such as healthcare, water, police or banking, among others. While outside the house, individuals must adhere to social distancing rules. A fine of AED 2,000 is applicable for any person leaving their home for unnecessary reasons.

In a “Remote Work for Private Sector” notice from Dubai Economy, the authority regulating businesses in Dubai, all private sector companies and commercial establishments (excluding pharmacies, cooperative societies, grocery stores and supermarkets) have been directed to adhere to implementing remote work systems for 80% of their employees until 9 April 2020; a similar notice was published by the Dubai International Financial Centre (DIFC), advising all DIFC establishments to implement a remote working from home policy for at least 80% of employees from 26 March 2020 until further notice.

In addition, extensive travel restrictions are in place. The UAE has cancelled all entry visas for tourists (except those from certain countries) and suspended the entry of residency visa holders for 2 weeks from 19 March 2020. On 23 March 2020, all passenger flights into and out of the UAE were suspended for 2 weeks with effect from 25 March 2020. The above measures may be subject to change at short notice.

Issues to consider for businesses

It is important for businesses to evaluate the potential implications of global restrictions arising out of Covid-19, particularly in relation to their supply chains and the potential impact upon the performance of contracts. This includes reviewing their current contracts, with a particular focus on provisions dealing with extensions of time and delays, force majeure, events of default and insolvency risks.

Contractual clauses which provide for liquidated damages to be payable on certain default events or which provide for an express duty to mitigate losses following a breach of contract should also be carefully considered. Businesses should check for any relevant material adverse change clauses in both lending documents and documents relating to acquisitions, which may operate to prevent a drawdown of funds or allow parties to terminate a contract. Businesses should also check their insurance policies for any applicable business disruption event insurance. In all cases, particular attention should be paid to notice and reporting requirements.

Force majeure clauses in contracts

Commercial contracts commonly include a force majeure clause which will usually contain exhaustive or non-exhaustive definitions of the scope of the triggering force majeure event. Such a clause may, depending on its wording, extend to the consequences of a global pandemic such as Covid-19. If companies are seeking to rely on their force majeure clauses, complying with the notice requirements in the contract will be essential to asserting this right.

Businesses should note that force majeure clauses will likely only be triggered by Covid-19 if the contracts were entered into before it became apparent that Covid-19 would cause significant disruptions to the business, as typically force majeure clauses are drafted so as to be triggered by unforeseen events. A potential cut-off point might be the date on which the World Health Organisation declared the outbreak a pandemic. Future contracts should address how the risks of Covid-19 should be allocated between the contract parties.

Applicable law to contracts

It is important to take note of the governing law of the contract, as this will determine whether the parties are able to terminate or delay the contract on the grounds of impossibility or a significant change in circumstances under the appliable law, which may provide the parties with additional relief outside of the express contract terms.

The UAE Civil Code provides that if a force majeure event occurs and the contract becomes impossible to perform, the contract will be automatically cancelled (or cancelled in part, if part performance remains possible). Similar provisions exist in other GCC jurisdictions such as Qatar and Saudi Arabia.

The UAE Courts are also able to reduce the obligations imposed by contracts where external factors have made the contractual obligations onerous or difficult but not impossible to perform.

In contrast, common law jurisdictions such as England and Wales do not generally allow for courts to reduce obligations where the contract has become onerous but may allow for termination in the event of impossibility pursuant to the principle of “frustration”.

For contracts governed by DIFC Law, a party may be excused from non-performance if it can prove that the non-performance was due to an impediment beyond its control which could not reasonably have been expected at the time of the contract, nor avoided, nor its consequences overcome. Where the impediment is temporary, the party will be excused from performance for only so long as is reasonable. Notably, however, the relevant provision excludes “a mere obligation to pay”.

Documenting procedures

Businesses should document reasons for any failure to perform contractual obligations or even any difficulty in performing such obligations. This should include any impacts caused by government guidelines or restrictions which have been implemented due to Covid-19. This documentation may later become important in any litigation or insurance claim. For instance, businesses should record any social distancing measures or travel restrictions such as those listed above if they prevent it from operating at its usual capacity.

For specific advice on any contracts or insurance policies and the implications of Covid-19 on your business, please get in touch with one of our key contacts below.

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