This article was first published in Arabian Business.
Joanne Strain, Partner at King & Wood Mallesons, Dubai, discusses what practical and necessary legal steps businesses should take in the coming months in response to the COVID-19 pandemic
In light of recent uncertainties and daily COVID-19 developments, the pandemic is affecting stakeholders across all sectors. The initial lockdown in Asia and subsequent lockdowns in Europe are disrupting all areas of commerce and industry.
Many project-based businesses are experiencing shortages in the supply chain, delays and uncertainty while banking and financial services businesses are dealing with the repercussions of market volatility and liquidity concerns. Equally retailers, educational services, marketing agencies and technology providers are all impacted, as service demands decrease and liquidity issues arise.
Despite businesses having contingency plans in place for standard business disruptions, the scale of disruption caused by COVID-19 is unprecedented and mostly unforeseen. Some companies may, therefore, find themselves unexpectedly unable to perform contracts or meet deadlines, and should take steps to protect against future litigation and mitigate losses.
Regardless of the sector, businesses should pay close attention to the contractual terms already agreed and assume that they continue to be bound by contractual promises made.
Businesses need to review their current contracts. Clauses relating to delays, non-performance and failure to pay should be identified. Many contracts contain notice provisions and procedures to be followed in these circumstances. Special attention should be paid to any contractual clauses which specify liquidated damages as a payable for certain defaults, and of any express duty to mitigate losses following a breach.
In circumstances where a business is simply unable to perform its contractual obligations, steps should be taken to identify any force majeure clause in the contract. Identifying the governing law of the contract is vital as this will influence the options available to a business looking to exit a contract on the grounds of impossibility or changed circumstances. Lending documents should be reviewed for any applicable material adverse change clauses, which might be triggered prior to any drawdown of funds. Insurance policies should also be reviewed for any applicable business disruption event insurance and notice requirements and procedures to claim.
Once the contractual and legal rights have been established, it is useful for businesses to document any reasons for a failure to perform. These may include any changes prompted by applicable government restrictions and advice, triggered by COVID-19, which may later be relevant in any litigation or insurance claim. These changes could include government announcements, such as enforced social distancing or international border closures preventing industries from operating at their usual capacity, as employees are required to work from home or cannot mobilise.
Depending on the language used within a contract and the relationship between the parties, businesses may have the option to anticipate a potential dispute and enter into negotiations with the other party. Opening the lines of communication with suppliers and customers is key to understanding the cause of delays or non-performance to avoid potential disputes. Both parties will then be in a position to either amend the contract to take account of the new prevailing circumstances or enter into a mutuallyagreed termination or settlement agreement to bring the contract to an end.
Many contracts will include a force majeure clause which, depending on its terms, might encompass a pandemic, allowing a party relief from the performance of its obligations. Depending on how this particular clause has been drafted, it may be possible for a business to terminate the contract or at the very least to avoid paying damages for delays or non-performance.
Even in the absence of a contractual force majeure clause, the legal framework in the UAE allows for contracts to be cancelled should external factors result in contractual obligations becoming impossible to deliver. There is also scope for the courts to elect to reduce the obligations imposed by a contract should external factors make the obligations onerous or difficult, but not necessarily impossible.
A key point to note for all businesses is that any force majeure clauses will only be useful in contracts which were signed before COVID-19 was declared a pandemic by the World Health Organisation. This is because a force majeure clause can only be triggered by an unforeseen event.
Any business considering entering into a new contract during the current situation should do so mindfully, taking into account the impact COVID-19-related repercussions will have on timelines, performance and payment. When drafting new contracts, businesses may choose to include specific contractual provisions to address the current pandemic and any that may arise in the future.