Can you protect your Contracts from COVID 19 Pandemic in the UAE?

COVID 19 Pandemic has brought the whole world to an unanticipated standstill. While everyone is busy trying to protect themselves and their loved ones from the Pandemic, its effect on businesses and commercial transactions are unforeseen and yet to be determined.

We have experienced and can expect in the future many Governmental Orders and Regulations in the interest of containing the widespread pandemic which is definitely the first priority now, but these may also have detrimental effects to commercial transactions in UAE and all over the World.

The inevitable consequences to these transactions can be assessed by the terms of the Contracts they are based on, and the UAE Law. The flood gates can be expected to be opened to disputes due to contracts that are rescinded, terminated and impossible to be executed and the protection of the interest of both parties in such a scenario will be tricky due to the unexceptional nature of the pandemic which may not have been adjudicated by the UAE Courts till now and due to lack of precedents directly applicable to this situation.

How does UAE Law handle Force Majeure in relation to Contracts?

The UAE Law specifically prescribes contracts to be ipso facto rescinded in the event of a Force Majeure that makes the performance of the obligation impossible and in such case the corresponding obligations based on the contract shall also be extinguished likewise. The obligations can also be rescinded partly if the obligations are partially impossible. But each party of the contract must ensure that he is not defrauding the other party by using the excuse of Force Majeure to evade performance of his obligations, and if the performance of the obligation is possible, then the abolition or termination will not be considered valid due to Force Majeure. Thus, the prerequisite steps for effective rescission or termination of the contracts may play a major role in validating the rescission.

Further UAE Law also mentions that further to the provisions in the Law or any terms agreed between the parties, no party shall be liable to compensate the other for any infringement of rights or obligations due to the Force Majeure.

Law affecting Secured Debts and Pledges

Even in the case of secured debts, the perishing of the property in possession of the secured debtor due to Force Majeure will result in the suretyship to be ended.

In case of Pledge, if the property pledged perishes or is damaged due to Force Majeure then the Pledger may choose to furnish adequate security or pay the debt in full before it falls due.

Applying Force Majeure to COVID 19 Pandemic

The Law specifies that damages in lieu of impossibility of specific performance of obligations by a Debtor or late performance of such obligations may raise liability against the Debtor unless he proves that the impossibility of the performance was due to reasons beyond his control which may be interpreted to include impossibility due to the Pandemic.

The special consideration provided by the Law is only applicable to Force Majeure and the most important question is will COVID 19 be considered as Force Majeure especially if the Force Majeure Clause does not cover this scenario or if there is no Force Majeure Clause in the Contract. And so, we come back to the title of this Article and the subject raising the doubt that how protected are your Contracts against COVID 19 Pandemic?

The short answer will be that COVID 19 may definitely be considered as a Force Majeure. But the actual effect of this Force Majeure and till what extent the parties of the Contract will be exempted from their obligations needs to be defined. The new laws and regulations that may be issued in this regard in the coming weeks or months will clarify many expected scenarios, but our initial assessment is that the obligations of parties will be dealt in distinct way departing from the usual cases relating to Force Majeure. It may be decided that each party of the Contract should bear the losses related to their part of obligation. It can be the creditor or debtor who may accordingly have to incur part of the actual loss (reducing the amount of their commitment to the largest extent possible), i.e. there are several expected scenarios and each case may be dealt on its own merits.

What can you do?

Step 1. It’s time to revisit those signed and executed Contracts, review them, amend them or add addendums for the extra protection. Any new Contracts should also be drafted considering and anticipating overall protection of the interest of the parties in case of the unforeseen event like the Pandemic.

Step 2. Contact an Expert like Allegiance International for further Assistance.

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