Introduction

The rise of the COVID-19 pandemic has stagnated the performance of the global industry, with supply chains being disrupted and consumers being driven away from marketplaces. The rapid expansion in the numbers of people infected, has disrupted not just personal routines, but also macro-level activities. While tourism and retail are obvious sectors that are being impacted, the global nature of business has led to growing uncertainty regarding the performance of transactions. Growth of the pandemic has been accompanied by wide-spread commercial effects and as such it is time for contracting parties to review their commercial agreements in order to distinguish whether any delays in performance due to coronavirus are excusable under the contract.

Contracts may provide for safeguards against disruptions either via force majeure clauses (in the civil law system) or frustration (in common law systems).

Frustration

Under English Law, frustration refers to a situation where due to the occurrence of an event (which a) is outside the control of either party, and b) has not been contemplated by the contract) that so alters the nature of the contractual rights/obligations than what was within the contemplation of the parties at the time of signing of the contract. This legal concept derives from principles of parity, as it would be unjust to enforce contractual obligations when the commercials underlying the contract have become entirely skewed. However, it is important to note that the standard of frustration should be of a nature that is extremely high to meet, and simply because performance is more expensive or more difficult has not been seen by courts as being enough to trigger frustration. Courts have only permitted limited number of cases where parties have successfully claimed the frustration of a contract.

Force Majeure

Force Majeure is a civil legal system concept similar to the English concept of frustration. Article 273 of the UAE Civil Code provides for a statutory right against performance in situations of force majeure and successful invocation of the provisions may rescind in part or in entirety the obligations under a contract whose performance have been made impossible due to the occurrence of external events. Most contracts provide for specific events that are regarded as the triggers for force majeure relief, such as Acts of God (like earthquakes), or disruptions in the workforce, or regulatory disruptions. Certain contracts, especially in sensitive sectors such as healthcare, may include pandemics or epidemics as triggers as well. However, the contractual position should be reviewed in order to assist with case preparation, and see whether such relief may be based from within the contract, or must be drawn via statute.

Insurance Policies

It is important to not underestimate the commercial consequences of the disruptions caused by the pandemic. As such it is important for businesses which have opted for commercial insurance to review insurance documents and consult their insurer with regards to their coverage. In the event that the business has made provisions to be insured against interruptions, the extent, scope and coverage of such insurance must be carefully addressed and spelt out, as the response of the insurance sector to the growing pandemic may very well be to construe their coverage restrictively. Typical insurance of commercial property requires the existence of physical loss before the insurer’s duty of indemnification is triggered. The specific provisions which were negotiated earlier, the circumstances facing a business and the language of the policy shall be the primary determinants of whether the loss suffered by a business may be mitigated by their insurance coverage.

Conclusion

In face of the COVID-19 Pandemic, businesses should review their pre-existing contractual obligations, as well as discover whether their agreements and local laws give them breathing room to operate in face of the commercial effects of the pandemic. The nature of the business obligations, the provisions that govern allocation of risk and the individual circumstances of the case are important questions that must be answered by businesses before preparing a claim for frustration or force majeure. Invoking force majeure or frustration has often been a risky endeavour, with case law firmly distancing itself from results that businesses might be looking for. It is important to understand the agreement outlining the relationship between parties, as clauses that may allow contravention of contractual obligations may have their own processes for invocation.

Companies are advised to check with their commercial insurance providers, and establish whether any disruptions due to the pandemic may be claimed for. Reviewing the insurance documents is a must, as the process of invocation of insurance, or any caps on the amount which can be claimed must be clear to companies in order to make the right decisions. While the legality of non-performance may be a disputed question before courts of law, it is important to note that in such trying times, participants in the economy have more to gain through collaborative measures (such as extension of time periods, etc.), rather than adversarial legal battles.