Thomas Paoletti participates in the IR Virtual Series – International Contracts: How has the global pandemic impacted international contracts?

Thomas PaolettiFounder & Managing Partner, Paoletti Legal Consultant

Foreward by Andrew Chilvers

The COVID-19 pandemic is one of those once-ina-lifetime events that few people predict but which affects everyone – individuals, businesses and governments.

During the past four months the pandemic has caused huge disruption to companies across the globe as many have suddenly found it impossible to fulfil their contractual obligations. From retail and the construction industry to hospitality and manufacturing, every area of the world economy has suffered.

As a consequence, lawyers and their clients are now rushing to look more closely at the force majeure doctrine as an option for businesses that are no longer able to perform their contractual obligations.

Different legal systems have different legislative definitions for force majeure. For instance, English common law – unlike in civil law – has no universal definition. The ability of a contracted party to invoke force majeure will depend on the presence of a force majeure clause and the particular terms set out in the contract.

Can force majeure justify a suspension of performance or the unilateral imposition of new deadlines or cancellations of purchase orders?

From a UAE perspective we rely either on the contract clause that is related to force majeure or we can rely on article 273 of the civil law that clearly states: regarding contracts binding on both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease and the contract should be automatically cancelled. Force majeure was last tested during the financial crisis of 2008-09 and, as a result, there were a few companies that used the force majeure clause to exit from their contractual obligations. Furthermore, the UAE Courts have interpreted the uncontrollable.

Consequently, according to those precedents, a force majeure clause cannot be not be invoked.

As of today, new cases have been brought to the attention of the court and recently we have seen this particularly in rental disputes for residential apartments. Usually if a tenant wants to terminate, the contract has a two months’ penalty to be paid. Now, the court says that if you lose your job then you can invoke the clause of force majeure to terminate the tenancy contract and you are not liable to pay that two months’ penalty. This is what is happening in terms of applying force majeure. As a result of the pandemic we will need to test each contract individually.

Does the COVID-19 crisis and possible breach of international contracts fundamentally alter assumptions surrounding risk allocation, supply chains and access to markets?

If you have a purchaser and a seller and the purchaser is unable to receive the products because they closed the restaurant, for example, that’s going to have a big impact. No one can foresee it. If you’re unable to receive the products in the restaurant, you will not be able to perform the contract. Similarly, we have court cases where tenants are unable to pay for their tenancies in shopping malls.

Here in the UAE as soon as the pandemic was announced, the government decided to shut down all the shopping malls and all shops closed. This caused a number of issues related to tenancy contracts. Some landlords were keen to help their tenants and provided free rent for two months, for example. Others were much more reluctant to negotiate with their tenants.

That is when a lot of tenants decided to vote for force majeure to try to terminate the contracts. Going forward in the hospitality industry, from restaurants and hotels to shopping malls, all will need to look at the risk involving tenants’ contracts. These are difficult times. With the leisure industry, for instance, people need to understand how they can’t go back to how it was with new social distancing measures in place. Leisure, hospitality, health and fitness; trying to mitigate risk in these industries is very difficult.

Where a contract does not contain a force majeure clause, how simple is it for parties to consider the doctrine of frustration? In which jurisdictions would this apply?

With the UAE you have to consider that we have two independent jurisdictions with their own judicial systems. One is Dubai International Financial Centre (DIFC) for Dubai and the other one is Abu Dhabi Global Market for Abu Dhabi. Dubai has its own legal system that is similar to English law – but is not English law. While Abu Dhabi is just English law. In both jurisdictions if you don’t have force majeure in the contract, you can then refer to the frustration clause.