Force Majeure and the Coronavirus

Companies are doing their best and taking precautions to prevent the spread of the Cornovirus;  some of the measures these companies are taking could invoke force majeure clauses or the “impossibility of performance” defence as a preventative measures , the main one being flight suspension, ban on foreign tourism and some operations being delayed. The question arises as to whether these measures give rise to a force majeure event, relieving one or both parties of performing its contractual obligations. In this article, we will discuss what constitutes a force majeure event in the UAE and what the companies have to say including what protection the UAE is taking to combat this virus.

1. Force Majeure in the UAE

A force majeure is an event beyond a party’s control, which prevents the party from fulfilling its obligations under a contract. A law providing for force majeure through doctrine or contractual provisions can relieve a party from liability for its non-performance.

In the UAE, we will consider the laws of the mainland, the DIFC, and the Abu Dhabi International Financial Centre (ADGM).

a. Force Majeure under the Civil Code of the UAE

Article 273 of Federal Law No. 5/1985 on the the Civil Transactions Law (the “Civil Code”) states:

1. “In bilateral contracts, if a force majeure arises that makes the performance of the obligation impossible, the corresponding obligation shall be extinguished and the contract ipso facto rescinded.
2. If the impossibility is partial, the consideration for the impossible part shall be extinguished. This shall also apply on the provisional impossibility in continuous contracts. In both instances the creditor may rescind the contract provided the debtor has knowledge thereof.”

Article 287 of the Civil Code states:

“In the absence of a provision in the law or an agreement to the contrary, a person is not liable for reparation if he proves that the prejudice resulted from a cause beyond his control such as a heavenly blight, unforeseen circumstances, force majeure, the fault of others or of the victim.”

It is clear that in the UAE mainland, in the absence of other law or agreement, a person will not be held liable for contractual obligations if circumstances beyond his or her control prevent him or her from performing them.

b. DIFC Law No. 6/2004

Article 82(1) of DIFC Law No. 6/2004 states:

“Except with respect to a mere obligation to pay, non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

A party may be exempted from performing its contractual obligation if it can prove that the nonperformance was due to circumstances beyond its control. This would arguably be the case with the coronavirus in limited circumstances such as with regards to suspension or cancellation of airlines and shop operations The World Health Organization currently does not encourage border closures and travel bans. . Please Part 3 of this article for a more detailed list.

Article 82(2) states:

When the impediment is only temporary, the excuse shall have effect for such period as is reasonable, having regard to the effect of the impediment on performance of the contract.

Thus, if an impediment is temporary, the expected performance and/or commitment may be held off for a reasonable time possible to continue such expected performance and/or delivery.

Article 82(3) states:

The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt.

In relation to the third clause, it is reasonable business behavior to notify parties that they are unable to complete their obligation as soon as the impediment becomes known to them.

 Article 82(4) states that “Nothing in this article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due. “ This implies that if a party wishes to terminate a contract due to a force majeure event will be permitted to do so.

DIFC rules are consistent with the UAE mainland rules and go slightly further to provide guidance on the application of force majeure when there is a temporary delay beyond the party’s control. The performance of the obligation affected by the potential force majeure event may also be dependent on how long the parties took to notify the delay. In other words, if there is a known timeframe, e.g., three months’ delay, the party may still be able to perform its obligations rather than cancel performance or delivery, despite the delays.

c. ADGM

The ADGM follows English common law. The guidance in ADGM Market Infrastructure Rulebook, article 2.6.2(d) and (f) is:

“A Recognised Body must have a business continuity plan, which is subjected to periodic review and scenario testing, that addresses events posing a significant risk of disrupting operations, including events that could cause a widespread or major disruption. The plan should:

…

(d) contain appropriate emergency rules for force majeure events,

…

(f) outline business continuity procedures in respect of its Members and other users of its facilities following disruptive or force majeure events.”

It appears that the ADGM’s position is that businesses ought to consider force majeure as part of their business continuity plans. Certainly, the onset of the coronavirus has brought much disruption to businesses and so the expectation from ADGM would be for businesses to plan their risks accordingly. Please see Part 4 below.

Impossibility of Performance Defence

In relation to the concept of impossibility in the UAE, article 273 of the UAE Civil Code (Federal Law No 8 of 1985) provides that if a force majeure event renders the performance of obligations under a binding contract impossible, then such obligations will be extinguished and automatically cancelled. Additionally, in the event of partial impossibility, the consideration for that part of the contract will be extinguished – the same principle applies towards temporary impossibility in continuing contracts. In such cases of partial impossibility, it will be permissible for the obligor to cancel the contract provided that the obligee is made aware of the cancellation. Note that although the UAE Civil Code provides a basis of relief from contractual obligations in the event of impossibility, there is no further clarity as to what constitutes a force majeure event or impossibility. That said, bankruptcy, financial or economic hardship, or insolvency would generally not constitute as basis for impossibility of performance as these are mere difficulties in performing the contract.

Conditions to be Satisfied for a Contract to be Legally Terminated or Changed under UAE Law

Article 267 of the Civil Code states:

“If a contract is valid and binding, none of the contracting parties may revoke, modify or rescind it except by mutual consent, order of the court or a law provision.”

The Civil Code consequently enable the parties to cease the contract upon mutual consent. However, such clause by the parties should be drafted in line with the UAE law.

Article 247 of the Civil Code states:

“In bilateral contracts, where the reciprocal obligations are due, each of the contracting parties shall have the right to abstain from executing his obligation in case the other party does not honor his obligation.”

The parties have the right to refrain from undertaking their contractual obligations in the event the other party fails to perform its contractual obligations. When such cases occur, Neither party has the obligation to deliver.

Article 271 of the Civil Code states:

“The parties may agree that in case of non-performance of the obligations deriving from the contract, the contract will be deemed to have been «ipso facto» without need to obtain a court order. Such an agreement does not release the parties from the obligation of serving a formal notification, unless the parties agree that such notification is dispensed with.”

In would appear at the onset of the coronavirus that many businesses have taken the assessment that the risk is high and opted to close down factories and businesses as the virus spreads and research underway as a vaccine is being developed. The question of foreseeability, commitment and termination would depend greatly on the developments of events and the parties’ ability to perform within reason. See 3. below for list of businesses that have been impacted by the coronavirus.

2. Action taken by the UAE Since WHO Treatment of the Coronavirus as a Public Health Emergency

a. WHO Declarations

On 30 January 2020, the second meeting of the Emergency Committee of the World Health Organization (WHO) convened by the WHO Director General, Dr. Tedros Adhanom Ghebreyesus–under the International Health Regulations (IHR)(2005). The Committee gathered and gave advice to the Director-General, who made the final decision to determine the outbreak of the novel coronavirus (2019-nCov) as a Public Health Emergency of International Concern (PHEIC).

As of 30 January 2020, representatives of the Ministry of Health of the People’s Republic of China reported 7711 confirmed and 12167 suspected cases throughout the country. Of the confirmed cases, 1370 are considered severe, with 170 people having died and 124 people recovering after being discharged from hospital. Moreover, there had been 83 cases in 18 countries.

WHO made clear that it was still possible to stop the virus spreading, provided that countries put measures in place to detect the disease early on, isolate and treat cases, tracing contacts, and promote social distancing measures. The committee also highlighted the role of the multidisciplinary technical mission to China, involving national and local experts, with a view of reviewing and supporting efforts to investigate the animal source of the outbreak, the clinical spectrum of the disease, the severity, human-to-human transmissions, health care facilities, and efforts to control the outbreak.

On 5 February 2020, the WHO and international community has launched a USD 675 million preparedness and response plan covering the months February through to April 2020.

The WHO’s advice was as follows:

• WHO should continue to use its networks of technical experts to assess how best this outbreak can be contained globally;
• “WHO should provide intensified support for preparation and response, especially in vulnerable countries and regions;
• Measures to ensure rapid development and access to potential vaccines, diagnostics, antiviral medicines and other therapeutics for low-and middle-income countries should be developed;
• WHO should  continue to provide all necessary technical and operational support to respond to this outbreak, including its extensive networks of partners and collaborating institutions, to implement a comprehensive risk communication strategy, and to allow for the advancement of research and scientific developments in relation to the coronavirus.
• WHO should continue to explore the advisability of creating an intermediate level of alert between the binary possibilities of PHEIC or no PHEIC, in a way that does not require reopening negotiations on the text of the IHR (2005).
• WHO should timely review [sic] the situation with transparency and update its evidence-based recommendations?
• The committee does not recommend any travel or trade restriction.”

The WHO’s advice in relation to China:

• “Implement a comprehensive risk communication strategy and to inform populations on the development of the outbreak. Undertake preventive and protection measures for the population and response measures for containment.
• Enhance public health measures to contain the current outbreak.
• Ensure the resilience of the healthcare system and protect the healthcare workforce.
• Enhance surveillance and active case finding across China.
• Collaborate with the WHO and its partners to conduct investigations to understand the epidemiology and the evolution of this outbreak and measures to contain it.
• Share relevant data on human cases.
• Continue to identify the zoonotic source of the outbreak, and particularly the potential for circulation with WHO as soon as it becomes available.
• Conduct exit screening at international airports and ports, with the aim of early detection of symptomatic travelers for further evaluation and treatment, while minimizing interference with international traffic.”

The WHO advice to the global community:

“In compliance with article 44 of the IHR (2005), to support each other in the identification of the source of this new virus, its full potential for human-to-human transmission, preparedness for potential importation of cases and researching and developing necessary treatment.”

b. Coronavirus Situation in the UAE

To better understand the situation in the UAE, we have gathered a summary of statements from leading medical practitioners:

Dr Adel Al Sisi, Chief Medical Officer of Prime Hospital:

“Our medical staff is well equipped and is screening all patients with a runny nose, fever, and cough to ensure that no case goes undetected.”

“The emergency department is taking all precautionary measures in detecting a possible case of the coronavirus, especially since there is a potential threat. We are doing a screening on all patients and highly suspect cases—those travelled from the region—are being referred for further screenings from the Central Laboratory. So far, we have had two high susceptible cases, but further tests revealed that those were just Influenza cases.”

Dr. Zia ur Rahman Shah, Senior Director – Administration, Zulekha Hospital, Dubai:

“Any suspected case will be immediately isolated in negative pressure room, following contact and droplet precautions. Staff at triage are provided with N95 masks, eye protection goggles, impermeable aprons and gloves. Suspected cases will be taken to isolation immediately till this condition is ruled out as per the protocol.”

Dr. Arun Goyal, Associate Medical Director and Head of Department, Cardiac Surgery with RAK Hospital:

“We also have separate isolation beds for the suspected and proven cases of coronavirus. And as per the ministry guidelines for all the patients visiting the hospital- we take their last 15-day travel history to ensure preventive measures are in place. The team in our hospital is well prepared to take care of all kinds of cases,”

The Ministry of Health and Prevention (MoHP) advised residents to adhere to general health guidelines. MoHP confirmed that, in coordination with health and all concerned authorities in the country, it has taken “all necessary precautions in accordance with the scientific recommendations, conditions and standards approved by the World Health Organisation.”

Etihad Airlines has made the following statement:

“Extensive measures have been adopted by medical and aviation authorities in China and the United Arab Emirates, and Etihad Aviation Group is fully compliant with the guidance of the Abu Dhabi Health Authority, the World Health Organisation, the Centre for Disease Control and the International Air Transport Association, and stands ready to take more actions based on informed advice”. As of 5 February 2020, MoHP has launched a coronavirus early warning system to identify patients at high risk of contracting the novel coronavirus. The early warning system is designed to be automated with algorithms that identify a patient that is high-risk, through the Wareed system, which is an electronic healthcare information system.

3. Issues Facing Companies

Businesses need to carefully investigate their supply chains where dealings involve China or other countries where there is a risk that the coronavirus may spread, so that they can assess whether their operations may be disrupted.

At this time, there have only been internal transport bans affecting certain Chinese cities around the centre of the outbreak. There has not yet been a travel ban to China or any other neighboring countries. The impact of coronavirus fears on Middle Eastern markets has, however, been severe. The Saudi Stock Exchange’s (Tadawul) headline index the TASI ended trading Monday 3 January 2020 down 1.78%, while Dubai’s main index fell 1.16%. Other regional markets followed the trend, with Kuwait’s market down 0.97%, and the Bahraini market down 0.13 %.

One of the most important steps companies should take is to review their contracts to determine what force majeure conditions might apply. Such provisions are quite broad; therefore, parties must really understand what events could be deemed “force majeure” under the contractual terms to determine whether such events could have an influence on the suppliers and customers. For instance, the virus itself could be deemed as an epidemic, but what about the measures taken by the government? Would the sudden involvement of the State be relevant or not.

Any party seeking to refer to the force majeure provisions in its contract has the burden of proving that there is no other reasonable means for the party to perform their obligations as per the contract, therefore this clause must be broad and ensure to identify what level of risk would be considered deplorable.

Impact on Businesses

While it is still too soon to access the economic impact and disruption to businesses, what we can observe is that businesses can already feel the impact of the coronavirus, below is a summary of some of the sectors impacted.  We have selected main companies that have been impacted by the onset of the coronavirus and in context of UAE- China trade, we also need to bear in mind that similar businesses in the below sectors could also be impacted:

Finance

Chinese markets dropped sharply after the extended new year and the Shanghai Composite closed 7.7.% wiping out nearly $400 billion value (WSJ).

Shipping

Shipping companies carrying goods from China to the rest of the world are reducing their vessels, causing an impact on the demand for services and disruption of global supply chains. According to the United Nations Conference on Trade and Development, about 80% of world’s trade in goods by volume is carried by sea and China has seven of the world’s ten businesses container ports; hence, the impact could be significant. According to Peter Sand, Chief shipping analyst at BIMCO, “a closure of the world’s manufacturing hub impacts container shipping at large, as it is a vital facilitator of the intra-Asian and global supply chains…and this will affect many industries and limit demand for containerized goods transport”.

Floating quarantine

According to Guy Platter, Secretary General of the International Chamber of Shipping, the shutdown means that some ships cannot get into Chinese ports, slowing down loading and discharging of goods (CNN)  Such vessels are considered idling in “floating quarantined zones” and countries like Australia and Singapore are refusing to allow ships that have called to Chinese ports to enter their own until the crew has declared them virus-free. Shipping companies like Maersk, MSC Mediterranean Shipping, Hapag-Lloyd and CMA-CGM have said that they have reduced the number of vessels on routes connecting China and Hong Kong with India, Canada, the United States and West Africa.

From cars to machinery, apparel to consumer goods, industries will be impacted far beyond China’s economy and the longer the health crisis lasts, the harder it will be to ship goods around the world.

Cruise lines

• Royal Carribbean Cruises cancelled three trips of its China- based cruise liner and warning of further hit if travel curbs continued to the end of February 2020.
• At least 135 people on board the Diamond Prince cruise ship in Yokohama, Japan have been tested positive for the virus. There are 3,700 people on the vessel.
• Cruise Ship World Dream anchored in Hong Kong’s port with 3,600 people on board were cleared to leave the ship on 9 February 2020 after five days in quarantine.
• Westerdam has 2,000 people and denied entry to ports in Japan, Taiwan and the Philippines. It will dock in Thailand on 13 February 2020 and currently there are no confirmed cases.
• Anthem of the Seas, docked in New Jersey for an extra two days after four returning passengers were sent to the hospital to be tested for coronavirus (CNN).

Airlines

In the Gulf, at the time of writing this article, Qatar Airways, Emirates Airlines, Etihad Airways and Saudi Arabian Airlines and others have suspended flights to and from China.

In the rest of the world, the following airlines have suspended flights to and from China:

• On 5 February 2020, Cathay Pacific asked 27000 staff and crew members to take three weeks of unpaid leave to cope with the impact of the coronavirus (BBC);
• United, Delta and American Airlines have suspended flights;
• One of the first major Chinese career to suspend flights between China and the United States was China Eastern;
• British Airways, Virgin Atlantic, Lufthansa, KLM, and Air France, among others.

Air cargo

Several air cargo companies have either suspended or cancelled their services to and from mainland China, at least till the end of February 2020. These include IAG Cargo, the arm cargo arm of British Airways parent IAC (ICAGY) and German logistics group DHL. While UPS (UPS) and FedEX Express (FDX) continue to fly in and out of China, UPS has seen reduced demand for its services as a result closures to businesses.

Automobile Manufacturers

According to Forbes, many have suspended production and limited travel within China, for example, VW Group, the largest foreign automaker in China asked about 3,500 employees in Beijing to work from home through to 17 February 2020.

• Carmaker Hyundai (HYMTF) has suspended production at its plants in South Korea;
• Jaguar and Land Rover parent Tata Motors anticipates the outbreak to hamper production in China and hit profits;
• Tesla warned a one to 1.5-week delay in production of its Shanghai built Model 3 cars and could hurt March quarter profit after China ordered a shutdown of the factory;
• Ferrari can offset weakness in China if it is for a few months only and is more concerned about Hong Kong;
• Toyota Motor shut factories through 9 February 2020;
• According to Bloomberg, Robert Bosch GmbH, shut two factories employing a total of 800 people in Wuhan;
• Airbus closed its Tianjin assembly line;
• Crude oil price falls to its lowest level in 12 months (BBC).

Restaurants

• McDonalds closed several hundred of approximately 3,300 outlets in China;
• Starbucks have closed more than half of its approximately 4,300 stores in china and delayed a plan to update its 2020 forecast;
• Burger King closed some of their restaurants;
• Haidilao shut restaurants.

Technology firms

• Employing 10,000 people in China, Apple closed all their corporate offices, stores and contact centers in China through 9 February (Forbes, WSJ);
• Google and Deere temporarily closed facilities in China;
• Baidu postponed the announcement of its fourth-quarter results;
• Foxconn’s shipments to customers, which includes Apples could be disrupted if Chinese factory halt extends for a second week;
• LG Display did not close any of its’ factories in China but warned the outbreak caused uncertainty for suppliers;
• Samsung Electronics extended closure over holidays for some factories though declined on comment on the impact;
• Samsung affiliate and batter maker Samsung SDI, which includes Volvo amongst their customers, warned of a hit to its March quarter earnings;
• SK Hynix, a chop plant in the eastern city of Wuxi- outbreak had not disrupt production but that could change if situation is prolonged.
• AT&S cut its revenue forecast to approximately 7% for year to 31 March.

Hotels

• International chains like The Peninsula Hotels, Hilton, Marriott International, InterContinental Hotels, and others are reportedly to offer free reservation changes or cancellations in China through 8 February 2020;
• Ctrip which is China’s largest online booking platform, Ctrip, said more than 300,000 hotels on its platform had agreed to refund bookings between 22 January and 8 February 2020.

Retail/ Consumers

There has not been reported any closures of retail outlets here, but UAE luxury retailers are feeling the pinch after the drastic reduction in big spending Chinese tourists.

• H& M closed its stores in China, around 45
• Levi Strauss closed half its stores in China and anticipates it would take a near-term hit
• Pandora states virus led to an unprecedented decline in consumer traffic in China and Hong Kong
• Nike warned of financial impact after closing half its own stores in China and cutting operating hours
• Walt Disney closed its Shanghai park which could cut their operating income in the second quarter by $135 million, if they closed for two months
• Watami Co Ltd, Japanese pub chain is withdrawing from mainland China due to concerns of it being a prolonged epidemic
• Fast Retailing closed approximately 280 of its 750 Uniqlo stores in China
• Ikea closed stores in China
• Ralph Lauren closed half its 110 stores in China
• Tiffany temporarily closed several stores in affected areas in China
• Gap closed its China headquarters and adjusting operating hours, including closures and shortening work hours
• Hugo Boss temporarily closing some of their stores in China, with the rest to cut trading hours
• Adidas has closed a significant number of its stores in the country
• Carlsberg mentions there could be short-term impact

Longer term

It is currently difficult to assess how long the outbreak of the coronavirus is going to last.  What is perhaps clearer is that businesses are having longer term impacts on their operations and because of the uncertainty from day-to-day operations there are many questions as to how the supply chain is impacted not just in China but globally.

It may be of no surprise that certain UAE companies/business entities and/or subsidiaries may operate in China and therefore we aim to follow the potential trend of these companies and share what potential results, specifically in relation to force majeure may be triggered.  For example currently Chinese construction companies with projects in the UAE could face difficulties shipping in supplies from China and this could mean that contractors could source more from UAE or the Gulf but in any event there may well be delays in shipments and/or construction developments (Gulf News).

Moreover, given that China- UAE trade worth $11.2 billion in 2019 Q1, the current coronavirus is likely to make its’ impact felt in Q1 of 2020 with rippling effects and implications for the year (Khaleej Times).

4. What Should Companies Do?

It is currently difficult to assess how long the outbreak of the coronavirus will last. What is clear is that businesses are experiencing longer term impacts on their operations and because of the uncertainty in day-to-day operations, there are many questions as to how the supply chain will be impacted not just in China but globally.

Actions companies can take:

1. Be aware that some force majeure provisions have time constraints for reporting a force majeure event, and make sure the notice period requirement is met.
2. Analyse contractual and statutory force majeure conditions to ascertain whether there has been a force majeure event that allows for non-performance of the contractual obligation.
3. In the event of a force majeure claim, the affected party affected provide as many details to support its claim, such as the timing, the number of parties impacted, how the supply chain has been affected and other evidence as deemed appropriate. For instance, in the case of impediments in the supply chain, one must have reasonable checks in place to make sure their facilities are not affected.
4. Termination clauses should be read and understood accurately, in case the event the supplier has the right to terminate the contract due to recent events, then the buyer must be wary of such and have a back up to find an alternative supplier who would be willing to undergo the work. Moreover, buyers sho