CORON­AVIRUS THE IM­PACT ON BUSI­NESSES IN THE GCC

WHAT IM­PACT WILL THE CORON­AVIRUS HAVE ON GCC COM­MER­CIAL CON­TRACTS, WHOSE SUP­PLY CHAIN HAS BEEN AD­VERSELY IM­PACTED?

CEO Middle East - - BUSI­NESS -

WHEN CHINA CON­FIRMED THE FIRST CASES OF CORO­N­AVIRUS, MOST GCC COUN­TRIES,

in­clud­ing the UAE, re­stricted di­rect travel to and from China (with the ex­cep­tion of Bei­jing). In just a few months, the virus has a name – Covid-19 – and over 110 coun­tries have recorded cases, in­clud­ing most coun­tries in the Mid­dle East with Iran prob­a­bly the worst hit in the re­gion.

As the virus has spread and re­ported cases in­crease so too have the re­gion’s travel re­stric­tions. First Saudi Ara­bia in­tro­duced travel bans from five new coun­tries in­creas­ing the to­tal num­ber of travel bans to 14 coun­tries. The UAE Min­istry of Health first ad­vised cit­i­zens and res­i­dents to avoid trav­el­ling abroad and as of now, flights in and out of the coun­try are stopped un­til fur­ther no­tice..

Many busi­nesses based in the GCC have been af­fected by COVID-19 whether by rea­son of sup­ply chains from se­verely hit coun­tries, such as China or Italy, hav­ing been cut off or due to key mem­bers of staff be­ing un­able to travel to the GCC. In some cases, the re­stric­tions on trans­port­ing people and goods have caused busi­ness to fail to ful­fil or­ders or meet dead­lines. Whether those busi­ness are ex­cused from li­a­bil­ity for fail­ing to com­ply with their con­trac­tual obli­ga­tions boils down to three main fac­tors: the gov­ern­ing law of the con­trac­tual ar­range­ments; the terms of the con­tract; and the real cause of preven­tion.

All GCC coun­tries recog­nise the le­gal doc­trine of ‘force ma­jeure’ in some form. Gen­er­ally, where an obli­ga­tion un­der a con­tract is ren­dered im­pos­si­ble to per­form, due to an ex­ter­nal event, the non-per­form­ing party may be ex­cused from li­a­bil­ity. Broadly, a party is en­ti­tled to rely on the con­cept where the event is ex­cep­tional and per­for­mance is made im­pos­si­ble.

So, for in­stance, if the clo­sure of a port or travel re­stric­tions have made per­form­ing a con­tract more dif­fi­cult, but still pos­si­ble (even if more ex­pen­sive), it is un­likely the re­stric­tions will qual­ify as a force ma­jeure event. How­ever, if the re­stric­tions mean that spe­cial­ist equip­ment, which can only be man­u­fac­tured in, say, China can­not be sup­plied to the GCC due to the clo­sure of Chi­nese ports, that may qual­ify as a force

ma­jeure event which ex­cuses a party from any li­a­bil­ity for non-per­for­mance.

In cer­tain cir­cum­stances, even where an event is not a force ma­jeure event, the laws of most GCC coun­tries may per­mit the court to re­duce (but not nec­es­sar­ily fully ex­cuse) a par­ties’ li­a­bil­ity where the im­po­si­tion of a con­trac­tual obli­ga­tion would be oner­ous due to un­fore­seen cir­cum­stances. The scope of such re­duc­tion dif­fers in each GCC coun­try. In the UAE, for in­stance, the re­duc­tion is trig­gered on the oc­cur­rence of “ex­cep­tional cir­cum­stances of a pub­lic na­ture.” Ar­guably, COVID-19, and the re­sult­ing travel re­stric­tions, are ex­cep­tional cir­cum­stances of a pub­lic na­ture.

How­ever, whether a non-per­form­ing party may avail them­selves of a re­duc­tion in li­a­bil­ity will de­pend on the con­nec­tion be­tween COVID-19 and the non-per­for­mance, the rel­a­tive loss the party would suf­fer from en­force­ment of the con­trac­tual obli­ga­tion and a bal­anc­ing ex­er­cise which the court would have to un­der­take in re­la­tion to the in­ter­ests of each party.

For a party to take ad­van­tage of the le­gal doc­trine of force ma­jeure (or, sep­a­rately, the re­duc­tion in li­a­bil­ity out­lined in the para­graph above) its com­mer­cial re­la­tion­ship must be gov­erned by a law which recog­nises the con­cept. If the sub­stan­tive or un­der­ly­ing law gov­ern­ing the con­tract does not recog­nise it, the terms of the con­tract it­self may ex­cuse li­a­bil­ity for ex­cep­tional events. Con­fus­ingly, such clauses are of­ten called force ma­jeure clauses but whether they op­er­ate in the same way as the le­gal doc­trine of the same name, de­pends on the pre­cise word­ing of the clause. For ex­am­ple, the ef­fect of the clause will de­pend on what has been agreed be­tween the par­ties and may range from a re­duc­tion in li­a­bil­ity, an en­ti­tle­ment to sus­pend obli­ga­tions or even ter­mi­na­tion.

Busi­nesses which have been ad­versely ef­fected by the COVID-19 out­break should check the gov­ern­ing law clause of all rel­e­vant con­tracts and also re­view whether there are any spe­cific force ma­jeure clauses which may be re­lied upon. If such clauses ex­ist, it is im­por­tant to en­sure that any no­tice pro­vi­sions are com­plied with.

Busi­nesses should also be care­ful when en­ter­ing into sup­ply con­tracts dur­ing the midst of the out­break. The ap­pli­ca­tion of the reme­dies out­lined in this ar­ti­cle is of­ten as­sessed by ref­er­ence to the par­ties’ knowl­edge at the time of en­ter­ing into the con­tract. Seek­ing re­lief for non­per­for­mance caused by COVID-19 may be much more chal­leng­ing in re­la­tion to con­tracts which have been en­tered into af­ter both the out­break and its im­pli­ca­tions have been well pub­li­cised.

Fi­nally, as is of­ten the way with these things, ob­tain­ing early le­gal ad­vice, can fre­quently save par­ties time, money and frus­tra­tion in the fu­ture.

Ex­pert Raza Mithani is Part­ner at at Bryan Cave Leighton Pais­ner LLP

In­sight Richard Du­pay, Se­nior As­so­ciate at Bryan Cave Leighton Pais­ner LLP

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