What is the current impact of the COVID-19 pandemic on commercial and consumer contracts?

Al Rowaad Advocates & Legal Consultants | View firm profile

The Covid-19 pandemic is still interfering heavily with international trade creating disruptions and delays on an unprecedented scale. The world has completed more than one year since the Covid-19 outbreak. However, its far-reaching effects are still far from over. Pandemic outbreaks have occurred before on numerous occasions, and they have had a crippling effect on the world economy. However, never before the world has collectively experienced such bottleneck effect on international trade and shipping. The underlying causes are numerous and include factory closures, supply shortage, transit and payment delays, to name a few. Many businesses have been pushed to the brink of bankruptcy in increasing numbers worldwide.

In this article, we would identify several common legal and commercial issues. We would like to illustrate the legal measures applicable in the UAE in case of non -performance of commercial and consumer contracts on account of the pandemic.

One of the most common after-effects of the pandemic has been the ‘contractual non -performance’ on account of conditions that are beyond the control of the contractual parties or, in other words “Force majeure conditions”. Force majeure is a French term that literally means “greater force”, and in legal terms, it refers to ‘unforeseeable circumstances that prevent someone from fulfilling a contract’.

The Federal law no. 5 of 1985 and its amendments on the Civil Transactions (UAE Civil code) states ‘force majeure‘ as follows:

Article 273

  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of the obligation impossible, the corresponding obligation shall be extinguished and the contract ipso facto rescinded.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 to the provisional impossibility in continuous contracts. In both instances, the creditor may rescind the contract provided the debtor has knowledge thereof.

Further, articles 274- 275 states the legal position if a force majeure condition is established as per article 273.

Article 274
When a contract is or shall be rescinded, the two contracting parties shall be reinstated to their former position prior to contracting, and in case this is impossible, the Court may award damages.
Article 275
If the contract is dissolved on the grounds of nullity, rescission or for any other reason, and both contracting parties have to return what they have taken possession of, each one of them may retain what he has received, as long as the other party did not restitute what he has received from him, or did not submit a guarantee for its restitution.

Despite the recognition of force majeure conditions under the UAE law, the parties to a contract should not be too quick to rely on the said general principle and should try to resolve the issues on mutual terms. As pursuant to Article 267 of the Civil code, “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”. UAE courts generally interpret force majeure conditions restrictively for each case as per its unique facts and circumstances. In addition, the UAE law imposes each party to confer with the good faith principle and to fulfil their contractual obligations.

More from Al Rowaad Advocates & Legal Consultants