Force Majeure and Business Contracts in the UAE

Recent regional security and geopolitical developments have raised concerns for some businesses operating in the UAE. Companies in certain sectors may already be experiencing operational disruptions, financial pressure, or sudden changes in demand.

In these circumstances, businesses may begin asking an important question: Can a company delay performance under existing contracts or exit those contracts altogether because of external events?

The answer depends on the contract itself and the actual impact of the event on the business. In limited situations, companies may attempt to rely on the legal concept of force majeure, which addresses extraordinary events that prevent contractual obligations from being fulfilled. Understanding how this principle operates under UAE law can help businesses assess their legal position and determine whether contractual obligations may be suspended, renegotiated, or terminated.

Summary of the Legal Framework in the UAE

Commercial contracts in the UAE are primarily governed by the UAE Civil Transactions Law (Federal Law No. 5 of 1985), which establishes the general legal principles applicable to contractual obligations.

One of the key provisions addressing extraordinary circumstances is Article 273(1) of the Civil Transactions Law, which governs force majeure in bilateral contracts. The article provides that if an unforeseeable external event occurs that makes contractual performance impossible, the corresponding obligation ceases and the contract may be automatically cancelled. In practical terms, this means that where a qualifying force majeure event prevents a party from performing its contractual obligations, the law may allow the contract to be suspended or terminated without liability for non-performance.

However, the threshold is high. The event must make performance objectively impossible, rather than merely difficult, inconvenient, or financially disadvantageous.

Importance and Practical Impact for Businesses

External disruptions can affect businesses in different ways depending on the nature of their operations. Industries that depend heavily on regional stability or international movement may be particularly sensitive to geopolitical developments. For example, businesses operating in hospitality, tourism, aviation, and international trade may experience cancellations, reduced bookings, supply chain disruptions, or operational delays.

These disruptions may place pressure on companies that must continue performing obligations under existing contracts, such as service agreements, supply arrangements, or commercial partnerships.

As a result, some businesses may explore whether force majeure provisions within their contracts allow them to temporarily suspend performance or, in more serious cases, terminate the agreement. However, the mere existence of economic uncertainty or reduced business activity does not automatically qualify as force majeure under UAE law.

Key Legal Considerations for Businesses

When companies consider invoking force majeure, several legal factors become important.

The Role of Contractual Force Majeure Clauses

Many commercial contracts include specific force majeure clauses. These clauses often define what events qualify as force majeure and outline the legal consequences if such an event occurs. In contracts where the clause is clearly drafted, it may determine:

• which events qualify as force majeure
• whether contractual obligations may be suspended
• whether termination of the contract is permitted

Because these clauses vary widely from contract to contract, the exact wording often determines whether a party can rely on force majeure.

When Contract Terms Are Unclear

In some agreements, the force majeure clause may be vague, limited in scope, or entirely absent.

In such situations, greater uncertainty may arise regarding whether force majeure applies. This can lead to disagreements between the parties about whether contractual obligations must still be performed. Where disputes arise, the matter may ultimately lead to negotiations, contractual disputes, or litigation.

The Requirement of Direct Impact

A critical element in relying on force majeure is demonstrating direct and material impact on the business’s ability to perform its obligations. For example, businesses in sectors affected by regional instability may experience operational disruptions that affect specific contractual obligations. In such cases, the company may attempt to rely on force majeure in relation to those obligations.

However, the fact that the country may be experiencing economic slowdown or uncertainty does not automatically qualify as force majeure. Businesses that remain capable of performing their contractual obligations will generally still be expected to do so.

Potential Consequences of Contractual Non-Performance

Where a business stops performing its contractual obligations without a valid legal basis, the consequences are usually determined by the contract itself.

These consequences may include:

• liability for damages suffered by the counterparty
• contractual penalties for non-performance
• potential termination of the contract by the other party

Because commercial contracts often contain detailed provisions governing breach and termination, companies should carefully assess their contractual obligations before suspending performance.

How LYLAW Can Help

Determining whether force majeure applies to a commercial contract often requires careful legal analysis. The outcome may depend on the wording of the contract, the nature of the external event, and the actual impact on the business.

LYLAW is a Dubai based law firm with extensive experience advising companies on contractual disputes and commercial obligations in the UAE. The firm regularly assists businesses with:

• reviewing contractual force majeure clauses,
• assessing the legal impact of external disruptions,
• negotiating amendments to commercial agreements, and;
• resolving contractual disputes.

Where businesses face uncertainty due to external developments, early legal advice can help identify practical solutions while ensuring compliance with UAE law.