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What is Force Majeure & How does it apply during COVID-19 in the U.A.E.

What is Force Majeure & How does it apply during COVID-19 in the U.A.E.

Lawgical with LYLAW and Tim Elliot

22 September 2020

Tim Elliot:  Hello and welcome to Lawgical, the regular legal podcast from the Dubai-based law firm, HPL Yamalova & Plewka, still the Gulf Region’s first and still the only legal podcast as well.  My name is Tim Elliot, I’m back, socially distanced at Dubai’s JLT, Jumeirah Lakes Towers District at the firm’s offices here at Reef Tower with the Managing Partner, Ludmila Yamalova.  As always, good to see you.

Ludmila Yamalova:  Great to see you too, Tim.  Socially distanced, but still close enough.  Much better than being in the virtual world.

Tim Elliot:  I’m with you on that, Ludmila.  Now, Lawgical today is going all be about force majeure and what that phrase means from a legal perspective, but also how it’s being used and how it’s currently being utilized in these COVID-19 times.  The obviously place to start, Ludmila, is a definition of force majeure.  Let’s start there.  What does it mean?

Ludmila Yamalova:  Sure, but perhaps even before then, another place to start is what is the term force majeure?

Tim Elliot:  Okay.

Ludmila Yamalova:  The term force majeure is actually a legal principle.  It’s a legal principle which means that it allows for an unforeseeable event to ultimately prevent or excuse a party from defaulting or not being able to fulfill its obligation.  It is an event.  It is a certain event that is not predictable, is unforeseeable, outside of a party’s control, that ultimately has as effect on one or the other party’s ability to perform its obligations in the contract.

Tim Elliot:  Okay, so by definition then it would be reasonable to say, would it not, that COVID-19 is perhaps a perfect, if that’s even the right word, a perfect example of a force majeure.

Ludmila Yamalova:  In short, yes.  It took a few months and there was a lot of speculation among the legal practitioners as to whether in fact it will be defined as force majeure.  Enough time has passed and practically across the globe there has been a consensus that yes, COVID-19 and coronavirus does constitute the event of force majeure.  Another important definition or aspect of the definition of force majeure is that it has an event that is so unforeseeable and so outside of control of one’s abilities that in a way it constitutes, as has now become ubiquitous, an act of God.  This is important.  Force majeure in general terms is usually referred to as an event that is more akin to an act of God than an event, for example, where your employee doesn’t show up, a critical employee, for example, who is responsible for filing that particular court pleading on that date does not show up to the office.  That would not be an event of force majeure because it’s not an event that is an act of God.  In the last many months, the courts have now ultimately decided across the board that coronavirus is an event that ultimately is a force majeure because it is so akin to an act of God.

Tim Elliot:  It’s almost as though it is an event that is so wildly unpredictable.  It’s almost beyond the realms of possibility.  Is that reasonably close to a definition?

Ludmila Yamalova:  Well, that, but this particular incident perhaps is much more.  It is more accurately defined the way you just stated, but there are other events of force majeure perhaps that are less unimaginable, such as earthquakes.  We know they happen, but they are unforeseeable as to the specific time when they may occur.  But the event itself we know does occur, and we know that it is just a matter of time before something like this will happen.  The same thing with floods and hurricanes and such.  Any one of those events usually is still considered to be a force majeure.  Something like coronavirus, obviously, the world wasn’t really quite expecting it in the same way that we have come at least to expect earthquakes and floods and hurricanes.  Yes, I would argue, and I would agree with you that COVID-19 is perhaps even more, not just unpredictable, but also an unimaginable event.  Therefore, it does provide a perfect or a classical definition or example of a force majeure definition.

Tim Elliot:  Okay.  We accept that COVID-19 is perhaps a classic definition of a force majeure.  The fact that you have a force majeure in a contract, whatever kind of contract it may be, any kind of legal contract it may be, the next question is invoking or the extent to which COVID-19 invokes force majeure.  Just run me through what you’ve seen.  We’ve talked about this in podcasts in the last month or so, but what more have you seen when it comes to invoking force majeure in cases in the U.A.E.?

Ludmila Yamalova:  For a while there was a debate.  There were lots of questions around the issue as to whether, in fact, or in what circumstances one could invoke a force majeure.  For example, let’s say in an employment context, I am a company and I’ve got employees that I have to terminate and now I want to be able to terminate them and not be responsible or subject to a penalty that I would otherwise be subject to because I terminated them early.  Now, in that particular case, chances are that in my employment agreement with my employees I never include the clause on force majeure.  Similarly, let’s say in the rental disputes between landlords and tenants, in most cases there is no – or perhaps I have yet to see – either in the employment context or in a tenancy context, a contract that includes a provision about force majeure.

For a while there was a lot of speculation and a lot of debate as to whether parties in those circumstances could in fact try to invoke a force majeure while that language was not in their underlying contract.  I will come back to that shortly, but this is somewhat different, for example, from a lot of the real estate agreements, or as they are often known as sales and purchase agreements or SPAs, in those contracts, more likely than not, and perhaps in my experience, all of the contracts I’ve seen, the developer would always include a clause on force majeure.  In those cases it was perhaps more predictable that one or the other party would invoke that clause in the real estate transactions, but with regard to employment or a tenancy or other commercial transactions, in most cases a lot of the contracts do not include a force majeure.  Therefore, can those parties try to rely on the event of force majeure if it is not in their contract?  That was perhaps a speculation, a debate, that rumbled around the legal world and the business world until a few months ago.

In general, the answer to that, I guess the quick answer to that, is it depends on the legal system that’s at play.  In a common law jurisdiction, such as the U.K. or the U.S., the default principle in those systems is that in order to be able to rely on the event of force majeure, invoke a force majeure, there has to be language to that effect in the contract.

In civil law jurisdictions, however, and the U.A.E. being one example of that, the event of force majeure is actually codified.  In other words, the legal practitioner’s legal mindset kind of concluded this before the courts actually started ruling on this issue that as far as the U.A.E. is concerned in the civil law jurisdiction, you don’t need to have the clause of force majeure in your contract in order to be able to try to rely on it or invoke it.  That was the legal interpretation or the legal conclusion.

Since then, we have seen that particular conclusion be confirmed on numerous occasions throughout and quite regularly and consistently by all relevant judicial authorities, in particular, in the U.A.E. the Dubai courts or the Abu Dhabi courts, the local courts.  We have also seen this by the Labor Courts and also by the Rental Dispute Committee.  Any one of these judicial tribunals I have just mentioned have already adjudicated the questions:  (1) Whether COVID-19 is an event of force majeure, and they have all concluded that yes, it is an event of force majeure, and (2) whether in fact you need to have that language in the contract to be able to rely on it, and the answer is no because the U.A.E. legal system provides for it as part of its legal code.

That means the parties can invoke the event of force majeure because it has now been confirmed by the courts.  In fact, coronavirus, COVID-19, is in fact that act of God that would classify as a force majeure in legal terms.

Tim Elliot:  Okay, so a force majeure does not have to be in a contract, but it would be sensible to have a force majeure clause.  But it does not make dispute resolution any easier because this is a two-way street.  If you’re in an employment situation, COVID has meant people have been laid off.  An employer has the right to say, “Look, this is beyond my control” just as an employee has a right to say, “It is beyond my control as well.  I should be paid because I have a contract.”  In a dispute resolution mindset or frame of mind, it really doesn’t make things any easier to have a force majeure.

Ludmila Yamalova:  What complicates it even more is that there are lots of examples where there is language of force majeure in the contract and, in fact, the courts don’t recognize it or do not enforce it.

Tim Elliot:  Right.

Ludmila Yamalova:  For example, in a lot of the real estate transactions and real estate deals, as I mentioned earlier, developers do include a clause or a definition of force majeure, but in general terms they define it so broadly as to include, in colloquial terms, the whole kitchen sink, so everything is a force majeure, including the delay by a contractors, the shortage of supplies and material, employee issues and such, so very, very broad definitions of force majeure that developers in the past numerous times have tried to invoke.  Even in those circumstances where it may seem like it’s a fairly easier burden or threshold to climb because you have the excuse of force majeure in the contract to rely on, in fact, even then the courts don’t necessarily accept it at face value, and they interpret force majeure only to the extent that in fact that any of the events are acts of God.  Anything that is not, for example, in the definition that normally would constitute an act of God, like delays by contractors or shortages of supplies, would not be considered a force majeure and therefore clauses to that extent would be struck out or not enforced by courts.

Tim Elliot:  Let me just put this to you for a moment.  I’m struggling with this on a number of levels, but the most simple way I’m struggling is this.  It means the contracts, if you invoke force majeure on either side, become impossible to resolve, do they not?  It strikes me that it’s very, very difficult to rule either way.  What you effectively end up having to provide for is some of kind of amicable resolution in some way in practically an impossible situation.

Ludmila Yamalova:  I guess it’s all relative because the idea of force majeure is there are a few elements that are required in order for that particular principle to be applied effectively.  (1) As we said before, is the event of unforeseeable, unpredictable event.  (2) It has to be an event that is directly related to a party’s inability to perform the contract.  In the case of a developer, and we have already seen this, they may argue, we are invoking the force majeure because in our delay, for example, or an excuse to delay performance of their obligations, i.e., hand over the property timely, let’s say in the next three months.  They say, we are invoking the event of force majeure because we are not able to deliver the property in the next two months because of coronavirus.

It may seem like a clear-cut position because (1) there isn’t a force majeure clause in the agreement, and (2) we know the courts have now established the coronavirus is an event of force majeure.  However – there is a big however here – in fact, now the developer has to prove that it is that particular event that actually was a direct link or the direct cause of the developer’s inability to perform that part of the contract, in other words, to deliver the property within the next two months.  Interestingly enough, if you recall, from the beginning of the coronavirus and during the lockdown that the U.A.E. went through, the construction sector was one sector that was always exempt.

While all other businesses were properly in the lockdown mode and could not send their employees home and ultimately had to shut down, the construction sector was clearly always exempt and therefore could continue and did continue to work.  Therefore, in an example like that, it may seem clear cut, but yet, in this case I would argue, and we have already seen courts inclined to go with the same logic, even though coronavirus is a force majeure and even though there is a provision in the contract about force majeure, in fact, in this particular example I just gave, the developer’s inability to deliver the property timely is not at all directly related to coronavirus because they were always allowed to work.  If anything, you could argue the opposite.  Because everybody else was shut and they were allowed to work, therefore, they could have perhaps achieved certain savings and perhaps many more efficiencies because of it.  In that case, that would not work in the developer’s favor.

That being said, it may actually work in the favor of the investor.  Let’s say the investor wanted to purchase a property and relying on his or her long-term employment history, let’s say as a pilot on a world class airline, and invested or made a commitment to buy this property and all of a sudden now because of coronavirus, has lost his or her job.  As we now know, (1) not only has he long his job, and the job here is a direct link of coronavirus, directly, the loss of the job, and (2) the chances that he or she will be able to find another job as a pilot in the near future are rather impossible or slim to none.  Therefore, in this case, all of a sudden, the table is turned.  If anyone has a legitimate excuse to not perform obligations, it would be the investor to continue with this investment because his ability to continue with the contract has been reduced to an inability.  In other words, it is impossible for him to perform the contract because he does not have an income to pay for this investment.

In his case, you can see how the courts actually would use the force majeure in favor of the investor, but not in favor of the developer.  What we have already seen is exactly that same logic applied, for example, in the context of employment cases and rental disputes.

With respect to rental disputes, even though there is no provision of force majeure in most of the tenancy contracts, the RDC, the Rent Dispute Committee, has clearly, consistently, and is continuing to take the position that if a tenant wants to terminate tenancy early because of his or her loss of employment and therefore inability to earn a living, therefore, that makes it impossible for the tenant to perform the contract and therefore, they can be excused from continuing with the contract and their early termination of the contract will not be subject to regular penalties which would normally be applied in these kinds of circumstances if the tenant were to terminate the contract early under all other circumstances.

For example, I have a one-year contract for tenancy and now I want to terminate six months into it because I do not have a job to pay for the remainder of my contract.  Normally, I would have to pay, let’s say, and this is often provided for in the contract, is a two-month penalty and perhaps some other payment or penalty for defaulting or late payments for the previous six months and perhaps some other fee to the agent for having to terminate the contract early, and so on and so forth.  Now the RDC has consistently ruled that in those kinds of circumstances a tenant can terminate the agreement and all those penalties would be waived.

Tim Elliot:  Ludmila, if I can take you back to the employee/employer situation and move away from the real estate situation for a moment.  I’m on the fence.  I can see both sides.  But in terms of resolving a force majeure employee/employer situation, I’m struggling.  It’s difficult as far as I can tell to come up with a resolution that could even come close to satisfying both parties.

Ludmila Yamalova:  You are absolutely right.  Let’s not forget what we are talking about here is a pandemic.  It is a global event.  It’s a pandemic.  There are very few parties, very few businesses that are coming out of this better off than they were coming into it.  For the most part, most people have been affected by it fairly negatively.  There are not going to be very many winners in relative terms and perhaps there will be many more losers, and losers usually happen in this particular case on both sides.

That is, in the employee/employer context, let’s look at the employee.  It is highly unfortunate that the employee is now losing her job because the company is terminating her employment earlier obviously because of this unprecedented pandemic that has affected the business to the point of where there is no pipeline of revenue coming.

It is highly unfortunate for the employee, but equally so, as you said, for the employer because if your pipeline has stopped, has just been cut off because of this event, as much as you may love your employee and cherish your business and want to continue on with your business, what are you going to fund the business with if there is no funding, if you have to customers, if you have no clients, or perhaps if you have, more importantly, no paying clients, no paying customers.  There are always customers and clients, except they are not often paying ones.  If you don’t have that, if all of a sudden, your supply chain and your pipeline have come to an end, what are you going to pay the salaries with?  It’s a difficult situation for both parties.  It’s true.

The balance that the courts have struck, and this is in line with the general principles of force majeure, is that from the employee’s perspective you would still be, as an employee, entitled to receive your compensation for the work which you have conducted.  If you worked for the last month, you are entitled to receive your salary for the last month.  Furthermore, if you worked for a company for x number of years, you are also entitled under the U.A.E. labor law to receive your end-of service benefits, and that is in general terms our version of a pension payment.  That is for every year of service of your employment you receive 21 days of basic salary.  If you have been with a company for three years, it will be 21 days times three, and that is your end-of service payment or your pension type payment.  The courts have held that in the cases were employees are being terminated prematurely because of COVID-19 that they are still entitled to receive those payments, the payment for the work done, their last salary.  They are entitled to receive the end-of-service benefits, and they are also entitled to received compensation for their untaken vacation.  In general terms, these are all the benefits that relate to employees past performance and past benefits, or benefits which they have earned in the past.  Your vacation, for example, you have earned over the last year or the x number of months before the event of force majeure, therefore, you are still entitled to that.  The work you have conducted, you still have to get paid for it.  The same thing with end-of-service benefit because you have earned them already prior to your termination.

Now, with regards to additional benefits which employees might otherwise be entitled, for example, notice which in the U.A.E. the default notice is one month, but contractually parties can agree to a longer notice period, or arbitrary dismissal and that is compensation of up to three months of full salary in the event that an employee is terminated arbitrarily and even bonuses or commissions, for example, for future work and such.  These kinds of benefits, in fact, will not need to be paid out.  Arbitrary dismissal in the event of force majeure for employers will not be an obligation for the employer to pay to the employee.  The same thing with any future bonuses and commissions which contractually otherwise the employee might be entitled to and the same thing with the notice period.

If you think about it, it perhaps is a fair balance because for a company it is also a difficult time.  Yes, there is this expectation that as a company you should have budgeted obviously for the salary of your employee.  If you let them work, you should have had the funds to pay for the work for the period that you let them work.  Same thing for the end of service, as a company you should have been accruing for that, and the same thing with vacation, you should have been accruing for that.  Then as a business, you don’t really have a legitimate excuse to not pay those benefits because as a business properly run you would have accrued for those benefits.  Now, for anything above that, such as the notice period and arbitrary dismissal, well, you were not really planning to terminate this employee.  In this particular case, the coronavirus is a direct cause for a business to terminate their employees with perhaps an immediate effect.  In these kinds of cases, this is the stance that the courts have taken, and I would conclude that and perhaps argue that (1) it is an accurate interpretation of the force majeure legal principle in the U.A.E. jurisdiction and (2) that it is also fair.

Tim Elliot:  That’s another episode of Lawgical, force majeure, how and what we’ve seen in these coronavirus times.  As ever, our legal expert here on Lawgical was Ludmila Yamalova, the Managing Partner here at Yamalova & Plewka.  As always, really good to chat with you.

Ludmila Yamalova:  Always great to be chatting with you too, Tim.  Thank you.

Tim Elliot:  If you have a legal question you need answered in a future episode of Lawgical or if you’d like a consultation with a qualified U.A.E. experienced legal professional, all you have to do is click Contact at LYLawyers.com.  Plus, you can WhatsApp us directly as well, 00971 52 525 1611.