Spread of Corona Virus Disease (“COVID-19”) over the past couple of months at the global scale has coerced the governments to enforce certain drastic measures, including but not limited to, limiting the movement of citizens and residents, closure of international borders and suspension of trade to keep a check on further spread of COVID-19. While the said measures remain necessary in the wake of COVID-19, their impact on the economy and contractual obligations would be profound as the global economy comes to a standstill. International Monetary Fund has already hinted that the recession which will follow COVID-19 would be worse than the one that world witnessed in 2008.
In view of such bleak economic landscape, businesses are eagerly looking for legal solutions to either avoid or minimize the impact that non-fulfillment of contractual obligations would have on the health of their businesses and Omani commercial enterprises are no exception. While we look to explore various protections made available to the commercial enterprises against unforeseen situations rendering the performance of obligations either impossible or burdensome, readers are advised to seek legal opinion in respect of their specific situation and challenges.
Civil Transactions Law (Royal Decree 29/2013) (“CTL”) provides protection to the any contracting party where the obligations may either be rendered redundant or suspended, in some circumstances, mainly where:
- performance of contractual obligations becomes impossible on account of circumstances which are beyond human control (Force Majeure); or
- performance of contractual obligation is not impossible but unduly burdensome to the extent that the obligor faces severe loss through performance of the obligation concerned (Emergency Circumstances).
A requirement common to invocation of either of the foregoing scenarios is that the aggrieved party shall not have contributed to the circumstances which render the performance of an obligation either impossible or burdensome and that the event must be unforeseen.
Article 172 of the CTL lays down the principle of ‘force majeure’ which is a common feature of majority of the commercial contracts. Force majeure, in simple terms, means an unforeseen event which prevents the fulfillment of a contractual obligation. It is pertinent to note that the event must be one which does not exist at the time of conclusion of contract and does not arise, as held by the Supreme Court in Appeal No. 11/2003, out of the negligence or act of the aggrieved party. While Article 172 does not provide for specific instances or situations constitutive of a force majeure event, commercial contracts usually contain an elaborate list of events occurrence of which can be used by a party to either terminate the contract or evade performance of certain contractual obligations directly affected by the force majeure event. What is important to note here is that even where a commercial contract does not contain a force majeure provision, Article 172 would remain applicable by operation of law.
However, where force majeure is defined in a contract then it becomes imperative to discern whether the measures taken as a result of COVID-19 would fall within the set of circumstances listed in the contract and which would constitute force majeure event. A usual definition of force majeure includes references to, inter alia, ‘act of God’ or ‘epidemic/pandemic’ and COVID-19 would be covered under both set of circumstances. However, where a force majeure definition does not refer to an instance which may cover COVID-19, even by reference, or to the measures taken by the government then it would be difficult for the aggrieved party to invoke the application of force majeure on account of non-fulfillment of obligations as the competent court usually defers to the intention of the parties and would not go beyond the term of the contract to include by reference or otherwise such circumstances in the definition of force majeure which were not originally included.
Another important factor to bear in mind before seeking application of force majeure on contractual obligations is to specifically determine the obligations which are affected by a force majeure event. It is pertinent to note that one can only avoid performance of obligations which are rendered redundant by a force majeure event whereas the rest of the responsibilities listed in the contract would remain enforceable.
Where the impact of COVID-19 is such that it does not render the performance of a contractual obligation impossible but rather burdensome on account of rescheduling or for any other reason which increases the cost for meeting the contractual obligation to an extent that the obligor faces severe loss through performance of the obligation concerned, then in terms of Article 159 of the CTL, competent court would be inclined to reduce the burden of obligation in manner so that the same becomes reasonable and does not result in undue losses for the aggrieved party. It is important to note that to invoke the protection provided by Article 159, aggrieved party must prove to the satisfaction of the court that the emergency circumstances were not foreseen and have occurred during the currency of the contract as observed by Ministry of Legal Affairs in Fatwa No. 2/28 of 2018.
However, determination as to whether a contractual obligation has become burdensome or not is a matter of fact and hence, a causal link needs to be established between the unforeseen situation, arising in consequence of measures adopted by the government to tackle COVID-19, and the obligation which stands effected by the unforeseen situation.
In the current set of circumstances, it is evident that the measures taken by the government in the wake of COVID-19 have either restricted or made it impossible to perform obligations for certain sectors of the economy and it is only a matter of time that parties would have to either renegotiate the terms of the contracts or invoke dispute resolution mechanism to avoid adverse consequences to the maximum extent. Where the parties choose the latter, Articles 172 and 159 of CTL would inevitably be involved. However, the party seeking refuge in either force majeure or the concept of burdensome obligation must remain wary of the terms of the concluded contract particularly the requirement to put the other party on notice where the performance of obligation becomes impossible or burdensome.
Since the Sultanate is facing the current epidemic as a new challenge, we believe that the current situation will be deeply assessed by the Judicial bodies and authorities through their judgments to be issued in the relevant contractual disputes. Subsequently, such judgments would serve as a resource for comprehending force majeure or emergency circumstances for times to come.
Abdulredha Al Lawati, Partner/Muscat:
Muhammad Bilal Ramzan, Associate/Muscat
Khadija Al Adawi, Trainee/Muscat