Force Majeure and The Global Pandemic

As the gravity of Coronavirus (COVID-19) gets bigger, the personal and financial repercussions become more and more serious. This has proven to be a challenging time for many individuals mentally, physically and commercially. Since the World Health Organization declared the current outbreak as a Global Pandemic, countries are starting to commence city wide lockdowns and curfews leaving everything at a standstill.

This unprecedented situation has raised many questions on how one is expected to perform their contractual obligations under the current conditions when supply chains are being disordered or even completely wiped out in nature. In my day-to-day practice, clients are regularly raising the question of Force Majeure (قوة قاهرة ) and enacting Force Majeure clauses.

What is a Force Majeure clause?

Force Majeure is a legal principle enacted in many contracts and is further codified in the Omani Civil Transactions Law promulgated in Royal Decree 29/2013 (CTL). A Force Majeure clause is a way in which parties can escape their contractual obligations to one another if conditions beyond anyone’s control occurred such as acts of God, terrorism and strikes etc.

An example of a Force Majeure Clause:

Here the clause lists a non-comprehensive list of what may constitute a Force Majeure events and also obligates both parties to mitigate their losses and work together in “good faith” to perform the contract. Not all contracts have such comprehensive and detailed lists.

What does Omani Law say about Force Majeure?

Article 172 of the CTL states that in bilateral contracts, Force Majeure is applied if the contract becomes impossible to perform and therefore the contract is automatically terminated. The parties can also apply Force Majeure in cases where the contract can only be partly performed or cannot meet its required deadline.

Emphasis on the impossibility of performance is further shown in Article 647 of CTL which says that if certain circumstances obstruct the execution of the contract, either party is able to rescind or terminate the contract depending on the situation.

Can COVID-19 trigger a Force Majeure Clause?

If the event is considered a Force Majeure, the parties should be able to show:

1. The event caused the inability to perform or obstructed and caused a delay in the performance of the contract. Force Majeure does not only apply to the impossibility of performance but to delays in completing the contract.

Example: X has a contract between Y to supply and install 50 light fittings which have to be ordered from Italy and must be installed and handed over to Y in 2 weeks. X ordered the fittings from Italy and was expecting the order to arrive within 7 days and X needed 5 days to finish installation and handover. Italy has issued a nationwide lockdown meaning the factories and closed and so are the airports and shipping ports. How can X meet its deadline for Y? – This event made it impossible for X to perform their contractual obligations and will cause a delay.

2. The parties should show that the non-performance was due to reasons beyond its control – eg government banning the import of certain products.
3. The parties are expected to act in good faith under Omani law; the parties must prove that there were no steps that could have been taken to mitigate the consequences of the event.

If a party foresees failing to perform the contract due to staff shortages due to illness and/or government mandatory quarantines or develop issues with imports and supply, the party must explore alternative measures to perform the contract even if this means operating on a higher cost margin.

What happens when a Force Majeure clause is enacted?

1. The party is excused from its contractual obligations without the implementation of damages.
2. Extension/suspension of any time limit
3. The parties can decide to renegotiate and restructure their agreement in a way that preserve both their interests without terminating the contract.

Conclusion

To summarize, Force Majeure is a legal principle that protects parties from being put in situations, which is no fault of their own, which make it impossible to perform their contract. It must be explored carefully before being enacted by either party. The current market and governmental instability will likely give rise to a Force Majeure event in many cases and we can expect governments around the world to declare that the current Global Pandemic is to be considered a Force Majeure event.

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