The recent emergence and rapid spread of the COVID-19 novel coronavirus has resulted in unprecedented disruptions to virtually all aspects of global and locally based commerce, as well as almost everyone’s normal routines. While we collectively and individually should now focus on protecting our personal, family, and greater community health and safety in this emergent situation, it is also important for businesses to be aware that the extreme stresses that the inevitable economic disruption will, and in many cases has already caused, may be mitigated somewhat by reliance on contractual force majeure clauses set forth in contractual agreements, as well as the availability of business interruption provisions contained in certain commercial insurance policies.
A contractual force majeure clause generally permits a party to a contract to avoid its obligations to perform, where certain external events prevent the party from being able to deliver the product or service as agreed. These are usually unforeseen events, such as strikes, natural disasters, and other large-scale societal disruptions, which by their overwhelming and unusual nature, disrupt a party from performing due to the circumstances imposed upon them by the uncontrollable force majeure event. Many contracts set forth with specificity what events may be deemed to trigger force majeure relief. Some may even include epidemics as a force majeure event. Any contract which does not state the same with such particularity will need to be reviewed to determine whether the COVID-19 virus may be deemed to provide the parties with a contractual right to declare force majeure and thus be relieved of their duty of compliance.
Additionally, UAE Civil Code Article 273 provides a separate basis under which force majeure may apply, in circumstances where performance is impossible, and may lead to rescission of some or all of the contract.
As such, all commercial entities should review their contracts to determine if they may obtain relief accordingly where they are unable to meet their obligations. Conversely, entities must be aware that their contractual counterparties may seek to invoke force majeure protections to avoid their duties, and should be prepared to resist the same should the circumstances and/or contractual provision not support invocation of the same. It is also important to evaluate whether the force majeure event has truly prevented a party from performing, and is not being used as an excuse to avoid complying with duties that are merely commercially not to that parties’ benefit.
An insurance policy that provides “business interruption” coverage may also provide relief from economic distress by offering indemnification for business losses arising from the peril insured against. The business interruption provisions must be carefully reviewed to determine if the event, in this case the COVID-19 disruption, is covered. There are many different forms of business interruption coverage, some being much more restrictive than others. For example, a typical commercial property insurance policy may provide business interruption cover, but requires that physical damage or loss first be sustained to the relevant business property, before the business interruption coverage will be triggered. Whether the circumstances of COVID-19 will be judicially construed as creating such physical loss will be hotly litigated over the coming years, although have been previously determined in limited cases in some jurisdictions, depending on specific fact patterns.
Some commercial policies contain more specified forms of business interruption coverage; however, these may be subject to exclusions and other limitations as to scope and applicability. As with any insurance matter, the specific circumstances and policy language will control, and a careful review of both must be undertaken to see if these losses may be mitigated through the coverage.
Authored by Senior Associates Barry Greenberg
and Robert Mitchley