The spread of COVID-19 has disrupted the world's economy and poses a significant challenge for most businesses. Legal ramifications include delays in payments, deliveries and performance of service, complete write-offs and non-performance under existing contracts. Due to this, commercial disputes are on the rise and ongoing as well as future litigation cases are impacted. In this article, we take a look at the effects of the pandemic on commercial1 disputes and litigation in the UAE.
The spread of the pandemic has resulted in reduced output due to closure of factories and, therefore, created a logistics bottleneck. Like manufacturers, many suppliers and service providers are also facing delays or are otherwise unable to meet their contractual obligations in times of shutdown of business life and cancellation of events. In particular in the Emirate of Dubai, the full shutdown of business and public life (with the exception of vital and support sectors) implemented at the beginning of April 2020 continues to severely restrict operations of businesses. The result is an increasing rate of commercial disputes.
2. COVID-19 as an Event of Force Majeure in the UAE
In order to avoid penalties, termination of contract or other commercial consequences and disputes, companies are increasingly trying to invoke force majeure, which is an accepted legal concept under UAE law. Assessing if this is a recommendable strategy depends on whether the COVID-19 pandemic qualifies as a force majeure event.
- If a contract contains a force majeure clause, it will typically also define what constitutes a force majeure event. If pandemics or other similar cases are specifically mentioned, the chances of successfully invoking a force majeure clause can be quite high. However, most clauses pre COVID-19 do not include such references. If this is the case, the party invoking force majeure will have to rely on more general wording which may or may not cover the current pandemic.
- In the absence of a contractual force majeure clause, statutory provisions may be used to invoke force majeure. Like many jurisdictions, UAE law contains provisions regarding force majeure 2: Article 273 of the UAE Civil Transactions Law (UAE Federal Law No. 5 of 1985) prescribes that "in contracts binding on both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease and the contract shall be automatically cancelled." The same article goes on to state "in the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware." Therefore, for force majeure to exist in the legal context, the event should be unexpected or unforeseeable in nature, inevitable and its consequences unavoidable. In the event it is proven that a force majeure event exists, then the obligations under the contract shall cease as the contract is automatically cancelled.
- While the UAE Civil Transactions Law regulates the consequences of force majeure in Art. 273, it does not offer any definition of what shall be considered as a "force majeure event". Much debate is ongoing amongst the legal community as to whether the current COVID-19 outbreak constitutes a force majeure event under UAE law. In this respect, and if a parallel can be drawn, it is worth noting that during the 2008 financial crisis, the UAE Courts have rejected claims relying on force majeure by reasoning that recessions are a normal part of the economic cycle and that parties should have devised their own risk allocation. 3 As of now, there has been no official announcement declaring the ongoing pandemic a force majeure event for the UAE.
Based on the above, asserting COVID-19 as a force majeure event carries considerable risk, unless there is an explicit contractual basis for this. Parties seeking to suspend or terminate contractual obligations without such basis risk having their actions being overturned in a subsequent lawsuit and being faced with damage claims as a result thereof (e.g. due to unlawful termination).
3. Current State of Litigation in the UAE under COVID-19
With the above in mind, commercial disputes are inevitable. However, the paradox lies in the fact that the pandemic itself is making dispute resolution (court and arbitration alike) restricted due to precautionary containment measures put in place by authorities all over the UAE. The effect of the outbreak has been felt on the litigation and arbitration scene, where courts are conducting remote hearings and suspending hearings on certain types of matters altogether. The following provides a chronological overview of measures taken at various UAE courts:
- DIFC Courts
On 17 March 2020, the DIFC Courts announced that the doors of the DIFC Courts and Registry offices would be physically closed until 26 April 2020 or until further notice. Therefore, all hearings from that day onwards have been conducted via teleconference and video conference.
- Dubai Courts
Also on 17 March 2020, the Dubai Courts announced that court hearings from 22 March 2020 onwards would be postponed till 16 April 2020. The move came as a precautionary measure to contain the spread of the COVID-19, pursuant to Dubai Resolution No. 30 of 2020, whereby it was decided that all judicial hearings of the Dubai Courts (including the Court of First Instance, Court of Appeal and Court of Cassation) will be suspended from 22 March 2020 until 16 April 2020. The Resolution specifically excludes urgent matters, criminal cases and appeals that include detainees and inmates. Similarly, the smart services (online requests) of the Courts remain fully operational. Following the aforementioned resolution, pursuant to an order issued by the President of the Dubai Courts, all court hearings are set to resume via remote proceedings as of 19 April 2020.
The Dubai Courts have already adjourned those hearings initially scheduled to fall between 22 March 2020 and 16 April 2020 to hearing dates starting 19 April 2020. This adjournment seems to apply to those matters before the Case Management Office as well as those before the judges. However, for those cases that are reserved for judgment, the Courts seem to be issuing the judgments without the parties' attendance with the judgments available online through the Dubai Courts' system.
- Ajman Courts
Ajman Court suspended physical court hearings as of 22 March 2020. Court hearings in Ajman since then are being held remotely via virtual courtroom facilities and e-Trials, which the Ajman Courts already had in place before the COVID-19 outbreak. Although not confirmed, the same suspension seems to apply to all Federal Courts (being the Courts of Ajman, Fujairah, Sharjah and Umm Al Quwain).
- Abu Dhabi Courts
By order of His Highness Sheikh Mohamed bin Zayed Al Nahyan on 23 March 2020, the Abu Dhabi Judicial Department has suspended all rental property eviction cases and execution procedures related to civil cases (including the capture, seizure and arrest of people; the blocking of bank accounts and the attachment over assets). The suspension, however, excludes those cases related to alimony and employment disputes. Hearings in respect of all cases that are not set for final judgment are to be suspended for not less than thirty (30) days whereas those matters which are already scheduled for a hearing within the thirty (30) days will be rescheduled and assigned new hearing dates. In the event of cases which are already reserved for judgment, the Courts will continue to render the judgments in the absence of the parties; and the parties can access the same via the online Court portal. As is the case with the Dubai Courts, the suspension applies to hearings (plus execution procedures) and the registration of all types of new claims will be operational through online means.
Those hearings before the Abu Courts which were scheduled for deliberation (and not reserved for judgment) have automatically been adjourned to dates past 19 April 2020. With regard to execution files, the Abu Dhabi Execution Courts have temporarily stayed all execution files until 19 June 2020 and hearings in respect thereof are being adjourned to dates starting 19 June 2020.
- Ras Al Khaimah Courts
Pursuant to Emiri Decree No. 6 of 2020, certain execution procedures before the RAK Courts (being enforcing eviction of leased residential units, arrest of debtors, attachment over movables, real estate, stocks and bonds) have been suspended. In addition, the Decree provides that in the event of attached monies in bank, and at the request of the person whose account is attached, the judge can issue a decision for the monthly disbursement of the amount from the seized money in order to ensure that the debtor's and his/her family's basic needs are met. Employment and personal status disputes remain to be the exception to such suspension.
RAK Courts are conducting hearings and providing judicial services via their electronic court services system, which was already operational prior to the COVID-19 outbreak. For those unsubscribed users who do not have access to the electronic court services system, the RAK Courts have provided phone numbers of relevant personnel for all court services so that judicial services can be provided through telephone and WhatsApp communication channels, as necessary.
- Federal Courts
As is the case with the Ajman Courts (which also fall under the Federal Courts' structure), other Federal Courts are also proceeding with hearings, as scheduled prior to the outbreak, albeit remotely without the parties' physical presence. Therefore, hearings are proceeding online via video conferencing facilities (BOTIM or Skype for Business). While the matter remains to be confirmed for each court under the Federal Court structure, we have had first-hand experience in attending hearings before the Sharjah Courts via Skype for Business and hearings before the Ajman Courts via BOTIM.
In the case of all courts, it should be noted that the reaction from the relevant courts, and the preventive action implemented in respect thereof, is progressing on a regular basis and is subject to change. From inquiries directed at the relevant judges and case management officers during online hearings as advised above, we understand that the Courts prefer to adjourn hearings past the respective suspension dates. Overall, parties to ongoing or future proceedings should expect delays.
4. Claims Management & Litigation: Strategic Considerations in times of COVID-19
In the event of an impending dispute, and given the current situation, it is advisable for parties to first attempt to negotiate an amicable out of court settlement in light of the postponed court hearings (thereby meaning that the litigation will likely be prolonged more than the normal course), lack of financial liquidity exacerbated by the pandemic (which means that the opponent might not have the funds to settle the judgment debt even if a party manages to obtain a favourable judgment in due course) and due to the controversy surrounding whether or not a defaulting party can successfully claim "exceptional circumstance" or "force majeure".
However, it should be well noted that, from the UAE perspective, the current suspension of litigation hearings does not suspend or prolong legally prescribed time bars or periods of limitation. Therefore, in the event of a potential dispute, and if an amicable out of court settlement is not possible thereby making litigation inevitable, a party should file the relevant claim before the UAE Courts before the lapse of the legally prescribed period of limitation.
In addition to the time bar considerations, a creditor should also keep in mind that pursuing litigation for its claim now (while things are in a relatively early stage) might likely put such creditor in a better position over other creditors (who may have claim over the same debtor) considering the financial implications that entities stand to face in the long term. In the event of an overdue debt, while waiting to pursue the debt until the current global situation subsides will certainly be a sign of good faith (considering the financial ramifications global businesses are facing), one needs to take decisions on a case by case basis taking several factors (such as the importance of the relationship with the debtor, the debtor's short term and economic position as well as the market situation) into account.
While UAE law recognizes the concepts of force majeure (and economic hardship), barring a fully applicable contractual force majeure clause, the Court's position on COVID-19 as a force majeure event is unclear. As a consequence, invoking force majeure carries certain risks as it can trigger damage claims.
With regard to litigation procedures, it seems that the UAE courts are coping with the current suspension and have already rescheduled all hearings to a later date. Similarly, any new claims that are being filed via online requests (which remain fully operational) are being assigned hearing dates falling beyond the suspension period. However, it can safely be assumed that, once the courts are fully operational, we are likely to witness backlog and judges are likely to take longer to decide on matters as they will have more cases on their hand.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.