This article first appeared in Lexis Middle East, April 2020.
The COVID-19 pandemic has heralded almost unprecedented levels of uncertainty in all industries, and the construction industry is no different. Contracting parties are looking to their contracts to assess their rights - and potential obligations and liabilities – in the event of breach of contract.
In principle, various types of remedies are available for breach of contract, depending on the nature of the breach. With particular reference to the impact of COVID-19, see our article here on the potentially available remedies in relation to construction contracts. In this article, we focus on issues surrounding entitlements to and claims for damages. We will briefly consider:
- The basic requirements for establishing an entitlement to damages.
- The impact of ‘external causes'.
- The impact of exceptional circumstances.
- The various types of damages, and what needs to be demonstrated in order to recover them.
- The quantification of damages, and liquidated damages.
When contemplating potential damages entitlements or liabilities, various questions must be addressed. What is the relevant contractual obligation, and has it been breached? What damage has been suffered? Is there a causal link between the breach and the damage suffered? All of these criteria must be satisfied in order to recover damages. These questions are heavily fact- sensitive, and we do not further dwell on them here.
A preliminary consideration is whether specific performance of the relevant obligation (that has been or may be breached) is possible. Article 386 of the UAE Civil Code treats the point, as it were, in reverse. It provides that:
If it is impossible for an obligor to give specific performance of an obligation, he shall be ordered to pay compensation for non-performance of his obligation, unless it is proven that the impossibility of performance arose out of an external cause in which (the obligor) played no part.
This is re-affirmed in the official commentary on Article 386, which states that where “impossibility of performance arose through an external cause in which [one] played no part” then “he will not be obliged to pay compensation, pursuant to the shari'ah rule that God imposes upon no person more than that person can do."
So in the event of a breach of contract, if the breach cannot be fixed (and often it cannot), then compensation can be claimed for breach of contract, unless the impossibility of performance is attributable to an ‘external cause'. But what is an ‘external cause'? It can include almost anything where the defendant played no part in causing the loss. For example, it may include acts of a third party, acts of the claimants themselves or force majeure events. In these circumstances, no damages are payable. Whilst it is beyond the scope of this article to consider the issue in detail, it is worth bearing in mind that, depending on the facts and the terms of contract in each particular case, COVID-19 may provide a defence to a claim for damages on this basis.
It is also worth bearing in mind that Article 249 of the UAE Civil Code allows courts and tribunals to adjust the extent of a duty to perform, to the benefit of the obligor, in ‘exceptional circumstances'. It provides:
If exceptional circumstances of a public nature which could not have been foreseen occur as a result of which the performance of the contractual obligation, even if not impossible, becomes oppressive for the obligor so as to threaten him with grave loss, it shall be permissible for the judge, in accordance with the circumstances and after weighing up the interests of each party, to reduce the oppressive obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void.
Article 249 has not been widely relied upon by the UAE Courts, perhaps because they are generally reluctant to interfere to amend contractual agreements (or to infringe upon pacta sunt servanda). But that has not stopped parties from seeking to rely on the provision. For example, in a 2012 Abu Dhabi Court of Cassation case (261/2012), a contractor (claimant) had entered into a contract with the employer (defendant) for the construction of a building in return for payment of a lump sum price. In consequence of an increase in the prices of materials, the claimant argued that the performance of the contract became too burdensome to perform, and requested the Court to adjust the parties' obligations under the contract in reliance on Article 249. However, the Court refused to do so. It stated that an alteration to the contract would be permitted only in the following circumstances:
- When the circumstances were of an exceptional and general nature that did not just impact the specific party to the proceedings, but also a category of the public;
- When the circumstances were incapable of being foreseen or predicted (at the time of contract); and
- When the circumstances make the performance of the contract, if not impossible, at least burdensome, to the extent that performance would result with the party obliged to perform incurring severe losses that are not customary and that gravely threaten the balance of interests between the parties to the contract.
In that case, the Court held that the fluctuation in prices of materials did not qualify as an exceptional unforeseen circumstance, particularly in the construction industry.
We are yet to see Article 249 used by the Courts to adjust contracts in the context of COVID-19. However, it would be no surprise to see an uptick in instances of parties asking Courts and Tribunals to exercise that power to alleviate the alleged impact of COVID-19 on contractual obligations. If so, it will be interesting to see how such attempts are treated by the courts and tribunals, particularly in relation to contracts entered into at a time when it could be said that COVID-19 and its impacts were not readily foreseeable.
Types of recoverable damages