The recognition of the Coronavirus (COVID-19) as a pandemic by the World Health Organization has had a tremendous impact on business globally. This has caused questions related to the applicability of force majeure clauses in contracts to come to the forefront. Specifically, some business have sought to use force majeure as a form of relief, specifically where those entities or persons are struggling to fulfill their contractual obligations due to COVID-19’s impact on supply chains and the global economy.
In light of the seriousness of the harm caused by COVID-19, this note was drafted by Meysan Partners as a form of high-level guidance on force majeure and hardship remedies analyzed under Kuwaiti law. This document is not intended and should not be interpreted as formal legal advice and should not be relied on for anything other than informative purposes. In the event you are unfortunately faced with a legal issue related to the performance of contracts, you should not rely on this note and instead should seek legal advice from qualified persons in your jurisdiction to analyze your legal issues in accordance with applicable law and the specific facts of your circumstances.
1. Force Majeure:
Force Majeure comes from French means ‘superior strength’. In the legal realm, force majeure is unforeseeable circumstance, beyond the control of the parties to an agreement that prevents someone from performing or fulfilling their contractual obligations. The Civil Code of Kuwait does not formally define force majeure. However, the elements of force majeure have been established by case law. There are three elements related to a force majeure analysis, they are as follows:
(i) exteriority; (ii) unforeseeability; (iii) irresistibility.
Exteriority means an event must be external to the performance of the contract. The event must be beyond the control of any of the parties to a contractual agreement. Unforeseeability means the event must have been an unanticipated event, which could not have been reasonably foreseeable by any of the parties to an agreement. Irresistibility means the event must have such a disruptive impact on the ability of parties to perform their obligations that none of the parties are able to mitigate or find an alternative means of performance.
Simply put, a force majeure event is generally deemed as (i) an event beyond the control of the parties (ii) which they could not have anticipated in advance and (iii) which renders them unable to perform or fulfill their obligations. Generally, force majeure involves natural disasters, civil unrest or wars, or some other form of superior force impeding the parties’ performance.
Determining whether the COVID-19 crisis constitutes a force majeure event for Kuwaiti law depends on a variety of factors including (i) whether the contract has an express force majeure clause and (ii) if so, the precise wording of the force majeure provision in the contractual agreement.
(i) Express Force Majeure Clauses
If the contract includes a force majeure clause then the precise wording of such clause forms part of the analysis. Accordingly, there is no one-size-fits all answer to determine whether the COVID-19 crisis or any other pandemic would constitute an event of force majeure under an agreement. Part of the analysis involves determining whether the outbreak of a pandemic is explicitly covered by the force majeure clause at issue. Assuming there is no specific reference to a pandemic, then the language would be analyzed whether it was drafted broadly enough to include infectious disease.
In the alternative, if the clause explicitly enumerates specified consequences of certain named events then it is likely the applicability of the force majeure clause in that particular contract would be limited to those events.
(ii) Contracts without an Express Force Majeure Clause
A party to an agreement governed by Kuwaiti law may rely on the various articles of the Civil Code to obtain relief in the absence of an express force majeure clause, including:
– Article 437 of the Civil Code will find an obligation is extinguished when the non-performing party establishes the impossibility of performance due to an exterior cause outside their control.
– Article 215 of the Civil Code will terminate a synallagmatic agreement (i.e. bilateral contracts where the parties have reciprocal obligations) where a party can establish an exterior event or force beyond their control prevents their performance. The agreement is deemed terminated by operation of law and the parties are discharged from their respective obligations.
2. Unforeseen Circumstances or Hardship:
If COVID-19 is not found to be a force majeure event within the meaning of Articles 215 and 437 of the Civil Code, a party may find relief under Article 198, governing hardship or unforeseen circumstances. Hardship refers to a situation where a contract becomes unbalanced due to a change in circumstances not foreseeable at the time of its execution.Pursuant to Article 198 of the Civil Code, where the performance of an obligation after the entry into an agreement was not made impossible, but extremely difficult and prohibitive for the non-performing party, a judge may revise the agreement to renegotiate and balance the obligations of the parties. This is a mandatory provision which parties cannot contract out of.
In this case, a party facing unforeseen circumstances rendering its performance excessively onerous may ask its co-contractor to terminate the agreement or amend its provisions to account for such hardships. If the other party refuses or the parties are unable to reach agreement, the non-performing party may seek relief via the Kuwaiti court system under Article 198 of the Civil Code.
In the particular case of the COVID-19 pandemic, Kuwaiti courts will have to assess whether the pandemic has caused an imbalance with regard to the obligations of the parties. Such imbalance must be sufficiently onerous and prohibitive to a party to entitle that party to relief under Article 198. There is an important distinction to note when claiming relief under a hardship theory as opposed to a force majeure theory. The form of relief sought under hardship does not entitle the party seeking relief to suspend its performance, rather the party seeking relief must continue performing with their obligations through the renegotiation period.
3. Other Considerations.
In addition to the above, other contractual provisions such as a material adverse change clause may provide alternative theories of relief to a party seeking to avoid performance. It is important to note that careful assessment of the contractual framework, the actual wording of each clause, in conjunction with reviewing the particular and unique facts is necessary to ensure the availability of relief for non-performance. Accordingly, should the need arise, we recommend seeking legal advice from qualified legal professionals to determine how Kuwaiti law would be applied to your particular circumstances.
Michel G. Ghanem
Meysan Secures Overwhelming Victory for Clients in Cayman Islands
Meysan Partners acted as international legal counsel to group of investors in proceedings that resulted in a landmark ruling delivered on 16 June 2020 by the Grand Court of the Cayman Islands
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