By: Naila Ramsay

The outbreak of Covid-19 is causing great uncertainty and confusion for businesses around the world. Governments are implementing measures to slow down the spread of the virus. In these unprecedented times, parties who have been affected by these measures need to understand their contractual rights and obligations and any relief which may be available to them.

There is a strong temptation for parties to invoke a force majeure event. It is all the more important for parties to contractual agreements to appreciate that force majeure clauses under Egyptian law are not a matter of public policy. This means that parties can agree freely on what to include in their contracts. As a result, the applicability to particular events of a force majeure provision will have to be determined on a case by case basis. Crucially, practical and mitigating steps must be taken quickly whilst cooperation and communication are key.

We provide below a suggested road map to assist your business to assess the situation

and weather these challenging times.

1 – What is Force Majeure?

2 – What are the consequences of Force Majeure?

3 – What is Hardship and how does it differ from Force Majeure?

4 – Are there any Notice Requirements?

5 – Causal link and Mitigation

6 – Practical Checklist

1 – What is Force Majeure?

It is an unforeseen event which is beyond the control of the party invoking the force majeure, and which makes that party’s obligation impossible to fulfil as a result of such event.

• Is Covid-19 an event which was unforeseeable at the time the contract was entered into? The courts will look at each case individually and specifically. Even if a recurring epidemic may be considered foreseeable given the previous epidemics of swine flu and SARS, foreseeability may have been drafted out or undermined in the contract by agreement between the parties.
• The courts are likely to consider whether the event in question can be attributed to the party invoking the force majeure event. This is particularly relevant to the partial or general lockdown situations put in place by governments around the world. In Egypt, the government has imposed a partial curfew which has just been extended further, but which has not amounted to a full shutdown of operations. Most Egyptian businesses are allowed to continue to operate subject to taking all necessary health & safety and social distancing precautions.

In the UK, work on building sites has now stopped, but in Egypt, construction work for major projects is to carry on. What if an employer takes the decision to halt operations as a precautionary safety measure, would this decision be considered to be beyond the employer’s control or choice? What would be the situation if a number of employees were found to test positive for Covid-19, would a business be required to close at that point and what would be the consequences?

Even if there is no lockdown in Egypt, international supply chain delays are bound to impact projects locally and this will surely have an effect on timely performance and completion.

• The particular event must have prevented the party relying on the force majeure from performing its obligations under the contract. Depending on the specific contract and obligation, has Covid-19 made performance impossible? The mere fact that performance is simply more difficult or more financially onerous is unlikely to be considered sufficient. Whether time was of the essence in relation to performance of an obligation will also be taken into account.

2 – What are the consequences of Force Majeure?

The rules of force majeure apply by law regardless of whether a contract contains a force majeure clause or not. However, these are not public policy rules. This means that if your contract contains a force majeure clause; such clause will supersede the statutory rules.

Typically, a force majeure event will suspend performance of the party affected by the event. This will generally only apply for a specific period of time. The fundamental principle of a force majeure event is that, after a specified period of time, the parties will be able to resume their contractual obligations as originally intended. In the event that the affected party remains unable to perform its obligations for an extended period of time, this will give rise to the right of termination of the contract.

3 – What is Hardship and how does it differ from Force Majeure?

If your contract does not include a force majeure clause and if your claim does not meet the criteria for force majeure events under Egyptian Law then, consider hardship.

Hardship may apply when there is a change in circumstances, which was unforeseeable by the parties when the contract was entered into, and which renders performance of obligations under the contract excessively onerous for a party who did not accept the risk of such change at the time the contract was entered into. The test for claiming relief for hardship is lower than that of force majeure. Hardship requires performance to be excessively onerous or economically unfeasible, whereas force majeure requires it to be impossible.

No specific hardship clause is required in order for the parties to a contract to be able to claim hardship. Parties to a contract may be able to rely on hardship when either a contract does not include a force majeure clause or when the criteria required to claim relief under a force majeure clause is not satisfied.

The rules of hardship allow the party to request modifications to the contract, not its suspension or termination. Such party may ask the counterparty to renegotiate the terms of the contract, and if such counterparty refuses then application to court can be made. These rules are a matter of public policy and may not be excluded by contractual agreement. Termination may eventually be obtained but only for breach of contract should the counterparty refuse to abide by a court ruling requesting changes to the contract as a result of hardship.

4 – Are there any Notice Requirements?

Often, time limits for claiming relief will be included. Specific information must usually be provided in accordance with a specific timeline. Failure to comply with these formal requirements could result in sanctions, delay and loss of contractual remedies.

5 – Causal link and Mitigation

A key question is whether Covid-19 was the cause of the affected party’s failure to perform under the contract. The affected party will need to consider if other ways of performing the contract are available to it which are not affected by Covid-19.

Remember that contracts must be negotiated, entered into, and performed on the basis of good faith. This is a matter of public policy under Egyptian Law. Continue to act in good faith and try to mitigate loss.

Consider what steps can be taken to preferably avoid or at least mitigate as much as possible the effects of Covid-19. In particular, ensure that you are performing your obligations under the contract as far as possible (especially any obligations under the same contract which are not directly impacted by Covid-19), this will help in avoiding any claims on the basis that the losses were within your control.

6 – Practical Checklist

• Review your contracts, do they specifically include a force majeure clause?
• If your contract does include a force majeure clause, check if the clause has been drafted in a way to carve out special events or actions from force majeure or to-reallocate the burden of a force-majeure event amongst the parties? Has foreseeability been drafted out by agreement?
• When was your contract entered into, was time of the essence in relation to performance?
• If your contract does not include a force majeure clause, you can still claim force majeure under the general principles of Egyptian law. Check if the event was unforeseeable and beyond your control. Did it make performance impossible?
• If it is not impossible to execute your obligations, consider hardship. Have current events made it excessively onerous for you to perform your obligations or economically unfeasible?
• Check your insurance policies, especially any insurance against business interruption or delay in construction.
• If you are a financing institution, review your loan documentation in order to prepare for any force majeure claim under related project documents. Review your security documentation and process for enforcing such security. Take into account the total or partial lockdown situations in many countries. Is there a moratorium in relation to the repayment of the debt?
• Communicate with your counterparties in order to find a workable amicable solution and preserve long term relationships.
• Consider whether your counterparty is a public body and whether the contract is an administrative law contract, as this may have some implications on the conditions and the process for suspension or termination.
• Consider specific provisions in specific laws that may take precedence over general law.
• Consider the impact on local employees. (We will address this in more detail in another legal update).

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