Asian Frustration: Force Majeure from Coronation Cases to Coronavirus Cases

Dubai is an important BRI node for Chinese enterprises regionally headquartered here transacting business and working on infrastructure and exporting throughout the surrounding Middle East and into Africa.

The novel Coronavirus joins the 2009 Financial crisis and the 2017 Qatar blockade to complete a trinity of recent events that have created real problems for businesses keeping to their contractual commitments and sending them to their lawyers for help.

The answers that come out will vary depending on governing laws that may derive from different civil law or common law legal backgrounds, which take different approaches to the stringency of contracts and the possibility to get out of them or adjust them, when misfortunes beset one or both of the parties.

The following is a high-level summary to give business leaders and their GCs an insight into what to look out for, depending where their projects are on the ground and the laws and attitudes, they are likely to encounter.

 A Brief Historic Legal Background

There are three main strands that influence legal culture in the Middle East and Africa, and they have all been exports. These strands are the Sharia, English common law and civil laws based on the Napoleonic Code. The Sharia was initially home grown and remains at its least diluted in one of the four main ‘schools’ of Islamic jurisprudence (the Hanbali) in Saudi Arabia.  The others are the respective legacies of principally British and French colonialism on the African continent (with Germany and Portugal also getting a look-in, plus some Romano-Dutch antecedents) .

In living memory, British extraterritorial laws (largely consisting of exported British Indian Statutes) were uniformly applied throughout what are now the GCC countries (excluding KSA and Oman) all the way down to Palestine, with ultimate appeals to the Privy Council in London.

This set-up only ended in the UAE, Qatar and Bahrain at the beginning of the nineteen seventies. As the winds of change blew the British and French out of Africa throughout the sixties and seventies, they left the continent littered with their laws and constitutions designed to give the locals rights they had largely ignored whilst in occupation.

Despite also leaving various constitutions behind in their later exit from ‘East of Suez' during the seventies, British laws were largely dismantled and replaced by civil and commercial codes that were the Franco-Egyptian ‘fusion cooking’ of the legendary jurist Abd El- Razzak al Sanhouri (1895-1971). Al Sanhouri laid the Ottoman codification of Islamic Law (the Majella) side by side with continental European codes and created a remarkable synthesis of civil and Sharia law that has informed the civil and commercial codes from Kuwait, to Qatar, the UAE, Jordan and Iraq and ,of course, in his native Egypt.

Coming swiftly to the present day, English imports are now back in vogue in the Dubai International Financial Centre (DIFC) in Dubai, the Abu Dhabi Global Financial Market (ADGM) in Abu Dhabi and  the Qatar Financial Centre (QFC) in Doha, all of which have adopted common law, in English language codes. Astana in Kazakhstan with its AIFC is the latest newcomer. These all have courts employing recycled English and Commonwealth judges alongside locals and contractors can and do frequently opt into litigation and arbitration in these common law anglophone fortresses in the deserts and steppes.

The Dichotomy in the Business and Legal Cultures

The late Noel Coulson, Professor of Oriental Laws at the University of London’s School of Oriental and African Studies, memorably characterised the legal and cultural differences between common law and the Sharia influenced civil and commercial laws in the Middle East (in a way that is of key relevance to the topic of Force Majeure) in the following passage. “In English law the sanctity of contract means that the promise endures despite the normal vicissitudes of fortune. It is right that the promise should be kept ‘for better or for worse’ ‘through thick and thin’, because this is in line with the popular belief that tenacity of purpose to some degree controls events and that the human will determines the future. The promise must dominate the circumstances. In Islam, precisely the converse is true. Circumstances dominate the promise. Future circumstances are neither predictable nor controllable but lie entirely in the hands of the Almighty. In the face of the predetermined march of events human activity assumes a relative insignificance and the contractual promise becomes a relatively ephemeral thing. If the tide of affairs turns, then the promise naturally floats out with it. The ubiquitous phrase of the vernacular insha’Allah (if God so wills) is no empty expression. It could in fact be read as a vital proviso into any contract for future performance.”.

Frustration by Impossibility v Adjustment for Hardship

Concretely speaking this dichotomy of approach is reflected by the contrast between: -

(a)   the common law approach restricted to Force Majeure, requiring supervening impossibility of performance arising from unforeseen causes external to the parties (and ignoring impecuniosity) which excuse performance, and;

(b)   a more modulated response found in civilian systems (including in China) permitting the adjustment of contractual obligations in the face of unforeseen hardships that do not render performance impossible.

 This latter approach derives from the universally implied requirement of good faith in contracts which underpins the French théorie de l’imprévision (theory of unpredictability) and the earlier Roman Law maxim of clausula rebus sic stantibus. These concepts stand for the principle that contracts are subject to an implied term that they are binding only absent a major unforeseen change of circumstances.

Hardship Provisions in Middle East Codes

Sanhouri’s exports from Egypt found their way into civil codes, in (e.g.) Kuwait, Jordan and Syria with provisions similar to that contained in Article 249 of the UAE civil code which provide that where unforeseeable exceptional events of a general or public nature occur making the performance of contractual obligations not impossible but onerous ,so as to threaten the obligor with grave loss, then it is permissible for a judge (or arbitrator) to weigh the interests of the parties in the circumstances to reduce the onerous obligation to a reasonable level ,if justice so requires, with any agreement to the contrary rendered void as a matter of public order.

The official UAE Ministry of Justice commentary on this provision records that it had Islamic law antecedents in the principle of excuse  (i’dhar) in the Hanafi school and calamity/blight (ja iha) in the Maliki and Hanbali schools, with foundations in the principle of equality between parties in a commutative contract and generally as a matter of equity.

It is beyond the scope of this piece to trace similar evolutions in civilian systems as far afield as Germany, Brazil, Portugal, Angola ,Romania, Turkey ,Russia and Denmark as well as finding expression in such soft law instruments as the Principles of European Contract Law, Unidroit Principles on International Commercial Contracts and Draft Common Frame of Reference, which include provisions under headings such as ‘Hardship’ and ‘ Variation or Termination by Court in Change of Circumstances'.

In all of these systems there is ,broadly speaking, the need to differentiate between the more binary approach of unforeseen supervening impossibility of performance terminating contractual obligations (which will also be present as a classic force majeure doctrine in Middle East Codes) and the possibility of adjustment for hardship in unforeseen changed circumstances. The latter concept will largely be alien to common law lawyers who have been brought up on the former concept alone. Indeed even the English law concept seen in the so called ‘Coronation Cases’ of frustration of contracts which are rendered substantially different but by no means impossible, such as renting a flat to view a coronation unexpectedly cancelled by the King falling prey to appendicitis as occurred in London 1902, is largely a fading law school memory

A ‘Real World View’ with Chinese Characteristics

From a practical perspective problems caused by the coronavirus for global construction and supply contracts are likely to land on the desks of commercial and contract managers and even legal advisers who may well be unfamiliar with anything beyond boilerplate Force Majeure and Extension of Time provisions, and with a different and sometimes mismatched range of perceptions as to how courts and arbitral tribunals will respond.

Inside China this road is not entirely new in that the SARS (Severe Acute Respiratory Syndrome) outbreak in 2003 and 2004 produced occasions to consider whether the effect of SARs was force majeure, requiring an event that was both ‘unavoidable and insurmountable’ or one that would come within the now formally recognised doctrine of change of circumstances in Chinese contract law. This recognition occurred with the publication in April 2009 (in response to the global financial crisis) of the Supreme People’s Court Second Judicial Interpretation concerning the application of the 1999 Contract Law of China.

During the SARs crisis the SPC had issued guidance to courts that permitted the application of a principle of fairness according to specific circumstances where the outbreak had ‘significantly affected’ a contract and contrasted this to circumstances where SARs had made performance impossible that fell to be treated under the Force Majeure provisions of the Contract Law.

It is helpful for both businesses operating internationally and the lawyers serving their interests to develop a broad awareness of the differing legal landscapes and cultures of contract adherence.

Conclusion

Coming from a culture where contractual adherence is expressed in terms of human bondage as in ‘An Englishman’s word is his bond’ (which should be accompanied by the caveat,’ so be extra careful to read the small print!') to practice law and serve both Western and Asian businesses in an environment where promises are apt ,in the words of Professor Coulson, to float out on the tide of changing circumstances, requires a special approach. This may do well to draw on the best traditions of both Chinese and English thinkers. The Confucian emphasis on a humane approach to confronting the difficult issues caused by the Coronavirus is well heeded at the present time and so too is Lao Tzu’s injunction of Wu Wei – don’t force it or ‘go with the flow’, to turn difficult circumstances to best advantage.

Having begun with one tidal analogy this permits us to close with a Shakespearean application of Wu Wei, by always recognising in difficult times that ‘there is a tide in the affairs of man, which taken at its flood, leads on to fortune.’