Contract Performance During the GCC Crisis

One of the most common and frequent questions from clients  after the GCC crisis is whether to know if the current diplomatic cut of relationships would be classified legally as a force majeure event or only as a hardship circumstance.  We will discuss the conditions  of both theories under Qatari law in order to show that the legal qualification of the crisis varies from one case to another.

1. The crisis as a Force Majeure

As per article 187 of the Qatari Civil Code, where performance of the obligation becomes impossible due to force majeure beyond the control of the obligor, the contract shall terminate automatically. Where such impossibility is partial, the debtor may enforce the contract to the extent of such part of the obligation that can be performed.[1]

As for bilateral contracts, article 188 indicates that  “ in contracts binding on both parties, where performance of an obligation by one party is extinguished by reason of impossibility of performance due to force majeure beyond the control of the obligor, such obligation and correlative obligations shall also be extinguished and the contract deemed rescinded ipso facto. Where such impossibility is partial, the obligee may either enforce the contract to the extent of such part of the obligation that can be performed or demand termination of the contract”.

It must be noted that Qatari law allows depriving the debtor from invoking the force majeure defense. According to article 258; “The parties may agree that the obligor shall bear liability for force majeure or unforeseen incident”. On the same note, article 259 entitles the parties to agree to discharge the debtor from any liability arising from his failure or delay to perform his contractual obligation, except for his fraud or gross negligence.

Qatari law does not have a clear definition of the term “force majeure”, however, the test to determine its applicability is three-fold: unforeseeability, externality, and irresistibility;

  1. Unforeseeability: An unexpected event gives a wide variety of acts whether an act of God (i.e earthquake, volcanic eruption) or a man-made act beyond the control of the parties (i.e war, civil unrest, riot). The event must be unexpected at the time of the conclusion of the contract. The test which is applied in this regard is that the event in question (a fire, a hurricane, a strike) must have been unforeseeable by a reasonable person.
  2. Externality: The event must be exterior to the debtor in that the debtor must not have contributed to the occurrence of the event.
  3. Irresistibility: A reasonable person could not have have resisted or surmounted the event and its consequences.

2. The crisis as a hardship circumstance

In many of the cases that our firm had examined after the cut of the diplomatic relations, we found that the conditions of force majeure would apply especially when it comes to the irresistibility of the event. No one can deny that the Qatari market was heavily dependent on its neighbors. According to the UN Human rights commission report the total importation from KSA, UAE and Bahrain amounted to some QAR 11.9 billion (USD 3 billion) in May 2017, and it represented QAR 392 million (USD 107 million) in September 2017.[2] Yet, most of the materials are provided to the Qatari market through other foreign markets and by other maritime and aerospace routes. The cost of the importation is, nevertheless, increasing for the end-buyer.

In this case, article 171-2 of the Qatari civil law may be useful to enterprises as it allows the judge to amend the contract in case of emergent events, where the fulfillment of the contractual obligation, though not impossible, becomes excessively onerous in such a way as to threaten the debtor with exorbitant loss. In such a case, the judge may, according to the circumstances and after taking into consideration the interests of both parties, reduce the excessive obligation to a reasonable level. This provision is related to public order and any agreement to the otherwise is considered null.

The presumption of this theory is when contracting parties make a contract, they do it within specific economic balance. They agreed on its content at the time they entered into the contract. But, there may be general and exceptional circumstances that arise after the contract and before its complete execution, and lead to economic imbalance which by its turn makes enforcement of the obligation of a party difficult.

The hardship theory is applied in executor contracts in which enforcement takes a period of time, during which the emergent circumstances may arise. There is no room for its application on aleatory contracts where probability of gain and loss are equal. Consequently, any of the two parties of the contract can allege that an emergent circumstances occurred and the obligation has been successive.

Conditions of the theory of emergent circumstances:

(a) A general and exceptional event arises after making the contract and before its execution. General events mean that the event is not a personal circumstances related to the debtor. Examples of these general events are: earthquakes, unexpected floods, and rushing stream. With regard to exceptionality, it means that such events were out of the potentiality of the debtor to expect or even to resist. If these events were expected, the debtor must prepare himself to face and limit their effects.

(b) As a result to the emergent circumstances, the enforcement of the debtor’s obligations becomes hard, but to the extent to make enforcement of the contract impossible, otherwise, the contract shall be null. Hardness in this concern means that the debtor is severely threatened with losses that are more than the expected and ordinary in current dealings.

Authority of the judge to modify the contract:

The judge decides on the circumstances of the contract balance between the interests of the two parties and addresses the hardship obligations to a reasonable rate. The judge chooses one of the following alternatives:

1 – Decreasing the excessive obligation; or

2- Increasing the corresponding obligation but not to the extent to charge the other party the whole burden of excess. He may distribute the excess burden to the two parties. The judge may suspend enforcement until such circumstances end.

[1] Article 7.1.7 of the UNIDROIT Principles of International Commercial Contracts provides the belwo definition of Force majeure:

“ (1) Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

(2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.

(3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt.

(4) Nothing in this article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due”.

[2] See OHCHR TECHNICAL MISSION TO THE STATE OF QATAR, 17- 24 November 2017, Report, On the impact of the Gulf Crisis on human rights December 2017, p.11.