Egypt’s Al Tamimi & Co signifies 5 tips to ease coronavirus impact on contractual ties

As the world faces coronavirus pandemic, markets and societies are dealing with unprecedented challenges to cope with.

In this very challenging environment, people’s well-being, work-flow, businesses and finances are at risk. Several sectors around the world and specifically in Egypt are encountering instability and people and businesses are incognizant of their next steps.

In this context, legal implications on businesses and individuals are becoming more and more important, and understanding their legal rights and obligations is necessary to ensure the well-being of society as a whole. Egyptian corporate law firm, Al Tamimi & Company is taking a closer look at the challenges facing individuals and corporations to fulfil their contractual obligations and enforce their contractual rights due to the current circumstances.

Al Tamimi & Company, therefore, presents the following guidelines that everyone should take into consideration in order to overcome the current situation on the basis of fairness and reasonableness:

1 – “Pacta sunt servanda” is a legally established principle, meaning that the contract makes the law of the contracting parties. This principle is well-regarded by Egyptian law; mainly in Article 147 of the Civil Code. Nevertheless, the second paragraph of the same Article permits the competent judge to amend a contract in the event of public exceptional and unforeseen events, by reducing the onerous obligation to a reasonable extent, which is known as the” unforeseen events” or “hardship” doctrine.

2- The “unforeseen events” or “hardship” doctrine relies on four cornerstones; a) the existence of a contract; b) the occurrence of the exceptional events after concluding the contract; c) that such exceptional events are unforeseen; and (d) that these events make the performance of the contractual obligation onerous (i.e. excessively burdening, yet not impossible).

3- Article 147 describes unforeseen events as events that cannot be foreseen by an ordinary common individual; meaning that the criteria for predictability is objective and not subjective. Hence, if such exceptional events could have been foreseen, as in the cases of floods or fluctuations in currency exchange rates, this doctrine does not apply.

4- The performance of the obligation becomes onerous or excessively burdening, if such performance inflicted – or will inflict if performed – great damages on the affected party that would not have occurred except for the said events. Consequently, if the damages suffered were commonly occurring, or were not suffered as a result of the unforeseen events, then the affected party cannot invoke the unforeseen events or hardship doctrine. For that purpose, and despite the magnitude of its budget, even the state may invoke the hardship doctrine in its contractual relations.

5- It is worth noting that, should the performance of a contractual obligation become onerous to the extent of impossibility of performance, the hardship doctrine seizes to become enforceable and the theory of Force Majeure dominates.

The main differences between the presented concepts are two: firstly, the effect of the unforeseen circumstances. In the theory of hardship, the occurring event overburdens one of the parties, making performance of contractual obligations extremely difficult. On the other hand, Force Majeure leads to the impossibility of performance.

Secondly, the impact of the application of both concepts. In the theory of hardship, the competent judge reduces the onerous obligation to a reasonable extent. However, in Force Majeure, the obligation for performance seizes to exist, without any liability on the non-performing party.

Upon applying the following rules, we conclude that Coronavirus (COVID-19) meets the criteria of an unforeseen event, as the World Health Organization declared it as pandemic on March 11, 2020. Such pandemic is exceptional and does not regularly occur, it is a public phenomenon, and an ordinary individual can neither foresee it nor prevent it. Nonetheless, considering COVID-19 as an exceptional and unforeseen event does grant the right to any contracting party to invoke it. All the aforementioned conditions must be taken into consideration.

Finally, it may be concluded, if a party to a contract proves that performance of their contractual obligations has become impossible as a result of the spreading of COVID-19, the Force Majeure theory will be applicable and the competent judge may completely terminate the affected party’s obligation, and terminate the contract.