Aug 30 2011
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Force Majeure: An Excuse Misunderstood in the UAE
29 August 2011
After the crash of the UAE real estate market a large majority of real estate project developers who were planning to construct iconic projects and anticipating large investment returns had to re-consider their decisions. But this exposed them to another wrath, this one from investors who paid them large sums of money when the market was different.
I have seen a plethora of articles, including one of my own, on the origin, scope and meanings of force majeure. In this article I am putting forward what the legal position and liability of a developer would be if a force majeure event indeed occurs and is proven in court. By the end of this article it will become apparent that force majeure is not a golden shield protecting a developer from all monetary obligations and, therefore, not what the developer hopes it to be.
A force majeure event excuses the developer from the performance of its obligations under the agreement and exempts the developer from the contractual and legal liabilities it would otherwise be exposed to for breach of the performance of these obligations.
Therefore, two preliminary questions must be addressed:
- 1- What was the contractual obligation of the developer?
To construct a project and hand it over to the respective purchasers within a pre-defined, specified and agreed time period.
- 2- What is the contractual and liability of the developer if performance obligation is breached?
Article 272 of the UAE Civil code states that
(1) In contracts binding on both parties, if one of the parties does not do what he is obliged to do under the contract, the other party may ... require that the contract be performed or cancelled.
(2) The judge may order the obligor to perform the contract forthwith or may defer (performance) to a specified time, and he may also order that the contract be cancelled and compensation paid in any case if appropriate.
- If performance is still possible and the court orders performance forthright, I will get the property worth AED 4,000,000.00.The aim of this compensation is to put me in a position in which I would have been had the contract been performed according to its terms. If the damages were calculated by only refunding what I have paid under the agreement, then the developers in a rising market may purposely fail to hand over and upon cancellation refund me my AED 1,000,000.00 and sell my property for AED 4,000,000.00, the market value in 2006. Therefore, compensation for breach or cancellation of an agreement is calculated to protect the expectation interest.
- If court delays performance, I will get the property and given such compensation which will put an X in the box as if the contract had been performed.
- If performance cannot occur (because of a reason besides force majeure) the judge will order cancellation of the agreement and give me only compensation.
Now suppose that the developer did not hand over the property because a force majeure event occurred. What would I be entitled to then?
A force majeure event excuses the effected party from continuing to perform its obligation. Therefore, I cannot compel the developer to continue the construction; I cannot compel the developer to hand over the unit; and I cannot compel the developer to give me compensation and damages because the occurrence of force majeure event does not make him liable for any breach of the obligations.
But that does not prevent the cancellation of the agreement. The force majeure excuse does not exonerate the developer from not refunding the money which was paid by me for the performance of its obligation. Therefore, whilst the developer will not perform the obligation and I cannot seek specific performance of the agreement, I will be entitled to a refund of the amount I paid towards the now unable/impossible to be performed agreement. In fact, the very effect of the occurrence of a force majeure event is the automatic cancellation of the agreement; this is the simple and clear application of Article 273 of the UAE Civil Code:
(1) In contracts binding on both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled.Therefore, the developer will refund me only the AED 1,000,000.00 as opposed to giving me compensation that would put me in a position in which I would be if the agreement was performed. I will be paid AED 1,000,000.00 and sent home.
(1) If the contract is cancelled automatically or by the act of the parties, the two contracting parties shall be restored to the position they were in before the contract was made...
The same principle is upheld by the English Law Reform (Frustrated Contracts) Act 1943. As per s.1(2) of this Act, moneys paid prior to the frustrating event are recoverable; money which was payable prior to the time of performance ceases to be payable.
But what is ironic is that most purchasers in my hypothetical situation are only asking for the AED 1,000,000.00. They are only asking for a refund, not compensation of expectation interest or specific performance. Then why are developers clutching at force majeure as if it is going to save them from refunding that amount? Consideration must move from both parties. If there has been a failure of consideration from one side, the truth is that no system of law and no legal principle allows any party to keep money belonging to another party without giving anything in exchange, unless that money was given as a gratuitous gift.
Fareya Azfar is a Partner at The Legal Group and can be contacted on +971 4 4477044 or firstname.lastname@example.org. The views expressed in this article do not necessarily constitute the views of Zawya.
© Zawya 2011
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