Weathering the Storm: Legal Issues for the Retail, Logistics and Supply Chain Sectors in the UAE

April 2024 saw the UAE hit by fierce and almost unprecedented storms, with the country experiencing its heaviest rainfall in 75 years and strong winds causing significant damage.

Over a year’s average rainfall fell in a single day on 16 April, overwhelming infrastructure designed for a dry and arid climate and causing serious and widespread flooding in many parts of the UAE (and neighbouring Oman). Setting the personal consequences aside, many businesses in the UAE suffered damage and disruption to their business, particularly those in the retail, logistics and supply chain sectors, which are the focus of this article.

Force Majeure

With highways submerged and flights temporarily suspended, it is easy to see how commercial parties may have been unable to perform their contractual obligations such as delivering goods. This is a particular issue for companies in the logistics and delivery sectors, and those such as retail and commodities which are highly vulnerable to supply chain disruption. A question we are commonly asked is whether major storms amount to a force majeure event, which would relieve the supplier of its obligation, and potentially deny the customer a remedy.

The starting point is always the contract itself: commercial contracts will often contain force majeure provisions dealing with the consequences of unforeseeable supervening events, in which case the contractual wording applies and must be evaluated on a case-by-case basis. That aside, UAE law does contain force majeure provisions which may relieve parties from their contractual obligations where they become impossible due to unforeseeable circumstances, which in principle could include severe weather events. 

In short, Article 273 of UAE Civil Code provides that where force majeure arises, i.e. unforeseeable circumstances beyond a party’s control make the performance of a contractual obligation impossible, that obligation and reciprocal obligations are discharged and the contract rescinded; while unforeseeable circumstances beyond a party’s control which make the performance of a contractual obligation partly (rather than wholly) impossible may lead to extinction of the corresponding obligations, permitting the “innocent” party to rescind the contract but without leading to automatic rescission. Similarly, Article 472 of the Civil Code provides that a right is extinguished if the obligor can show that performance of the corresponding obligation has become impossible for a reason beyond their control.

Whether force majeure under a contract or the Civil Code is invoked, applying the law to the facts and establishing that in any given case, the supervening event was unforeseeable, out of the obligor’s control, and that it rendered performance actually impossible (as opposed to more difficult or onerous) is often a source of dispute between contracting parties. It is likely that arguments will be made about whether the events were truly unforeseeable: while the rains were a generational event in the UAE, such heavy rainfall is common in other parts of the world, and the rains were forecast ahead of time – though likely not before most affected contracts were entered into. The UAE has also experienced turbulent weather on a lesser scale before, with storms causing more localised damage and disruption in February 2024 and in August the previous year. Another hurdle for parties wishing to rely on force majeure to relieve them of liability will be establishing that damage and disruption were out of their control in each instance, such as where preventative measures were not taken or advance warnings and government recommendations not heeded. With the precedent of severe storms and flooding now established by the April 2024 storms, and with more (thankfully less severe) heavy rain and flooding now experienced in May 2024, there is also a question about whether a recurrence would be treated in the same light, or whether it might be held to be foreseeable.

Additional relief for suppliers may be found in Article 249 of the Civil Code, which does not use the language of force majeure, but deals with “public exceptional unpredictable circumstances” that make performing an obligation more burdensome. In those circumstances, a judge may depending on the circumstances reduce the burdensome obligation to “reasonable limits”. This can be seen as a milder version of force majeure: it deals with cases where performance is not rendered strictly impossible, but where exceptional and unpredictable circumstances, of a public nature (i.e. not affecting just a particular individual or situation, but the public at large), would render it extremely burdensome to the obligor, which would face “heavy loss” as a result of performing its contractual obligations. 

Transfer of risk – damaged or destroyed goods

Transfer of title and transfer of risk are likely to be live issues in cases where parties have agreed on the sale of goods, but delivery has been frustrated or delayed, or the goods themselves have been damaged or destroyed by flooding before delivery. Images abound of flooded stores and warehouses, and lorries and trucks abandoned on the road and entirely submerged. 

If UAE law applies, the Civil Code provides that title to goods passes once the sale is complete, and that the seller is obligated to deliver goods to the purchaser in the state in which they were at the time of the sale’s conclusion. While ownership transfers on conclusion of the sale, the seller thus bears the risk of damage to the goods until such time as they are delivered; after delivery, the seller is no longer responsible for what happens to the goods. The Commercial Code (Federal Law No. 50 of 2022) contains similar provisions. However, these provisions can be varied by contract, and therefore the contract should always be examined first.

Article 531 of the Civil Code also contains provisions analogous to force majeure in the context of sale of goods:

1. If the thing sold perishes before delivery as a result of a cause beyond the control of either party to the sale, the contract shall be dissolved and the price refunded to the purchaser.
2. If the thing sold perishes partially, the purchaser shall be at option either to rescind the sale or take the remaining part against payment of its share of the price.

Where goods sold have been damaged or destroyed as a result of the storms, it is likely that the same arguments described above in relation to force majeure will play out, where Article 531 is invoked. Where Article 531 differs from Article 273 is that it contains no express mention of foreseeability: on the face of it, it applies where goods sold perish before delivery as a result of circumstances outside the control of either party, regardless of whether those circumstances were foreseeable at the time of entering into the contract. However, foreseeability is likely to play a role in legal disputes insofar as it may be argued whether parties could in fact have foreseen the consequences of the storm (based on weather forecasts), and taken preventative action, such that damage caused by a failure to do so was in fact within a party’s control.

This article looks at the general legal position regarding damaged or destroyed goods, but parties must always be mindful of product or health and safety regulations specific to their industry which may come into play where stock is affected by floodwater, for example in the food industry. 

Damage to shops/warehouses/premises

Retail and logistics firms typically operate out of rented business premises. Certain malls and commercial districts, including some of the country’s most prestigious real estate, have been badly affected by flooding, requiring extensive repair and potentially limiting or obviating the tenant’s enjoyment of the property. 

Tenants whose rented premises have been seriously damaged may seek discounted rents or, alternatively, extensions to their rental contracts, in consideration for their loss of enjoyment and amenity; and are also likely to demand that landlords carry out the necessary repairs in a timely manner. This is an issue across all business sectors, and our Insight article Weathering the Storm: Legal Implications of Flood-Damaged Properties addresses the issues facing landlords and tenants in more detail.

Conclusion 

As the floodwaters recede, they leave behind a very challenging situation for many businesses, which are left counting the cost of the damage and disruption incurred. As the UAE returns to business as usual – albeit with a heightened awareness of potential future climatic events as with most other regions in the world – there will be significant legal fallout, and affected businesses in the retail, logistics, and supply chain sectors should familiarise themselves with their legal rights and responsibilities.

Please contact Alexandra Lester or Tom Parkin if you have been affected by the recent storms and require legal advice or if you would like to learn more about how we can help.