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Coronavirus – Overview of force majeure – Iraq

  • Iraq
  • Coronavirus
  • Coronavirus - Contractual issues
  • Coronavirus - Country overview

19-03-2020

Coronavirus (COVID-19) and Force Majeure

The Coronavirus outbreak has led to widespread disruptions which hindered businesses from conducting their day-to-day activities, and significantly hampered the ability of companies to meet their contractual obligations. In light of these issues, this legal update discusses whether the global outbreak of the Coronavirus (COVID-19) constitutes ‘force majeure’ and ‘emergency circumstances’ under the Iraqi regulatory framework.

The provisions of the Iraqi Civil Law No. (40) of (1951) (“Civil Law”) regulate the general framework in relation to force majeure and emergency circumstances. The Civil Law does not provide a clear definition of force majeure or emergency circumstances; instead, the Civil Law regulates the obligations of parties after they have examined and concluded that certain contractual obligations cannot be performed. This note examines force majeure (“Force Majeure”) and emergency circumstances (“Emergency Circumstances”) under the Civil Law, as well as Force Majeure in the context of contracts.

 

Emergency Circumstances

Under Iraqi law, an ‘Emergency Circumstance’ is defined as an event which (i) arises during the course of the contract; (ii) is not attributed to any of the contracting parties; and (iii) makes the performance of the contract onerous and burdensome albeit not impossible. Emergency Circumstances, unlike in the event of impossible performance, do not result in an immediate lapse or termination of the parties’ obligations.

‘Emergency Circumstances’ must satisfy the following three conditions under the Civil Law:

 

  • Emergency Circumstances do not render the performance of the contract impossible, but rather onerous and burdensome on the debtor/contractor as a result of such extraneous factors;
  • The Emergency Circumstances which occurred could not be foreseen or avoided by the debtor/contractor; and
  • Such Emergency Circumstances are deemed exceptional factors which shall affect the contractor/debtor among others and shall not be required to have the same effect on all debtors affected by such circumstances, as the effects may vary from one debtor to the other depending on each debtor’s circumstances.

 

Pursuant to the Civil Law, if 'Emergency Circumstances' arise, the debtor’s performance of the contract, and its obligations shall become burdensome and onerous. In the event of 'Emergency Circumstances', the Civil Law permits the interference of the court so as to reduce the debtor’s obligations to a reasonable limit as may be required by the principles of justice.

 

Article (146)(2):

“If public exceptional and unpredictable circumstances arise, and their occurrence renders the contracted obligation burdensome, if not impossible, to perform by the debtor and in such a manner as to threaten him with heavy loss, the court may, by comparing the interests of both parties, reduce the burdensome obligation to reasonable limits, if justice so requires. Any agreement to the contrary is void.”

Based on previous court decisions, the court’s interference, which shall be prompted upon request by the parties, may include without limitation an extension to the contract’s duration, suspension of penalties (if there is a provision in the contract triggering penalties in the event of a delay) and/or the suspension of any obligations.

An example of a court decision relating to the application of Article (146)(2) is found in Case No. (230) dated 20 June 2007, which reinforces the principle that if exceptional events occur which were not anticipated at the time that the contract was made but which then make the performance of the debtor’s obligations onerous (rather than impossible) and threaten a substantial loss to debtor, the court has the right to reduce the obligation to a reasonable level under Article (146)(2) after balancing the interests of both parties. It is possible for a claimant to seek this remedy either before or after the contract is performed/finalized, although in practice, most claimants will seek the court’s relief before the contract performance is finalized.

 

Force Majeure Contractual Clause

Whether the Coronavirus (COVID-19) outbreak qualifies as a 'Force Majeure event' significantly depends on the force majeure clause stipulated in the contract. Most contracts define force majeure as an event that is beyond the control of the contracting parties, and some contracts also include an exhaustive list of force majeure events. Such clauses commonly include the term “epidemic” which will most likely qualify, and encompass, the Coronavirus (COVID-19) outbreak as a Force Majeure event.

 

Impossibility of Performance

Iraqi Civil Law recognizes the concept of the impossibility to perform contractual obligations due to extraneous circumstances or Force Majeure. Article (127) of the Civil Law provides that upon the impossibility to perform a contractual obligation, the contract shall be deemed null and void.

 

Article (127):

“Where the object [purpose] of an obligation is absolutely impossible per se, the contract is null and void.”

 

In addition to the above, Article (425) of the Civil Law provides that the obligation shall be deemed cancelled or terminated if the execution of the contract becomes impossible due to extraneous factors which cannot be attributed to the debtor.

 

Article (425):

“An obligation on debtor is extinguished if the debtor establishes that its performance has become impossible due to causes beyond debtor’s control.”

 

Civil law deems a contract to be terminated when force majeure or extraneous circumstances occur, provided that such circumstances render the execution of the contract impossible and such impossibility to perform is not attributed to the parties of the contract.

Extraneous circumstances which render the performance of a contract impossible (and damages would not be due) are - as seen in Article (211):

 

  • Fortuitous events;
  • Force majeure;
  • the fault of the creditor; and/or
  • the actions of a third party.

 

When a force majeure event arises, and the contract is subsequently terminated, the termination and nullification of the contract shall lead to the termination of any mortgages and all guarantees related to the nullified/terminated contract.

 

If the circumstances in Article (127) and (425) are temporary circumstances which render the execution of the contract impossible to perform temporarily, the contract shall not be considered to be terminated. However, the obligations  will be halted until the foregoing circumstances have been resolved or are ceased/interrupted.

 

 

 

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