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Legal impact of Covid-19 in Iraq

Legal Impact of Covid-19 in Iraq

The recent COVID-19 pandemic has been characterized as “humanities darkest hour”, at least since World War II.

The Covid-19 pandemic and restrictions imposed by governments around the world have created a host of challenges for commercial activity.

Around the world, countermeasures limit public life, international businesses are faced with supply chain issues, cancellations of commercial events and trade shows, border-control, travel restrictions, in some countries shut-downs and curfews.

It will also have far-reaching implications for the economies of the MENA region.

In the long term, it may pose questions for existing global supply chain arrangements and mobility. As China has become a significant economic player in the MENA region over recent years, in the medium term, the slowdown of the global economy in general and the Chinese economy in particular will affect exports, hit the tourism sector and affect ongoing investments.

In the short term, restrictions on travel, the lock down of public life and the suspension of the work of the judiciary have already had a tangible and immediate effect on commercial contracts.

1. Measures by the Iraqi Government

The Iraqi government Crisis Cell (alias Committee of the Office Order 55/2020), an inter- ministerial committee – headed by the Minister of Health and established by virtue of Prime Minister Office’s Order 55/2020 to combat the outbreak of COVID-19 – issued a series of decisions starting from February 20. Following its latest meeting on March 21 the Crisis Cell announced 12 decisions/recommendations including

  • Establishing a curfew to Baghdad and the rest of Iraq. The curfew excepts visits to pharmacies, medicine stores, food stores, bakeries and petrol stations. It also excepts medical, security and media personnel and staff of internet service providers (ISPs).

  • Schools, universities and colleges remain closed until.

  • Flights to and from Iraq remain suspended

  • The Municipality of Baghdad and municipal departments in the provinces are directed to suspend the collection of levies and other financial dues from residents to ease the financial burden caused by the Coronavirus.

  • Relevant authorities are directed to suspend deductions for loans from the salaries of all state employees.

  • “[t]he period of the coronavirus crisis is deemed force majeure [event] for all projects and contracts starting from 20 February 2020 until the Ministry of Health announces the end of the corona epidemic”.

2. General legal features of the Force Majeure and Hardship Concepts

In light of its unprecedented effects on the global economy, the outbreak and impact of the Covid-19 pandemic has led to the revival of two classical concepts of international contract law: force majeure and hardship

Both concepts provide legal tools to deal with the effect of unexpected future events and unforeseen changes in circumstances, particularly in long-term contracts.

Given its global and unprecedented dimensions, its lethal potential and its drastic effects on international contracts, whether long-term or not, the COVID-19 pandemic will generate years, if not decades, of post-pandemic litigation and arbitration.

Apart from the COVID-19 pandemic there are myriads of examples of changed circum- stances in international business life. They relate to situations where the initial condi- tions or circumstances contemplated by the parties to a long-term contract change subsequently. These changes of circumstances can be of any conceivable character, whether commercial, technical, political, environmental or of any other known or un- known quality:

  • a substantial devaluation of the contract currency or dramatic fall in the price for a sold product;

  • the refusal of a central bank to grant a permit for payments in the currency due under a contract;

  • a regional (such as in South East Asia in 1997) or global financial crisis (such as in 2008/09) causing extreme economic burdens for a party to a contract;

  • a long-term gas or Liquified Natural Gas (LNG) supply contract concluded 25 years ago in which the gas price formula is linked to the oil price index, and the much lower current gas prices on the spot markets make the contract wholly un- profitable for the buyer;

  • civil riots,other hostilities or natural catastrophes that prevent the performance of construction works at a site in a distant country (for example for a road or other infrastructure project);

  • hurricanes or typhoons that destroy off-shore facilities for sub-sea gas or oil ex- ploitation or an off-shore wind-park;

  • an unprecedented drought that results in the suspension of the operation of a plant for the production of tungsten;

  • extremely high demurrage payments caused by the fact that a ship is detained by state authorities of the country in which the port is located;

  • cancellation of an export license by state authorities;

  • state embargoes or sanctions that have an impact on the parties’contractual obligations

The COVID-19 pandemic appears as a classical example for such an event. However, one needs to first distinguish between the general evaluation of the pandemic from a political, socio-economic and health-related standpoint, for example by medical researchers, politicians, governments and public authorities and international organizations, and the legal qualification of a COVID-19 related situation as a force majeure event. Typically, the force majeure event is not the pandemic as such, but the factual or legal effects of the public health crisis. Factual effects may involve illness or quarantine or even death of key personnel, production facility closures, or interruption of supply chains. Legal effects relate to lockdowns, curfews, travel restrictions and other measures by governments and public authorities which are issued in reaction to thecrisis.

In the COVID-19 pandemic as well as in all the scenarios listed above, the parties are faced with the eternal dilemma of contract law: the conflict between two ancient and fundamental legal maxims, “pacta sunt servanda” on the one hand and “clausula rebus sic stantibus” on the other.

The pacta principle stands for the sanctity and stability of contractual relations. That theory regards a contract as a deal: a discrete transaction in the form of a mutual promise that must be kept. This principle is upheld in a rigid manner in Common Law. For that reason Common Law as will be outlined later does not recognize the legal doctrine of Force Majeure, unless it is explicitly mentioned in the contract itself.

In Civil Law systems Force Majeure is acknowledged.

In Germany for instance it is dealt with in Articles 275 ( 1) BGB as “Impossibility” and in the recently introduced Article 313 as “disturbance of the contract foundations” (Störung der Geschäftsgrundlage), in France the principle of Force Majeure is firmly embedded into the Civil Law (albeit a definition of Force Majeure was only recently incorporated into the Civil Code)

The clausula principle follows a more flexible approach and allows the parties to free themselves from the strict application of the pacta principle. It is based on the idea that the continued enforceability and performance of a contract is always subject to the continued existence of those circumstances which existed at the time of contracting and which formed the basis for the parties’ bargain. The clausula principle is derived from equity and good faith (“pacta sunt servanda bona fide”)

The clausula principle is firmly incorporated into the Civil Law System (albeit in French Law it was for a long time only acknowledged in contracts with the state (contrat administratif).

In Common Law Hardship is not acknowledged as a firm legal doctrine, however the realities of commercial and business life have given ground for the development of similar principles such as “Frustration” ( in English Law). As a consequence of requiring a radical change to the obligation, the frustrated contract is automatically terminated and both parties are released from their obligations from the time of the occurrence of the frustrating.

Due to this effect of frustration “to kill the contract” and discharge the parties from further liability under it, “the doctrine must not be lightly invoked and must be kept within very narrow limits.

In US Law one can find the doctrine of “Impractibility” which gives a certain flexibility to adapt to changed circumstances, however with a very high treshhold.

3. Force Majeure and Hardship under Iraqi Law

In common with most Middle Eastern jurisdictions, the Iraqi Civil Code regulates “force majeure” and hardship.

The Iraqi Civil Code is one of a number of similar codes in the Arab world that were directly influenced by the Egyptian Civil Code, including that of Syria, Algeria, Libya, and Kuwait. It represents a synthesis of traditional Arab legal rules and an understanding of the needs of modern times. The chairman of the drafting committee of the ICC was the Egyptian legal scholar Abdel Razzak Al-Sanhouri who sought to combine principles of Islamic law and civil law, principally the French Civil Code (Code Napoleon).

Both doctrines, Force Majeure and Hardship (in Iraqi Civil Code known as: Exceptional Circumstances) have the common aim of excluding the parties’ liability to the extent that exceptional circumstances occur which are beyond the parties’ control and which prevent them from fulfilling their contractual obligations.

The main distinction between “force majeure” and hardship lies in the fact that, in the case of “force majeure”,implementation of the contract becomes impossible; in the case of hardship, whilst implementation remains possible, it becomes onerous.

Force Majeure is dealt with in Article 425 Civil Code which states that: “An obligation on debtor is extinguished if the debtor establishes that its performance has become impossible due to causes beyond debtor’s control”. Furthermore Article 168 is applicable which provides that: “damages for non-performance or delay in performance become payable if the debtor fails to perform its obligations, unless the debtor is able to establish that the impossibility of performance arose from a cause beyond his control.”

Under Iraqi law, an obligation is extinguished if its performance has become impossible for reasons beyond a party’s control. In that sense, “force majeure” releases a party from its contractual obligations and the other party from its corresponding obligations. Impossibility under “force majeure” must be objective rather than related to the debtor’s personal inability to perform.

If a “force majeure” event is of a temporary nature only, the contract may be “suspended” until the “force majeure” event ceases and the timeframe for performance is extended accordingly. This would normally be examined on a case by case basis.

Hardship, on the other hand, does not result in immediate suspension of a party’s obligations but rather enables a court to alter the debtor’s obligations to a reasonable degree, commensurate with the specific circumstances.

This is regulated in Article 146 (2) Civil Code which states that: “If public exceptional and unpredictable circumstances arise, and their occurance 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”.

In line with Iraqi law and practice, hardship may be invoked when a debtor’s obligations become onerous due to circumstances that are exceptional, general and unforeseen. In that case, an Iraqi court’s remedy would be to decrease the onerous obligation to the extent that it restores the equilibrium of the contract between the parties.

4. Force Majeure and Hardship in the context of Contract Clauses

The Iraqi Civil Code adopts the principle of freedom of contract. According to Article 146 Iraqi Civil Code, a contract makes the law of the parties.

Accordingly, the parties are free to detail in the contract the scope and effect of a “force majeure” event.

While the defense of hardship cannot be excluded in a contract (Article 146 (2) Iraqi Civil Code), Iraqi law permits an agreement whereby the debtor bears the consequences of a “force majeure”( Article 259 (2) Iraqi Civil Code)

Many national and nearly all international, cross-border contracts contain a Force Majeure Clause and/ or a Hardship Clause, in which the Force Majeure Event or the hardship event as well as the legal consequences of such an event is extensively dealt with.

As a result of the dominance of English as global “lingua franca” - and may be also the dominance of the US in business and international organizations as well as the large US and English Law firms in international business consultancy - most international, cross border contracts are drafted with clauses, which are derived from, or at least heavily influenced by English Common Law or similar US Anglo-Saxon Law.

Since, as mentioned above, the Common Law does not know an inherent and independent Principle of Force Majeure nor Hardship but only acknowledges it if the parties have agreed to it it the contract and only within the text of the contract, clauses regarding Force Majeure and/or Hardship have become common place.

Sometimes you find in the same contract also both of such a clause, creating sometimes confusion between them. Accordingly, when force majeure and hardship clauses are both provided for in a contract, their relationship and overlap is often unclear.

The contractual clauses are often very detailed as regards the criteria for determining the Force Majeure or Hardship event as well as regards the legal consequences resulting from such an event.

There are also some often used model clauses, such as the New ICC Model Clauses on Force Majeure and Hardship (updated in March 2020)

The ICC offers two models of the force majeure clause, a long form and a short form. The ICC suggests to simply incorporate the long form in a contract by reference, whereas the short form could be included in its entirety. The content of the clause is covering what is governed by most force majeure clauses: It defines force majeure and stipulates that the party prevented or impeded from performing one or more of its contractual obligations by force majeure is relieved from its duty to perform its obligations under the contract and from any liability in damages for the duration of the impediment. The clause also provides for an obligation to give notice of the event to the other party. Additionally, it stipulates that a party engaging a third party to perform the contract may invoke force majeure only to the extent that the impediment to performance is established for the contracting party and for the third party. A right of termination is also provided for, which may inter alia be asserted if the duration of the impediment exceeds 120 days

The model clause on hardship,from the outset, encourages tailoring it to the specific needs of the parties, as it is available in three options. They cover cases in which performance of contractual duties is possible, but excessively onerous due to an event beyond that party’s reasonable control which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract and that it could not reasonably have avoided or overcome the event or its consequences. These are cases which, according to German law, are to be solved via the principles of interference with the basis of the transaction (Section 313 Civil Code). If the prerequisites are met, the clause provides for the parties’ obligation to negotiate alternative contractual terms which reasonably allow to overcome the consequences of the event. In its various alternatives, the clause then provides either for a right to terminate the contract or to adapt it (with different roles of the parties and the judges or arbitrators). If the provision of Section 313 Civil Code is to be applied to the contract nonetheless (this is the case with international contracts where “the laws of Germany in exclusion of the UN Convention on Contracts for the International Sale of Goods” have been agreed; in other cases, this is at least doubtful because the UN Convention on Contracts for the International Sale of Goods is partly considered to have a blocking effect towards Section 313 Civil Code), the ICC clause is not necessary. Section 313 Civil Code is hen usually a good option. In other cases, the clause is quite useful and, since it is balanced, chances are good that the other party is willing to accept it.

There are also other model clauses such as a clause in the FIDIC Silver book (for construction contracts) or a model clause in the CISG.

All combined, the transnational rules and the practice of international long-term con- tracting have led to the general understanding that the force majeure excuse for non- performance as a transnational doctrine and as a contractual clause is based on the following four cumulative requirements:

  • Externality: The occurrence of an external event for which the obligor has not assumed the risk;

  • Unavoidability/Irresistibility: The occurrence of the external event was beyond the obligor’s (typical) sphere of control/the ordinary organization of his busi- ness and was absolute;

  • Unforeseeability: The event and its consequences,i.e.the adverse impact on the obligor’s ability to perform, could not reasonably have been avoided or overcome by the obligor, e.g. by alternative and commercially reasonable (measured against the risk-distribution in the contract) modes of performance, procurement or transportation, or other safety measures;

  • Causation (“conditio sine qua non” or “but-for” test): The obligor’s non-performance was as a matter of commercial reality caused by the external event and not by the obligor’s own fault, e.g. by self-inflicted production problems, defected goods or packaging.

The COVID-19 pandemic meets this four-pronged test, provided that a court or arbitral tribunal determine Covid -19 confirm, the pandemic was a force majeure event.

The pandemic clearly is an external event. It was also unforeseeable, at least with espect to contracts concluded before February 2020 . It is true that some medical experts have emphasized the threat of zoonotic spillover, i.e. the transmission of pathogens from nonhuman animals to humans for many years, and have hinted at the fact that the elevation of spillover events is two to three times higher now than 40 years ago, driven by the huge increase in the human population and expansion into wildlifeareas. Virologists have also predicted for many years that a pandemic such as the SARS of 2002-2004 could break out again, which, ”statistically, would occur once in a period of 100 to 1,000 years”. In the legal context of the force majeure doctrine, the COVID-19 pandemic must thus be characterized as an “an event so unlikely to occur that reasonable business parties see no need explicitly to allocate the risk of its occurrence, although the impact t might have would be of such magnitude that the parties would have negotiated over it, had the event been more likely The severe global consequences of the COVID-19 pandemic, which affected multiple business sectors and not just individual companies or employees – for example with respect to lockdowns, quar- antine of personnel, interruption of global supply chains etcetera make it easier for the affected party to prove the unavoidability of its non-performance.

Force Majeure being an ex-ception to the obligation to perform [i.e. the pacta principle], a party that invokes it has the burden of proving that [the above four] conditions of force majeure existed with regard to the contractual obligations which it did not perform”.

In case, that that the four a.m. conditions are not met, especially performance of the contract is still possible, albeit will be very onerous due to the new circumstances to the debtor the Hardship clause in the contract, if any, will determine the legal consequences for the contract parties or will leave it to be adjusted by a court decision.

5. The declaration of COVID - 19 as Force Majeure by the Iraqi government

Given that Iraqi law already regulates “force majeure” and permits a party to rely on it and also grants the freedom of contract to the parties especially also regarding defining and regulating Force Majeure and Hardship there must be some question as to the background and underlying rationale of the Iraqi Government in issuing the declaration and its effect on contractual freedom.

A similar approach was foreshadowed e.g. in France, when on February 28, 2020, the French Ministry of Economy stated that the COVID-19 pandemic will be considered as a force majeure event and that penalties for late deliveries will not be applied in public procurement contracts. This seems to assume, that late deliveries by private companies due to governmental measures as lock-down, quarantine or may be also stay-home measures by employers etc. are to be considered as “temporary impossibility to deliver in due time” and will not trigger penalties for not delivering in due time according to the contract terms.

One has to consider, that this declaration of the French government concerns a special kind of contracts namely Public Contracts (contrat administratif ). Since in such contracts the French State, respectively a State Entity or State Company is a partner of such an administrative contract, one might argue, that such a declaration of Covid-19 beeing deemed as Force Majeure is legitimate and could also bind French Administrative courts to such a legal assumption.

Regarding the Declaration of the Iraqi government one could assume it to be meant or to be interpreted in such a restricted manner, that it concerns contracts and projects where the Iraqi government or an Iraqi state entity is a party of a contract und which insofar one-sided, as it commits only the government (-entity) to assume a Force Majeure event and therefore foregoing penalty payments by the other contracting party for not delivering in time.

In the context of a Public Contract (contrat administratif ) one can find even more radical approach insofar as it is argued, that one should even go further enable investors, banks and companies contracting with the government (e.g. public utilities and infrastructure contracts and other administrative agreements) to claim compensation for damages incurred as a result of actions and measures imposed by the government due to the current situation, which were unforeseen at the time of concluding the contract. Such claims, -according to this opinion could be placed under a so called “Act of Lord principle, provided that the following requirements are met:

  1. The claim arises in relation to an administrative contract

  2. The hrmful action/measure is issued by the contracting administration or government

  3. The action has caused harm to the contractor, regardless of the degree of severity

  4. Assuming the harmfull act adopted y the administration does not constitute an error or a breach

  5. The harful act issued by the administration is unforeseen, and

  6. `the contractor has sustained losses which are not sustaine by other entities subject to the decisions, measures, adopted by the administration.

It will be certainly a uphill battle to succed with such an approach in front of a court in Iraq ( and elsewhere), however it shows the direction to be awaited in subsequent court sessions or arbitral proceedings.

Burt what about “normal” projects and contracts between private parties or between a private party on one side and a governmental entity on the other side, however not in a public sovereign position but as a normal private contracting party ( f.i. the construction of a government building on basis of a contract between a private contractor and a governmental entity or the rent of a conference hall by a Ministry for a reception)

The wording of the declaration of the Iraqi government expressly covers “all projects and contracts”. This means that debtors can be expected to invoke this beyond government contracts and projects and their supply chains. This means that it may affect all existing commercial, civil and labour contracts, thus creating considerable uncertainty for domestic and international businesses working in Iraq.

Also for such a extensive interpretation there is a kind of precedent in China, when early during the pandemic, on February 10, 2020, a spokesperson for the PRC’s Legislative Affairs Commission of the National People's Congress Standing Committee (全国人大常委会法工委) announced that measures which were implemented by the Chinese government to combat the virus and which interfere with contracts should be considered force majeure events. In line with this statement, the China Council for the Promotion of International Trade (CCPIT), a quasi-governmental body, had issued a record number of 6.454 force majeure certificates to Chinesecompanies until March25, 2020. They covered a total contract value of about 89.4 billion USD and were intended to exempt local exporters from fulfilling contracts with overseas parties by proving that non-performance of their contract was due to Covid -19 related measures like holiday extensions or lock-downs.And indeed, according to the ECONOMIST Chinese firms use obscure legal tactics to stem virus lossesand he virus has led to firms trying to get out of contract. However, reputed legal opinions, published so far regard neither Governmental declarations of Force Majeure like in France nor the issuance force majeure certificates issued by public authorities, like the one issued by the Chinese CCPIT, in and of themselves as a binding to a legal force majeure determination or a proof for the factual existence of force majeure in that country.

As such, they may be binding for the Chinese court’s interpretation of domestic force majeure provisions in Chinas Civil or Contract Law ( especially in the light of the proven tgovernmental interference in civil court proceedings) They may not, however, prejudge a domestic court’s or international arbitral tribunal’s factual evaluation of the COVID-19 situation in a given case, if that court or arbitral tribunal sits outside China. The same might hold true for the case in Iraq regarding the Declaration of Covid – 19 as Force Majeure.

Prior to the Government’s announcement, developers, contractors and employers were supposed to be handling the Covid-19 crisis on a case-by-case basis, based on existing contract clauses and the Iraqi Civil Code as outlined above.

Now, following this declaration, it is unclear whether a debtor will be relieved from establishing “force majeure”and impossibility even if COVID 19 did not, in fact, render its contractual obligations impossible but only onerous, or did not affect the performance of its obligations at all.

This may also result in parties relying on the aforementioned decision to deliberately default –without bearing any liability.

Needless to say, no decision of the government can change the applicable Iraqi law and it remains to be seen how the Iraqi courts will treat the decision and whether it will be interpreted as some kind of “binding interpretation guidance for Iraqi public authorities”.

In summary, the declaration of COVID -19 as “force majeure” by the Iraqi Government leaves some questions unanswered until the first judgements or arbitral awards may clearify.

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