The Legal Framework for Commercial Contracts: Force Majeure and Hardship

The commercial contract is the cornerstone of protecting companies when regional conflicts erupt or supply chains break down. Validating the efficacy of legal protection requires a precise understanding of the fundamental differences between the Civil Transactions Law applied in the Abu Dhabi Mainland and the English Common Law principles applied exclusively within the geographical and legal jurisdiction of the ADGM.

A precise understanding of contractual clauses during times of crisis and war is an absolute necessity to avert catastrophic commercial losses and ensure operational survival.

— Bianca Gracias, Managing Partner at Crimson Legal (possessing over 15 years of commercial legal experience in the UAE).

Legislation in the Mainland (Civil Transactions Law)

In the Mainland, contractual disputes arising from wars or crises are subject to the provisions of the UAE Civil Transactions Law (Federal Law No. 5 of 1985 and its amendments). The legislation provides two parallel avenues for dealing with external shocks: Force Majeure and Exceptional Circumstances (Hardship). Bianca Gracias emphasises the necessity of strategic differentiation between the two concepts, noting that Force Majeure requires an absolute impossibility (physical or legal) to perform the fundamental obligation.

Article 273 of the Civil Transactions Law regulates the concept of Force Majeure, which, if proven, leads to the automatic rescission of the contract and the extinguishment of corresponding obligations by operation of law. For the UAE Judiciary, specifically the Abu Dhabi Court of Cassation, to recognise the existence of Force Majeure, three strict, concurrent conditions must be met:

• Unforeseeability: The geopolitical event must not have been reasonably foreseeable at the time the contract was concluded.
• Unavoidability: The event is beyond the parties’ control and its consequences cannot be averted by taking reasonable measures.
• Absolute Impossibility: The courts have affirmed that Force Majeure must render the performance of the obligation absolutely impossible, not merely more onerous or expensive.

In cases involving the closure of vital ports due to armed conflicts, the courts considered the absolute impossibility of shipping to exempt the carrier from contractual liability and compensation claims.

On the other hand, Article 249 of the same law addresses situations where the crisis does not reach the threshold of absolute impossibility but renders the performance of the contractual obligation excessively onerous for the debtor, threatening them with severe loss. This principle is known as Exceptional Circumstances or Hardship. For this article to be applied, the event must be exceptional, general, unforeseeable, and unavoidable. Unlike Force Majeure, which terminates the contract, the Hardship principle grants the judge or arbitral tribunal broad discretionary power to intervene to restore the financial balance of the contract, either by reducing the onerous obligation to a reasonable level or by extending the deadlines for performance, thereby ensuring the survival and continuity of the contractual relationship despite the crises.

Legislation in the Abu Dhabi Global Market (English Common Law)

The legal approach differs radically for companies that choose to subject their contracts to the laws of the ADGM. The market adopts English Common Law principles, which do not recognise a general or automatic legal concept of Force Majeure or Hardship.

In this jurisdiction, protection from geopolitical risks is a purely contractual matter. This means that ADGM Courts interpret Force Majeure clauses strictly and literally. For a company to successfully invoke a Force Majeure clause, the event causing the crisis (such as armed conflict, hostilities, naval blockade, or state intervention) must be expressly and clearly stipulated within the list of covered events in the contract. The affected party is also obligated to present conclusive evidence establishing a direct causal link between the geopolitical event and their inability to perform, whilst proving that they have taken all reasonable steps to mitigate the loss and seek operational alternatives.

In the absence of robust drafting, a party may be compelled to perform regardless of the losses incurred, unless they can prove the complex doctrine of Frustration of Contract under English Law, which results in the immediate termination of the contract. Through its Protecting department, Crimson Legal offers advanced advisory services to review and draft these clauses, safeguarding investors’ rights against unforeseen volatility.

Legal Analysis Criteria Comparison

• Civil Transactions Law (Mainland): Statutory basis guaranteed by Article 273. Requires absolute impossibility of performing the fundamental obligation. Legal consequence is automatic rescission. Financially onerous obligations are treated via the judge’s discretionary power (Article 249). Mitigation of loss is implicit.
• English Common Law (ADGM): Strictly contractual basis requiring an express clause. Standard for exemption depends on precise drafting (prevention or hindrance). Legal consequence is defined by the contract. Hardship is not recognised unless expressly drafted. Mitigation of loss is mandatory, strict, and subject to literal judicial scrutiny.

Dual Corporate Structuring and Strategic Asset Protection

Investment entities and multinational corporations recognise that contracts alone may not suffice to protect strategic assets and interests from the fallout of complex geopolitical crises. Therefore, corporate structuring and selecting the optimal jurisdiction for registering assets constitute the second, and most vital, line of defence. Abu Dhabi has innovated unique institutional mechanisms enabling foreign investors to ring-fence and secure their vital assets. Here, the Structuring services at Crimson Legal play a pivotal role in assisting founders to establish a sound legal and commercial architecture that ensures sustainability and scalability from day one of setting up in the UAE.

Special Purpose Vehicles (SPVs) as a Legal Shield for Assets

The regulatory environment in the ADGM provides a highly effective strategic tool known as Special Purpose Vehicles (SPVs). These companies are designed as passive holding entities, meaning they do not engage in daily operational commercial activities nor do they hire staff; their role is strictly limited to holding assets, managing liabilities, and intellectual property rights.

The ring-fencing strategy represents the most prominent function of these companies. When a foreign company transfers the ownership of its high-value assets or investments to an SPV in the ADGM, it legally separates these assets from the operational risks or debts associated with operating subsidiaries in regions directly affected by geopolitical conflicts. These entities feature 100% foreign ownership with no nationality restrictions for shareholders, along with the ability to issue multiple classes of shares, providing exceptional flexibility in allocating voting rights and dividend distributions. Furthermore, the corporate documents for these companies are exempt from complex attestation requirements, and registration is conducted via a swift, transparent, and efficient digital platform.

On the tax front, under federal laws, SPVs incorporated in the ADGM benefit from a highly tax-efficient environment. These entities can apply for a Tax Residency Certificate from the UAE Federal Tax Authority, granting them full access to the UAE’s extensive network of Double Taxation Treaties with numerous global markets, which mitigates cross-border withholding taxes on financial returns.

Entity Types and Protection Mechanisms

• Private Company Limited by Shares (LTD – SPV): Offers 100% foreign ownership, a Common Law-based system, and tax efficiency. Best applied for ring-fencing assets to prevent financial default from spilling over from regional operating companies to core corporate assets.
• Restricted Scope Company (RSC – SPV): Provides all the benefits of an LTD, plus exemption from comprehensive disclosure requirements on the public register. Best applied for protecting family wealth and sovereign assets, ensuring confidentiality during periods of tension.
• ADDED Dual Licence: Allows operations in the Mainland with exemption from leasing an additional physical office. Best applied for ensuring business continuity, accessing major tenders, and diversifying local revenue streams to offset regional supply chain disruptions.

Operational Integration via the Dual Licensing Regime

Abu Dhabi did not merely provide an isolated environment for asset protection; it created an operational bridge connecting the secure jurisdiction of the ADGM to the broader local economy through the Dual Licensing regime.

Under a strategic agreement between the ADGM Registration Authority and the Abu Dhabi Department of Economic Development (ADDED), eligible companies incorporated within the geographical boundaries of the ADGM (Al Maryah and Al Reem Islands) are permitted to obtain a trade licence allowing them to conduct business and contract in the Abu Dhabi Mainland without the physical or legal need to establish an additional office outside the free zone. This standard integration is an exceptional advantage for foreign companies, allowing them to retain the benefits of legal protection, English courts, and advanced governance within the ADGM, whilst simultaneously enjoying the flexibility of direct access to government tenders and clients in the local market. This ensures the continuity of cash flows and commercial operations even during times of regional unrest that might restrict access to other markets.

Crimson Legal provides Operating and Growing services to support companies adopting these dual structures, assisting them in establishing strategic partnerships or distribution agreements to ensure safe and sustainable scaling within regional markets.

Regulatory Compliance and Workforce Management During Crises

When geopolitical risks escalate and impact the cash flows of companies operating in the region, executive management often resorts to measures to reduce operational costs. In the UAE, these measures require strict compliance with Federal Decree-Law No. 33 of 2021 regarding the Regulation of Employment Relations (the New Labour Law), which prohibits unilateral actions that prejudice workers’ rights. The Hiring and Financing services provided by Crimson Legal support companies in managing employee retention with high legal efficiency to avoid fines and labour disputes, guided by comprehensive advice from Bianca Gracias regarding the continuous updates to MoHRE regulations.

The legislative framework imposes strict limitations on preemptive unpaid leave and salary reduction decisions. Pursuant to Article 33 of the Labour Law, an employer may not force an employee to take unpaid leave; explicit and mutual written consent between both parties is a prerequisite to executing this measure. Similarly, it is strictly forbidden to reduce an employee’s basic salary without a valid legal justification or a written and registered agreement; wages must be paid according to the agreed mechanisms via the Wage Protection System (WPS) approved by the Ministry of Human Resources and Emiratisation (MoHRE). Any breach of these regulations or unilateral salary deductions during times of crisis exposes the company to severe financial penalties and an immediate suspension of dealings with the Ministry.

However, with a profound understanding of economic challenges, the UAE legislator introduced for the first time in the new law a mechanism permitting the termination of employment contracts for reasons related to restructuring or economic reasons (Redundancy). This provides a safe legal pathway for companies to lay off surplus staff without facing the risk of arbitrary dismissal claims. Activating this pathway requires adherence to statutory notice periods ranging between 30 and 90 days, payment of a repatriation ticket, and granting the employee their full End of Service Gratuity (EOSG) and cash allowance for accrued but untaken annual leave.

War Risks and Political Violence Insurance Mechanisms

Transport operations and supply chains through vital maritime corridors, such as the Strait of Hormuz and the Bab el-Mandeb Strait, are the lifeblood of companies operating in the import and export sectors. As these corridors turn into critical flashpoints, insuring assets against hostile and political acts has become an urgent strategic necessity to avert catastrophic losses.

The Arab War Risks Insurance Syndicate (AWRIS), with its regional headquarters encompassing a vast network of insurance institutions, stands at the forefront of providing coverage for complex risks typically excluded from standard commercial policies. The syndicate possesses massive underwriting capacities, enabling it to provide insurance coverage tailored to modern crises:

• Up to USD 250 million per policy for Marine Cargo – War.
• Up to USD 200 million per vessel under Marine Hull – War policies.
• Up to USD 10 million for War on Land insurance, protecting land transit shipments damaged by armed conflicts.

These policies cover compensation for physical damage caused by war, civil war, rebellion, revolution, seizure, and detainment. The syndicate has demonstrated immediate responsiveness to recent maritime crises, reinstating Cargo War cover for shipments transiting the Strait of Hormuz at a premium rate of 0.15%, and via the Bab el-Mandeb and the Arabian Sea at 0.2%, with major strategic shipments subject to bespoke daily assessments to ensure the continuity of trade flow in the region.

Alongside maritime protection, national export credit agencies such as Etihad Credit Insurance (ECI) offer specialised Political Risk Insurance products. This type of insurance is designed to enable holding companies and investors to protect their cash flows and physical assets in volatile foreign markets from acts of confiscation, nationalisation, or strict currency transfer restrictions, in addition to covering business interruption resulting from political violence and terrorism.

Urgent Judicial Protection and Dispute Resolution

A strategic protection framework is incomplete without a judicial authority capable of decisive and immediate intervention to safeguard assets prior to the final adjudication of complex disputes. The ADGM Courts and its affiliated arbitral institutions possess broad powers to issue Interim Measures that prevent disputing parties from dissipating their assets or evading liability during periods of geopolitical turmoil.

Worldwide Freezing Orders (WFOs) are among the most potent legal tools available in the arsenal of the ADGM Courts. These orders restrain the respondent from transferring or dissipating any assets they own anywhere in the world. In a recent landmark decision issued by the ADGM Court of Appeal (Case A30 & Ors v E30 & Ors), the Court affirmed that the mandatory rules of the ADGM arbitration regulations override the institutional rules of arbitral bodies (such as the London Court of International Arbitration – LCIA). This confirms the ADGM Courts’ jurisdiction to intervene independently in support of arbitral proceedings and issue freezing orders exceeding hundreds of millions of dollars to protect investors’ assets.

This aligns with the updates to the Abu Dhabi International Arbitration Centre (ArbitrateAD), which ratified advanced rules for 2024 allowing for the appointment of an Emergency Arbitrator within a single working day to consider urgent interim relief applications prior to the constitution of the full arbitral tribunal. This provides an immediate and decisive response to protect investments exposed to sudden risks associated with escalating conflicts.

Frequently Asked Questions (FAQ)

1. Are regional conflicts in the Middle East considered “Force Majeure” that automatically terminates commercial contracts?

   This depends primarily on the legal jurisdiction governing the contract. Under Article 273 of the Civil Transactions Law in the Abu Dhabi Mainland, contract termination requires the conflicts to have resulted in an absolute impossibility of performing the fundamental obligation. If they merely cause an increase in costs, Article 249 (Exceptional Circumstances) can be invoked to have the judge modify the obligation. Conversely, ADGM laws require an express clause in the contract clearly stating that hostilities constitute a Force Majeure event, and this clause is interpreted very strictly.

2. What is the mechanism by which Special Purpose Vehicles (SPVs) in the ADGM protect foreign companies’ assets?

   These entities serve as a strategic tool for ring-fencing. By registering valuable assets and investments within an SPV that enjoys an independent legal personality governed by English Common Law, these assets are shielded from the legal and financial repercussions associated with the default of other operating companies within the group that might be directly affected by regional crises. These companies also benefit from full foreign ownership and tax efficiency via Double Taxation Treaties.

3. Does an employer have the legal right to impose unpaid leave or reduce salaries during periods of declining revenue due to crises?

   According to Federal Decree-Law No. 33 of 2021 (the Labour Law), companies are prohibited from unilaterally imposing unpaid leave, and clear, written consent from the employee is required. Similarly, reducing the basic salary is strictly forbidden without signing a new contract addendum and registering it with MoHRE, given that salaries are linked to the stringent Wage Protection System (WPS), which imposes administrative and financial penalties in the event of a violation.

4. How can companies incorporated in the ADGM free zone freely conduct business in the Abu Dhabi Mainland?

   The Dual Licensing regime established between the ADGM and the Abu Dhabi Department of Economic Development (ADDED) allows eligible companies to obtain a trade licence authorising them to operate in the Mainland and bid for local tenders, without the legal requirement to lease an additional physical office outside the free zone. This enhances their operational flexibility and substantially reduces costs.

5. What are the insurance coverage options available to protect cargo transiting through high-risk maritime corridors?

   The Arab War Risks Insurance Syndicate (AWRIS) provides comprehensive protection of up to USD 250 million per policy to insure marine cargo against the risks of war, detainment, and sabotage. The syndicate recently reinstated coverage for shipments passing through flashpoints like the Strait of Hormuz and Bab el-Mandeb at flexible premium rates that are updated based on daily geopolitical assessments, ensuring the continuous flow of supply chains for importing and exporting companies.

To CEOs, Chief Risk Officers, and Legal Counsel in International Corporations: The current geopolitical landscape dictates rapid shifts that leave no room for hesitation or delayed reactions. To safeguard your vital assets and sustain your commercial operations, execute a Comprehensive Strategic Audit of your business portfolio immediately:

• Contractual Review: Re-evaluate the drafting of Force Majeure and Hardship clauses in all procurement and supply contracts to ensure they explicitly cover events such as naval blockades and economic sanctions, whether you operate under the Civil Law or ADGM jurisdiction.
• Engaging Experts for Proactive Consultancy: Identify and formulate strategies to protect assets and property rights proactively. Collaborate with consulting experts at accredited law firms, leveraging the suite of services encompassed by Crimson Legal‘s expertise.
• Restructuring and Ring-Fencing: Invest in establishing Special Purpose Vehicles (SPVs) in the ADGM to act as a protective shield for your core assets, and explore local expansion pathways via the Dual Licensing regime to secure alternative cash flows.
• Updating Insurance Coverages: Review current insurance policies to ensure the continued validity of marine coverages and political risk insurance programmes through trusted institutions such as the Arab War Risks Insurance Syndicate.

Are you prepared to fortify your corporate structure against the next geopolitical shockwave, or will your operations remain vulnerable to regional volatility?

References

• UAE Government Official Portal: Employment Laws and Regulations
• Ministry of Human Resources and Emiratisation (MoHRE) Official Guidelines