The World Health Organization (WHO) announced on March 11, 2020, that the coronavirus (COVID-19) had become a pandemic, meaning it had evolved into a global epidemic. Since that date—and even prior to it—most nations instituted precautionary measures and actions to combat the virus and curb its spread. These measures included unprecedented restrictions on freedom of movement and transit, which in some countries reached the level of partial curfews, the closure of airports, and the shutdown of international borders. They also included the suspension or reduction of operations in public facilities and private companies as part of implementing recommendations to stem the spread of the virus through social distancing strategies, in the hope of buying time to discover an effective vaccine for the virus or to acquire herd immunity so that it would eventually transform into a regular influenza virus.
Egypt was not far removed from these measures; the Egyptian government implemented a number of precautionary and societal steps aimed at preventing the spread of the coronavirus. These measures included suspending studies in schools and universities and all services provided by ministries and governorates to citizens—with the exception of services provided by health offices—as well as imposing a partial curfew, closing airports, sports clubs, cafés, and restaurants (excluding home delivery services), setting operating hours for commercial shops, and issuing economic decisions aimed at mitigating the severity of the consequences of these measures, particularly on sectors affected by the new restrictions.
Just as the World Health Organization described the virus as a global epidemic—a pandemic—economic losses also bear a global character. These direct losses encompassed sectors such as tourism, aviation, and others affected by the imposition of travel and transit restrictions, while also indirectly impacting numerous other sectors.
These losses caused many companies, institutions, and individuals to default on fulfilling their contractual obligations—entered into prior to the emergence of the virus and its evolution into a global pandemic—either because performance became impossible or because performance would be excessively burdensome. Consequently, contractual justice, which existed at the moment of concluding those contracts, was disrupted by the shifting economic conditions during their execution period. Therefore, it is expected that many individuals, companies, and institutions will struggle to continue fulfilling their undertaken obligations, potentially leading to practical and legal problems and dilemmas both in the current period—during the currency of the restrictions and precautionary measures against the virus—and after the virus is reined in and normal life resumes.
This paper aims to provide simplified and general legal consultations/advice to individuals and companies—both clients of the Ahmed Ragheb Law Firm and Legal Consultations and others—on how to deal with current contractual obligations in light of the expected default in their execution following the spread of the coronavirus. This is achieved through:
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Presenting the legal characterization of this crisis as either force majeure or exceptional/emergency circumstances in Section One.
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Exploring the legal means to restore balance to contractual relationships amid the shifting economic conditions of the contracting parties—whether through the contracting parties themselves, the executive administration/authority, or the judiciary—in Section Two.
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Providing general advice to individuals and companies in the final section on how to deal with the fallout of this crisis, while taking into account differences between contracts and the legal positions of contracting parties, which is why we always advise contacting us to study each case individually.
Section One: Legal Characterization of the Coronavirus Crisis—Force Majeure or Exceptional Emergency Circumstances?
It is established that the spread of the coronavirus caused a change in the economic conditions of contractors, resulting in a default in fulfilling contractual obligations. However, what is the legal ruling regarding this situation? Can we say that we are facing a case of force majeure resulting in the extinguishment of the obligation, or are we dealing with general exceptional circumstances?
To answer this question, it is helpful to briefly point out the difference between force majeure and exceptional or emergency circumstances as a basis for non-performance of contractual obligations.
Force Majeure
This refers to sudden and unforeseeable events that are impossible to prevent or ward off, which occur after the contract is drawn up, resulting in the impossibility of performing obligations. The presence of force majeure results in the extinguishment of the obligation and the release of the parties from their duties. Assessing whether a claimed event constitutes force majeure or not is a matter falling within the jurisdiction of the trial court, provided it adheres to these legal principles and bases its judgment on sound reasoning sufficient to support it.
It is important to note here that cases of force majeure may be general—such as wars, natural disasters, or the spread of epidemics—or they may be related to the contract itself, such as an employee being called up for military service, which makes the performance of obligations under the employment contract between the employee and employer impossible.
Exceptional/Emergency Circumstances
The intended meaning of exceptional circumstances as a basis for non-performance of obligations under contracts is that if general exceptional incidents occur that could not have been foreseen, and their occurrence renders the performance of the contractual obligation burdensome to the debtor, threatening them with heavy losses, then the judge may—depending on the circumstances and after balancing the interests of both parties—reduce the burdensome obligation to a reasonable limit.
It is clear from this that the conditions for applying exceptional circumstances are:
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The existence of general exceptional incidents.
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That these incidents occurred after the conclusion of the contract.
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That these incidents could not have been foreseen.
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That the performance of the contractual obligation has become burdensome for the contractor.
The scope of the theory of emergency incidents extends to apply to all deferred-performance contracts as well as continuous (temporal) contracts. It also extends to all contracts characterized by a time gap between their conclusion and execution during which an unexpected exceptional incident occurs that renders performance burdensome for the debtor. This is because its objective is to repair the disruption in contractual balance resulting from exceptional emergency circumstances, which applies equally to deferred obligations and obligations executed periodically.
From the above, it is clear that force majeure and exceptional circumstances share the concept of surprise and the unexpected event, but they differ in the effect of that event on the performance of obligations. Herein lies the main criterion for distinguishing between them: if the unexpected event leads to an impossibility of performance, we are dealing with a case of force majeure; whereas if the effect of the event is that the obligation has merely become burdensome to the debtor, we are facing the application of the theory of exceptional or emergency circumstances.
Applying the foregoing to the economic and social repercussions resulting from the coronavirus epidemic, it cannot be said globally that either theory (force majeure or exceptional circumstances) applies to all contracts indiscriminately. This is because the impact of the crisis is not uniform across all contracts:
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Force Majeure: For some contracts, performance became impossible—such as international passenger transport contracts and tourism sector contracts—due to the suspension of air traffic worldwide and the halt of tourist trips. In these contracts, we face a case of force majeure resulting in the extinguishment of obligations due to the impossibility of performance.
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Exceptional Circumstances: On the other hand, for contracts such as supply contracts (where a supplier is obligated to transport materials or items in specified quantities over a time span), during the contract's term the government announced a curfew to combat the coronavirus. This made the supplier's obligation to deliver goods burdensome because it would require more transport vehicles and drivers to fulfill obligations under the supply contract, thereby raising costs oppressively. The same applies to employment contracts obligating workers to be present at specific times—an obligation that imposes a hardship on workers who must take costly precautions to maintain their safety under announced restrictions and procedures, forcing them to use high-cost technological means to work remotely or secure safe private transport. In such cases, we are discussing the application of the theory of exceptional or emergency circumstances because the worker's or supplier's obligation is not impossible, but rather has become burdensome.
In summary: The impact of the coronavirus on contracts varies depending on the subject matter and circumstances of each contract and the extent to which the parties are affected in performing their obligations. If the performance of obligations has become impossible, we face force majeure and obligations are extinguished; whereas if performance has become burdensome for one of the parties, we face an exceptional circumstance.
Section Two: Legal Means to Address the Disruption of Contractual Justice Caused by Shifting Economic Conditions During Performance (The Concept of Adapting Contracts)
Generally speaking, when discussing the disruption of contractual justice due to economic conditions, the law has specified several means to restore that justice to contracts. These forms fall under the concept of adapting contracts, whereby flaws in contracts during times of general disasters and crises are corrected.
These means include:
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Contracting Parties Themselves: Implementing an agreed-upon contractual amendment that takes into account emerging circumstances during performance, or even reaching a settlement or conciliation in the event that performance of the obligation is impossible.
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Executive Authority/Administration: Intervention by the executive authority to restore balance in certain contracts where failure to fulfill obligations harms the public interest.
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The Judiciary: The judiciary plays an important and primary role in adapting such contracts through its role in interpreting contracts or creating new legal rules.
Thus, legal means to restore contractual justice—which existed at the moment of contract formation—can be divided into three paths: the contracting parties themselves, the executive authority, and the judiciary upon presentation of the dispute.
1. Adapting Contracts Through the Parties Themselves
In the event that one or both parties are affected by the spread of the coronavirus and the resulting measures and restrictions causing losses, the parties to any contract have the right to negotiate to amend the contract or even reach a settlement satisfactory to both parties if contract performance has become impossible.
This right is fundamentally based on the principle that "the contract is the law of the parties"; whoever has the right to conclude a contract has the right to amend it. Amending a contract is subject to the same requirements as its conclusion, such as legal capacity, and that the amendment does not violate public order or public morals, among other conditions.
It is worth noting that it is conceivable that contracting parties may have anticipated these conditions and established a mechanism to address them. In such cases, this mechanism must be activated immediately unless it causes losses to one of the parties. In the event of ambiguity or disagreement regarding the mechanism, such contracts are governed by general rules.
A. Contractual Amendment (Consensual Modification of the Contract)
Consensual contract modification means that the contracting parties agree to amend the contract to render it suitable to the new economic conditions affecting their original agreement, thereby restoring justice between the parties after it was disrupted by economic conditions.
Consensual amendment requires the same conditions as a contract—capacity, intent, and non-violation of public order and morals—alongside the addition of terms concerning the economic circumstances newly emerging upon the original agreement. Contractual modification may take several forms to accommodate new economic conditions. We discuss two forms here:
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Mutual Partial Waiver: This refers to contract modifications focused on a mutual reduction of the parties' obligations aimed at addressing economic circumstances faced by one or both contractors.
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Example: An employer modifies a contract concluded with a contractor, whereby the employer agrees to a lower-cost plan for the contractor in exchange for the latter accepting a lower fee than agreed upon in the original contract.
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Example in Employment Contracts: An employer agrees that an employee need not attend the company headquarters daily, provided the employee performs routine tasks from home while waiving travel allowances or the private car allocated by the company for commuting.
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Performance in Lieu (Alternative Performance): This involves contract modifications focused on the subject matter of the obligation itself, where the parties agree to alter the nature of the mutual obligations.
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Example: If a factory owner agreed to supply solid iron to several companies, but due to a natural disaster or war was forced to convert production to foodstuffs, and the parties agree to substitute solid iron with foodstuffs and amend the contract accordingly, we are facing performance in lieu or reciprocal performance.
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Example in Employment Contracts: If an employer agrees with a worker to be employed as a company security guard, but due to the spread of the coronavirus pandemic, they agree to replace the security guard position with a delivery service role, we are similarly facing consensual contract modification via alternative performance.
B. Settlement or Compromise
Settlement or compromise is a legal act whereby the parties modify certain elements of their legal relationship, with each party waiving a portion of their claims in exchange for the other party waiving a portion of theirs. This concept finds its legal basis in Article 549 of the Civil Code.
Contractors may resort in certain contracts to settling an existing or potential dispute by drawing up a compromise where each party waives some of their rights under the contract. This path is usually resorted to in cases where continued performance of the contract has become impossible.
2. The Role of the Administration in Adapting Civil Contracts
"Administration" here refers to the executive authority. A distinction must be made between administrative contracts—where the administration possesses broad authority to modify them unilaterally when required by the public interest—and civil contracts, which are governed by the principle that the contract is the law of the parties and to which the administration is not a party.
In principle, the administration has the right to intervene to confront disasters and exceptional circumstances, provided this intervention targets the public interest. This intervention is clearly demonstrated by the broad powers granted to the executive authority by the declaration of a state of emergency.
However, regarding the administration's role in restoring balance to contractual relationships due to economic conditions, the administration has the right to intervene to protect a public interest or as part of confronting public disasters or exceptional situations. One manifestation of this is refusing to assist in executing judicial rulings if such execution would disrupt a public utility or lead to social unrest.
Although this intervention by withholding assistance in executing judicial rulings remains a subject of legal debate and lacks unanimous scholarly consensus, there are legal precedents. Among them is a ruling by the Supreme Administrative Board (Supreme Administrative Court) upholding a ruling by the Administrative Judicial Court rejecting a lawsuit filed by a landlord of a building used as a school whose tenant breached lease conditions. The landlord obtained an eviction judgment. To evade this eviction, the Minister of Education issued a decree seizing the property based on a provision allowing the Minister of Education to seize properties necessary for education.
The landlord appealed the seizure decree on the grounds that it was issued to disrupt the execution of a final eviction judgment having the force of res judicata. When the Supreme Administrative Court reviewed this appeal, it upheld the judgment rejecting the lawsuit, concluding that:
"While an administrative decision may not, in principle, disrupt the execution of a judicial ruling—otherwise it would violate the law—this rule does not apply if immediate execution would result in a grave breach of public interest that is irreparable, such as the outbreak of civil strife or the disruption of a public utility. In such cases, public interest outweighs private individual interest."
In all cases, however, the executive authority's withholding of execution of judicial rulings to protect a public interest must likewise be grounded in a legal provision.
The second image of administrative intervention to restore the balance of contractual justice is direct state intervention in certain contracts, most notably employment contracts and previously tenancy contracts for premises.
Examples of intervention during the coronavirus crisis include decisions by the Central Bank of Egypt regarding the postponement of credit obligations for clients for 6 months without applying additional returns or penalties on delayed payments, issued pursuant to the Circular Letter dated March 15, 2020.
3. The Role of the Judiciary in Adapting Contracts
When a dispute regarding a contract is brought before them, the judiciary and judges possess two main tools to adapt contracts to suit economic variables and circumstances caused by general disasters, emergency events, and exceptional circumstances: adaptation through interpretation and the creation of legal rules.
A. Adapting Contracts via Interpretation of Contracts and Governing Rules
The judiciary possesses the authority to interpret contracts when contract terms are ambiguous, in accordance with Article 150 of the Civil Code. Under this authority, a judge may adapt contracts to make them suitable for restoring balance to a contractual relationship disrupted by new economic conditions.
In this instance, the judge wields broad interpretive power extending to reliance on custom or principles of justice, as set forth in Article 1 of the Civil Code and Article 148 of the same code, which grant judges sweeping discretionary power to interpret contracts in accordance with the requirements of justice.
The judge's interpretive power covers both contract clauses and governing legal provisions. A judge may rely on the legislative intent of the lawmaker based on explanatory memoranda and parliamentary debates—a broad, flexible power enabling the judiciary to play a role in aligning contracts with emerging economic circumstances.
B. Adapting Contracts via the Creation of Legal Rules
The judiciary's stance was previously highly conservative regarding the creation of new legal rules in the absence of governing legal provisions for disputes, based on the principle of separation of powers on the premise that creating new legal rules is a function of the legislature, not the judiciary.
However, this conservative stance has shifted—more visibly apparent in administrative judiciary rulings than in ordinary judiciary rulings. In a famous ruling regarding the creation of legal rules to address changing economic circumstances, the French Council of State in the "Gaz de Bordeaux" case on March 30, 1916, ruled in favor of the Bordeaux Lighting Company to review contract terms and increase prices due to increases in coal prices resulting from war and German occupation of coal regions.
This position is similar to what the Egyptian Court of Cassation decided in a session on June 4, 1977:
"If the appealed judgment proceeded in its ruling to establish the worker's right to equality with colleagues who share equal working conditions and to claim the Aswan allowance in full, and did not base this on the provision of Article 53 of Labor Law No. 91 of 1959, but rather relied on the rule of equality among workers of a single employer—a fundamental rule even in the absence of a special statutory provision, which the rules of justice compel to be applied if an employer resorts to discrimination among workers—such ruling is not subject to appeal on grounds of violating the law."
In summary: The judiciary possesses the authority and right to intervene in contracts to adapt them to better suit emerging economic circumstances with the aim of re-establishing balance between parties to the contractual relationship, through two primary tools: interpreting contracts and their governing provisions, and creating new legal rules.
Section Three: General Advice for Individuals, Institutions, Bodies, and Companies Regarding Their Contracts in Light of Coronavirus Precautionary Measures
Following the preceding legal presentation, the Ahmed Ragheb Law Firm and Legal Consultations offers the following advice for dealing with contracts under the repercussions of the coronavirus and its accompanying measures and procedures affecting economic conditions:
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Review Contracts, Clauses, and Tally Losses: The first step is to review ongoing contracts to examine whether they include provisions regulating default or impossibility of performance, and whether negotiation or dispute resolution mechanisms exist. Initially, one must determine whether there is an absolute impossibility to continue performing the contract or if continued performance entails heavy losses.
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Initiate Negotiations Toward Settlement/Conciliation or Contract Amendment: If the contract review concludes that performance is impossible, we advise settling and reconciling via the extinguishment of obligations due to the presence of force majeure, and agreeing on compensation if warranted or justified. If the study concludes that performance remains possible but burdensome (meaning continued performance leads to heavy economic losses), we advise initiating negotiations to amend contracts with the aim of re-establishing balance in the contractual relationship and avoiding losses for both parties, either via mutual partial waiver or performance in lieu.
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Resort to the Administration: In certain contracts, parties may resort to the administration to intervene to protect a public interest. The administration may also resort on its own accord to issuing decisions protecting contractors against circumstances like current conditions, as seen in the decisions issued by the Central Bank of Egypt.
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Resort to the Judiciary: This is the final step that can be taken, by presenting the dispute to the judiciary so it may rule thereon in accordance with powers granted by law regarding the interpretation of contracts or governing provisions, or even via the creation of new legal rules.
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