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April 07, 2020 - Authors : Michel Ghanem, Sammy Al Shatti Client Alert: Coronavirus (COVID-19) and its impact on employment and lease relations in Kuwait

Over the last few days, we have received an increasing number of enquirers from employers about what they should being doing, from both an employment law and human resources (“HR”) perspective, about the novel coronavirus (COVID-19). We have also received queries from landlords and tenants regarding the status of lease contracts in light of the COVID-19 crisis. Below, we set out our answers to some of the common questions we have been asked along with some practical tips on how to deal with certain particular issues. We will keep this note under review, as we appreciate the ever-evolving nature of the situation and the government’s guidance to employers.

What are the applicable legal theories on the coronavirus disease 2019 in the context of employment agreements?

Employment contracts are deemed continuing contracts even if an employer ceases to carry out their normal activities for a certain, limited period of time. In particular, if the work resumes after the Corona pandemic is over then all employees will be required to continue performing their obligations under their respective employment contracts. Unlike the force majeure theory (which requires the impossibility of execution or performance to be absolute), employment contracts are subject to the theory of emergency conditions if they are directly or indirectly affected by the Corona pandemic.

The theory of emergency conditions applies to employment contracts, which requires Article 61 of the Labor Law to be respected. This Article requires an employer to pay the salaries of its employees during the period of closure or disruption. The theory also applies despite the provisions of Article 62 which does not allow the employer to reduce the employee‘s wages during the period of the employees‘ work.

In our opinion, both these articles assume work conditions are normal, and, therefore, it would be impermissible for an employer to intentionally shut down its business or to undertake any action which would disrupt it with the effect of depriving employees of their salaries during normal circumstances. However, if circumstances change, and a total or partial shutdown of business was caused by reasons beyond the will of the employer (e.g. following governmental directives mandating closure to minimize risk the spread of COVID-19), then in this case, these exceptional circumstances provide an employer with exceptional authorities under Article 198 of the Civil Law. Article 198 of the Civil Law applies to all contracts including employment contracts (on the basis that the salary is in consideration for work being executed). This is in line with the judgments issued by the Court of Cassation in respect of work relations during the Iraqi invasion of Kuwait in the early 90‘s.

The preceding sentence is purely based on analysis of available legislation and case law. This issue will certainly become the subject of discussion amongst legal jurists pending the issuance of special legislation addressing the legal issues set out above. We provide some practical solutions for employers as an alternative to a decision to reduce the wages or suspend employment contracts of its employees, especially given social and humanitarian consequences surrounding these actions.

One solution is to provide employees with paid annual leave if they have sufficient leave balance. Such leave should last until the classification of COVID-19 as a pandemic expires. This is in accordance with Article 72 of the Labor Law which provides an employer the right to either (i) determine the date of the annual leave, or; (ii) to divide working hours across all employees (for example, Employee A works from 9am to 11am; Employee B works from 11am to 1pm; Employee C works from 1pm to 4pm) and (iii) pay wages according to the hours actually worked by those employees.

What the legal consequences does COVID-19 Pandemic have on commercial lease contracts?

In respect of the implications of this pandemic on the obligations of landlords and tenants, we must differentiate between two phases, of the pandemic: (i) the initial pandemic phase and the issuance of governmental decrees requiring businesses and storefronts to cease operation, and (ii) the resulting financial implications of the COVID-19 pandemic once the pandemic is resolved.

(i) Article 581 of the Civil Code applies to the first phase*. The explanatory note issued in connection with the Civil Law provides actions issued by public authorities, including decisions issued by the administration which deprive the tenant of the rent, are considered an event of force majeure. Accordingly, a tenant is entitled to terminate the lease or, in the alternative ask for a reduction in rent. Pursuant to the government directive requiring all store-fronts inside commercial malls to shut down the stores inside commercial malls and restaurants, these tenants may refuse to pay rent by invoking Article 581 of the Civil Code.

(ii) With respect to the post-COVID-19 world, the repercussions are expected to continue for a relatively long period of time due to the severe economic stagnation which has and will continue to occur. Accordingly, we envision a scenario where landlords may be forced to reduce rents, and in the event they refuse to do so, tenants may litigate this issue before the courts of Kuwait, pursuant to Article 198 of the Civil Code, as well as Article 11 of Decree Law No. 35 of 1978 regarding real estate leasing.

How can the Government help during this Crisis?

In light of the severe financial, social and humanitarian repercussions of the current crisis we would truly be surprised if the government does not provide any support or assistance. We recall their rapid issuance of Decree Law No. 6/1991 (regarding the General Authority for Estimating Compensation as a result of the Iraqi Invasion), Law No. 41/1993 (regarding the state‘s purchase of some debts that dealt with the financial crisis resulting from the climate market crisis), and Decree Law No. 2/2009 regarding the financial stability as a result of the global financial crisis in 2008 and 2009, introduced to ensure the continuity of troubled companies. All these measures are in line with Article 25 of the Kuwaiti constitution which provides that “the state guarantees the solidarity of society in bearing the actions resulting from public disasters and tribulations.” Accordingly, the Government of Kuwait will likely step in and provide some assistance as they have done with past crises.

Conclusion

The social and financial harms caused by the COVID-19 pandemic have affected the private sector in a tremendous way, such to cause it to fall within the definition of public disasters and tribulations. Such a view will necessarily bring Article 25 of the Constitution to light and the government of Kuwait will likely provide some action to help alleviate some of the harm caused by this pandemic. The government of Kuwait will likely issue ministerial decisions to activate Article 25 and advance its role in addressing the effects of this pandemic and supporting all actors, whether expatriate or local. If the government fails from taking any steps towards easing the damaged caused, the private sector may resort to the courts and demand compensation for losses they have sustained, in accordance with Article 25.

* Article 581: If a measure issued by the public authorities within the limits of the law entails a significant shortage in the use of the tenant, he may request the termination of the contract or reduce the rent unless the measure resulted from a reason he caused

 

CONTACTS

 Michel

Michel G. Ghanem Counsel, Kuwait, Beirut D: +965 2205 1004 M: +965 6075 6000 E: mghanem@meysan.com

Sammy Al Shatti Associate, Kuwait D: +965 2205 0827 M: +965 9975 8498 E: salshatti@meysan.com

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