Newsletter No. 119

1. Introduction

When drafting international contracts, a matter of particular concern is to focus on un­foreseen circumstances that may lead to sub­stantial problems and cost. Questions may arise, such as:

• Who will be responsible if a ship with urgent cargo for a construc­tion site is damaged by a heavy storm and the cargo is lost?
• Who is responsible for the de­lay in completing the construction work and substantial penalties that might incur?

Due to recent events, we included a case study in this newsletter to examine the effect of the coronavirus disease 2019 (COVID-19) on contractual obligations.

Force majeure applies to cases where performance has become (temporarily) impossible due to an event beyond one party’s control although all reasonable precautionary measures had been taken.

Hard­ship deals with cases where the agreed per­formance is basically still possi­ble. However, some under­lying facts have substantially changed, so that proper fulfilling of the contractual obligations is still possible in principle, but does not make any economic sense.

It is important to understand that force ma­jeure and hardship are two differ­ent principles, even if they sometimes are treated as the same. They are different in their preconditions and in their legal conse­quences. To ap­ply force ma­jeure to a case, the legal obliga­tions of a party must become impossible for everybody due to circumstances that nobody can avoid (e.g. caused by a major earthquake).   

The Eng­lish translation of force majeure is “act of god”, indicating that such circumstances cannot be foreseen. However, precautionary measures may be necessary (e.g. if a factory is near the sea, the owner must be prepared for certain levels of flooding).Hardship, in contrary, is based on the fact that the underlying circumstances of the contract change in a way the parties did not foresee at the time of concluding the contract, and although in principle the contractual obligations are still fulfillable, it does not make sense from an economic viewpoint. Example: The seller of a specific object looses the object in the ocean. In principle, he must try to recover it from the bottom of the ocean, which is theoretically possible, but obviously does not make economic sense.

The legal consequences of both doctrines are very different. Consequence of force majeure is that one party cannot fulfil its contractual obligations (impossibility) and is therefore relieved from such obligations during the time of force majeure. The legal conse­quence of hardship is that the party for which the underlying circumstances did change substantially can basically still fulfil its contractual obliga­tions and perform the contract, but the per­formance became economically worthless.

Depending on the contractual agreement between the parties or the material law and/or the agreed legal consequences with regards to force majeure or hardship, the contract will be adjusted to the circumstances automatically, or the parties will have to re-negoti­ate the contractual details that are affected by the changed circumstances (most likely the purchase price and delivery date).

Most national laws and international conventions contain provision on force majeure and/or hardship.

• The United Nati­ons Convention on Con­tracts for the Inter­national Sale of Goods (“CISG”) contains a force majeure clause, however, it does not con­tain any rules on hardship.[1]
• The principles of the Interna­tional In­stitute for the Unification of Private Law (“UNIDROIT”) contain provisions dealing with force majeure and hardship.
• The rules of the Interna­tional Chamber of Commerce (“ICC”) also contain provisions dealing with force majeure and hardship.
• There are vari­ous other contract terms issued by renowned international associations, such as the Fédéra­tion Internationale Des In­genieurs-Con­seils (“FIDIC”), which in­clude a force majeure clause. It has to be noted that the FIDIC terms focus on con­tracts concerning construc­tion and engineering projects.

2. Definition and Purpose

2.1     Force Majeure

Force majeure is French and stands for higher force. Force majeure means unavoidable events such as natural disasters of all kinds, especially storms, earthquakes, flood, volcanic eruption, but also fire, traffic accidents, kidnappings, wars, riots, revolution, terrorism, sabotage and strike. Force majeure regularly requires an unexpected occurrence of such events. How­ever, a force majeure event has to be de­nied if the parties must expect such incident to happen, e.g. floods that occur repeatedly in the same region or fires in dry countries, and one party neglected to take the respective precautions. A force ma­jeure event, therefore, could be generally de­scribed as an event that affects the contractual relation­ship unpredictably from the out­side and that, despite the parties taking extreme care, was not avoidable.

The ques­tion remains who is responsible for the non-per­formance of the contract due to the force majeure event. In order to avoid dis­putes and risks of interpretation, force ma­jeure clauses have been included in a great number of international commercial sources of law to essentially dispense both parties from liability or their obligations when an extraordinary event or circumstance beyond the control of the parties occurs. The occurrence of a force majeure event leads to the – at least tempo­rary – suspension of the primary obliga­tions of both contracting parties. Either party has to bear the ad­verse conse­quences of non-performance or the de­lay in perform­ance. As a consequence, the liability dispenses and the other party is unable to claim compensa­tion for damages.

2.2.   Hardship

In case of hardship, the per­formance of the con­tract is not impossi­ble, but hindered. Hardship is defined as any event of legal, technical, politi­cal or financial nature oc­cur­ring after the conclu­sion of the contract, which was unforesee­able at the time the contract had been formed, despite using the ut­most care. In general, hardship does not cause the impossibil­ity of performance, but allows for re­negotiation of the contract.

Hardship clauses typically recognise that par­ties must perform their contractual obligations even if events will render performance more diffi­cult than one would reasonably have antici­pated at the time of the conclusion of the con­tract. However, where continued performance has be­come excessively burdensome due to an event beyond a party’s reasonable control, a hard­ship clause can oblige the parties to negoti­ate alternative contractual terms. The purpose of a hardship clause is to provide a higher level of flexibility and to balance the risk between the parties.

The principle of hardship is particularly influ­enced by common law and the equi­table rights of the Anglo-American le­gal system to find a balance under the principle of equity and good faith.

3. Force Majeure in Codified Law

3.1     Force Majeure in German Law

The term “force majeure” (“höhere Ge­walt”) occurs in §§ 651a seq. BGB, which regu­late the travel law. In addition, the idea of force majeure is also recognised in § 275(1)-(3), § 326(1), (5) and §§ 323 seq. BGB.

Example:

A vendor and a purchaser conclude a contract on the delivery of five tons of specific rice. The vendor sorts out those five tons and stores them in an­other (well-built) warehouse ready for delivery. Due to an  exceptionally heavy storm, the warehouse and the rice are destroyed during the night.

Solution:

The rice is destroyed because of the storm. This is an unavoidable event of superior power which the parties could not have foreseen at the time of the conclusion of the contract. As the vendor already finished the ascertainment of goods by sorting out the rice and storing it in another warehouse, the performance of the delivery of exactly these five tons of rice is now im­possible for the vendor and everyone else, § 275(1) BGB. Accordingly, the right of the purchaser to demand deliv­ery is barred by this, § 275(1) BGB. On the other hand, the vendor cannot claim damages, § 326(1) BGB. The pur­chaser has the opportunity to withdraw from the con­tract, § 326(5) BGB, without hav­ing to set a time limit. Thus, the performances exchanged have to be returned, e.g. the deposit the pur­chaser had to pay.

3.2    Force Majeure in French Law

Force majeure is defined by the Art. 1218 of the French Civil Code as follows:

“The occurrence of an event which is beyond the control of the obligor, which could not have been reasonably foreseen at the time of the entry into the contract and the effects of which cannot be avoided by appropriate measures and which prevents performance of its obligation by the obligor”.

This definition requires only irresistibility and unpredictability. If the effects are temporary, the performance of the obligation is suspended unless the delay resulting therefrom justifies termination of the contract. If the effects are permanent, the contract is automatically terminated, and the parties are discharged of their obligations.

3.3    Force Majeure in US Law

In US Law there is no codified definition of force majeure. The enforceability of force majeure clauses is highly dependent on the specific state law, the wording of the clause and the court’s interpretation. Therefore, companies must be aware of how force majeure clauses are interpreted and enforced in the particular state. Nevertheless, as the US contract law supports the principle of freedom of contract, so it is a good idea to implement a force majeure clause as it is mostly not construed into a contract by the courts.

3.4    Force Majeure in Thai Law

Section 8 of the Civil and Commercial Code of Thailand defined force majeure as follows:

“Any event the happening or pernicious result of which could not be prevented even though a person against whom it happened or threatened to happen were to take such appropriate care as might be expected from him in his situation and in such condition.”

Apart from that, force majeure is mentioned and recognized by other laws as well, such as the Civil Procedure Code. Moreover, common contract templates used in the country usually include force majeure clause. Within the limitation of the law, e.g. the Unfair Contract Terms Act, the parties may agree to define certain circumstances as force majeure in their contract.

3.5    Force Majeure in Vietnamese Law

Art. 156 of the Civil Code defines force majeure as follows:

“An event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and admissible measures being taken.”

The consequences of force majeure are stipulated in Art. 420 para. 2 and 3 of the Civil Code:

“2. Where circumstances change substantially, the party whose benefits are affected has the right to request the other party to re-negotiate the contract within a reasonable period of time.

3. Where the parties are unable to reach agreement on amendment of the contract within a reasonable period of time, either party may request a court to:

(a) Terminate the contract at a definite time;

[…]”

3.6    Force Majeure in the CISG

3.6.1 About the CISG

CISG is a treaty offering an uniform interna­tional sales law that has been ratified by 93 countries. This makes the CISG one of the most successful interna­tional uni­form laws. It should be noted, however, that the application of the CISG is often excluded by the parties.

3.6.2 Applicability

CISG law is directly applicable to contracts for the sale of goods between parties whose places of busi­ness are in different member states (Art. 1(1)(a) CISG). CISG is also applicable in case only one of the parties is a resident in a CISG member state and the contract between the parties refers to the material law of this state (Art. 1(1)(b) CISG). Even if neither party is resident in a member state, the CISG can be applicable when the parties expressly agree on its application for their legal relationship. CISG de­fines its own territorial criteria of application without the need to resort the rules of private international law. For sales con­tracts concluded prior to the ratification of the CISG, Article 100(2) CISG applies:

“This Convention applies only to contracts con­cluded on or after the date when the Convention enters into force in respect of the Contracting States referred to in subparagraph (1)(a) or the Con­tracting State referred to in subparagraph (1)(b) of article 1.”

3.6.3 Definition

According to Art. 79(1) CISG, a party is not liable for failure to perform any of its obligations if it proves that the fail­ure was due to an impediment beyond the party’s con­trol and that such party could not reasonably be ex­pected to have taken the impediment into ac­count at the time of the conclusion of the con­tract or to have avoided or overcome it or its con­sequences. If a party is able to prove these requirements, it is relieved from its liabil­ity of performance and the other party cannot claim any further rights.

3.7    ICC Force Majeure Clause 2003  

3.7.1 About the ICC

The ICC is the largest, most representative busi­ness organisation in the world. Objective of the ICC is to promote international trade and to support inter­national businesses to face chal­lenges and opportunities of globalisation. By issuing contract rules, an efficient settle­ment of interna­tional transactions is pro­moted.

3.7.2 Definition

• 1 of the ICC Force Majeure Clause states that in order to be considered force majeure, there must be an im­pediment due to failure, (which is similar to Art. 79 CISG) . § 2 is designed specifically on the basis of Art. 79(2) CISG and is intended to make it clear that a contracting party can invoke the clause where a party fails to perform its duties towards the other contracting party because of non-performance of a third party. § 3 of the ICC Force Majeure Clause provides a list of force majeure events, which includes, for example, war, explosions, natural disaster, strikes etc. As a legal consequence, the party who fails to perform and claims force majeure will be re­lieved from liability without having to face any claims of the forfeiting party and the other party is released from their obligations as well.

3.8    Force Majeure in the UNIDROIT Principles

3.8.1 About the UNIDROIT

The UNIDROIT is an independent intergovernmental organisa­tion. Its purpose is to study needs and develop methods for modernising, harmonising and coordinat­ing private interna­tional law and in particular commercial law be­tween states, and to draft inter­national regulations to address the needs of the members. Member­ship of UNIDROIT is re­stricted to states adher­ing to the UNIDROIT Statute. UNIDROIT’s currently 63 member states represent a vari­ety of different legal, economic and politi­cal systems as well as different cultural back­grounds.

3.8.2 Definition

The UNIDROIT Principles of International Commercial Contracts 2010 contain a force majeure clause in Art. 7.1.7. This rule excuses non-performance by a party if such party proves that the failure was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its conse­quences. The article does not restrict the rights of the party who has not received perform­ance to terminate the contract if the non-performance is funda­mental. Where applicable, it states to exclude the non-performing party from liability in dam­ages. In some cases, the impediment will prevent any performance at all but in many others, it will simply postpone performance.

3.9    Force Majeure in the FIDIC Contract Samples

3.9.1 About the FIDIC

The FIDIC, the International Federation of Consult­ing Engineers, represents members of the engineering industry. As such, FIDIC promotes the interests of the construction and engineering industry. Founded in 1913, FIDIC today numbers 102 member associa­tions representing approx. 1 mil­lion profes­sionals. FIDIC also publishes inter­na­tional contract samples and business practice documents.

3.9.2. Definition

The “Red Book” (con­cerning construc­tion contracts), the “Yellow Book” (con­cerning contracts on plants and their design) and the “Silver Book” (con­cern­ing EPC (Engineering, Procurement and Construction) contracts) all contain a force majeure clause in their Art. 19. The clause is a combination of a new provi­sion for defined events of force majeure, and a new wording of a provision covering im­possibil­ity (or illegality) of performance. Clause 19.1. defines force majeure as an event be­yond the control of the employer and the con­tractor, which makes it impossible or ille­gal for a party to perform, including but not lim­ited to war, hostilities, rebel­lion, contami­nation by radio-activity from any nu­clear fuel or riot.

4. Hardship Codification in Law

4.1     Hardship in German Law

• 313(1) BGB states that a con­tract must principally be renegotiated if an event occurs which fun­damentally alters the present contract and places an excessive burden on one of the party’s per­formance making the adherence to the contract unreasonable. In case renegotia­tion is impossible, the disadvantaged party can with­draw from the contract. This hardship clause derives from the idea of good faith in § 242 BGB and restricts the basic principle “pacta sunt servanda”.

4.2    Hardship in French Law

Art. 1195 of the French Civil Code stipulates the following:

“If a change in circumstances that was unforeseeable at the time of the conclusion of the contract renders performance excessively onerous for a party who had not accepted the risk of such a change, that party may ask the other contracting party to renegotiate the contract”.

“The requesting party must continue to perform its obligations during the renegotiation. In the case of refusal or the failure of renegotiations, the parties may agree to terminate the contract from the date and on the conditions which they determine, or by a common agreement ask the court to set about its adaptation. In the absence of an agreement within a reasonable time, the court may, on the request of a party, revise the contract or put an end to it, from a date and subject to such conditions as it shall determine”.

The clause expressly states that it does not apply to a party who has assumed the relevant risk. Therefore, it is recommended that parties endorse wording specifically stating that risk of hardship is assumed.

4.3    Hardship in US Law

In the US contract law, there is no common definition of hardship. Nevertheless, hardship clauses can be used, but it is difficult to create the hardship if the relevant event is too vague. Therefore, a force majeure clause in combination with the requirement to firstly renegotiate the contract accomplishes what a hardship clause could provide in other legal systems.

4.4    Hardship in Thai Law

Since the principle of hardship is generally and originally adopted in common law legal system, Thai law, particularly the Civil and Commercial Code, only mentions force majeure. However, since a hardship clause does not contradict public order or good morals, it can still be agreed by the parties and added into the contract upon the doctrine of freedom of contract.

4.5    Hardship in Vietnamese Law

The concept of hardship is known under Vietnamese law and may under the freedom of contract be specified in contractual agreements

4.6    Hardship in CISG

The CISG does not contain a hardship clause, and the prevailing opinion is that Art. 79 CISG does not cover hardship. Renegotia­tion is therefore not an op­tion.

4.7    ICC Hardship Clause 2003

Paragraph 1 of the ICC Hard­ship Clause recognises that parties must perform their contractual obliga­tions even if

“events have rendered perform­ance more onerous than would reasonably have been anticipated at the time of the conclu­sion of the contract.”

However, according to paragraph 2,

“if continued per­formance has become exces­sively onerous due to an event beyond a party’s reasonable con­trol which it could not reasona­bly have been expected to have taken into ac­count, the parties shall negoti­ate alterna­tive contractual terms which reasonably allow for the consequences of the event.”

According to paragraph 3, the party invoking the hardship clause is entitled to terminate the contract in case alternative contract terms cannot be agreed upon.

4.8    Hardship in the UNIDROIT Princi­ples

Art. 6.2.2 of the UNIDROIT Principles of International Commercial Contracts 2010 de­fines hardship as a situa­tion where the occur­rence of events fundamentally alters the con­tract, provided that those events meet the re­quirements which are laid down in subpara­graphs. This also shows that Art. 6.2.2 is not ex­haustive but has to be adjusted by the parties to fit their needs.

Under the UNIDROIT Principles of International Commercial Contracts 2010, hardship has effects both in procedural and material law (Art. 6.2.3). The disadvantaged party can request renegotiation. If this party fails to do so, it does not lose this right. However, this failure may affect the finding as to whether hardship actually existed. If the parties fail to reach an agreement on how to amend the contract according to the changed circumstances within a reasonable time, Art. 6.2.3(3) authorises either party to resort to the court. Paragraph 4 provides legal consequences (termination/contract adaption) for the court to deliver judgement in these cases.

4.9    Hardship in the FIDIC Contract Samples

The major FIDIC contract samples do not contain hardship clauses. In large projects, where the performance of the parties’ contractual obli­gations is spread over several years, the par­ties might thus consider to add a hardship clause to the contract to stipulate when and how the parties will rear­range the contractual terms in the event the con­tract loses its eco­nomic balance.

5. Similarities and Differences in the International Force Majeure and Hardship Clauses

Please refer to the table in Annex I.

6. Conclusion

The aforementioned rules and regulations are just examples for the variety of regulations avail­able to deal with force majeure and hard­ship events. Due to this, the parties have to take a closer look at what they believe is necessary to be regu­lated in the contract itself. Different con­tracts need different clauses on di­verse grounds. There needs to be an evalua­tion on what exact purpose the clause shall serve in the individ­ual case.

7. Case Study: COVID-19 and Force Majeure

Due to the recent outbreak of the coronavirus disease 2019 (COVID-19), caused by the SARS-CoV-2 virus, questions relating to the failure of contractual performance have become particularly relevant. The World Health Organization (“WHO”) has announced on 30 January 2020 that COVID-19 constitutes a public health emergency of international concern. Thus, the question arises whether contractual parties affected by the recent outbreak of COVID-19 and/or corresponding government restrictions might be exempt from their contractual performance and/or liability under certain circumstances.

Due to governmental shutdown of factories and the quarantine of whole cities, many contracts cannot be fulfilled as agreed, as these measures led to severe disruptions to both inbound and outbound shipments. This impeded countless supply chains and may result in companies being unable to fulfil their contractual obligations.

Whether the outbreak of COVID-19 or any corresponding circumstances meet the contractual or statutory prerequisites to qualify as force majeure or hardship depends on the agreed contractual provisions, e.g. whether the contract provides for categories or defined events expressly qualifying as force majeure or hardship. Generally, it has to be assessed whether the outbreak was beyond the parties’ control and whether it has impacted performance to the extent required.

Force majeure is given if the clause does explicitly include disease, epidemic, quarantines or similar. Indeed, the outbreak of epidemics must not be seen as an unforeseeable event as the emergence of new viruses is a given scientific fact.

Nevertheless, the unheard scale of close- downs and the quarantine of many millions of people represents a unique situation.

The China Council for the Promotion of International Trade (“CCPIT”) has set up an online platform in order to issue Force Majeure Certificates to qualifying applicants who can provide legitimate documents proving delays or cancellation of transportation and/or export contracts. According to CCPIT, this aims to “help enterprises minimize liability for contracts that cannot be fulfilled due to the epidemic and safeguard their legitimate rights and interests”.

It has to be noted, however, that such Force Majeure Certificates will only indicate but not prove the occurrence of force majeure or hardship.

[1]   In a landmark decision, the Belgian Supreme Court (19 June 2009, case number: C.07.0289.N) therefore applied the UNIDROIT principles to close this loophole in the CISG, although UNIDROIT principles were not agreed upon between the parties.