Why a Force Majeure clause in Commercial contracts is Essential in Uncertain times

by Evelyne Legaux on 11-05-2020

With widespread disruptions to supply chain & operations, the Covid-19 pandemic affects many businesses ability to fulfil their obligations under Commercial contracts. In this context, it is important for companies to explore how Force Majeure clauses may apply & provide relief from performing obligations under Commercial contracts.

 

Key questions about Force Majeure

Many businesses suffering disruptions are faced with these questions: how should a Force Majeure clause be interpreted in relation to the current pandemic situation? Can Covid-19 invoke Force Majeure?

A Force Majeure clause is often included in companies general Terms & Conditions of trade (T&C’s) and in Commercial contracts with third-parties, with a purpose to outline the requirements for ascertaining the existence of a force majeure event that prevents a party’s performance of their contractual obligations.

The main difficulty here is that, although force majeure exists as a legal concept in most countries, its principles may imply substantial differences under national laws. This is particularly true for multinational organizations trading across multiple jurisdictions.

It is therefore essential for companies, impeded in the performance of their contractual obligations by the Covid-19 pandemic, to understand if the concept of force majeure can be used in this context to justify same in the particular jurisdiction where the Commercial contract is governed. If yes, does the pandemic force majeure trigger the right to suspend or terminate the contract?

Likewise, even if the contract does not include such a clause, companies should still explore whether a pandemic can be legally considered as a force majeure event in that same jurisdiction or not.

Depending on the national jurisdiction at stake though, the answer to these questions may vary substantially.

 

The ICC Force Majeure clauses

In order to overcome this legal hurdle, the best solution is for companies to include the ICC Force Majeure clause in the Commercial contract or incorporate a reference to it, as it does not depend on the specificities of national laws.

Another benefit of the ICC clause is that it combines predictable listed force majeure events with a general wording that catches other situations falling outside the listed events, in an attempt to balance legitimate business expectations with harsh circumstances that make the contract itself no longer viable.

With the 2020 revision of its Force Majeure cIause, the ICC brings improvements such as a new Short Form version of it that is narrowed down to essential provisions & suitable for SME’s in particular.

The ICC Force Majeure clause (Long Form) typically provides a definition of what constitutes force majeure, and a list of events qualifying for it. The parties to the contract may add or remove events such as a pandemic to the list, to suit their specific needs.

One key principle is that the affected party must prove that all conditions constituting force majeure are met when invoking it, that is:

• the impediment is beyond its reasonable control,
• the impediment could not have been reasonably foreseen at the time the contract was concluded,
• the effects of the impediment could not have reasonably been avoided or overcome.

When the clause is successfully invoked, the affected party is subsequently relieved from its duty to perform, responsibility or damages from the date of occurrence of the event , or until the impediment ceases to prevent the performance. This is conditional to timely notice given by the affected party to the other party.

The clause also provides for a contract termination option when the impediment duration becomes unsustainable or after a specified certain period of time (120 days or else).

The new ICC Force Majeure clause (Short Form) is a reduced version of the clause to essential provisions, therefore has a limited scope in nature.

 

The ICC Hardship clause

In essence, the Hardship clause intends to protect the disadvantaged party where events have rendered performance of obligations more onerous than reasonably anticipated at the time the contract was concluded.

In such circumstances, most national laws would typically encourage the parties to renegotiate the contractual terms. Here again however, when such negotiations fail, the principles adopted by national laws may vary substantially from country to country.

The 2020 revised ICC Hardship clause provides a framework of legal certainty regardless of the national governing law, through several options for amendment or termination of the contract when circumstances make performance of same untenably onerous.

In case the parties are unable to agree alternative contractual terms, the clause provides options between which they must choose: termination by the party invoking hardship (option A), adaptation or termination by a judge or arbitrator (option B), or termination by a judge or arbitrator upon request of either party (option C).

 

Conclusion

Companies, especially those affected by operational disruptions, should work with their internal Law department or external Law firms & specialized consultancies, to understand where they legally stand with regards to the Covid-19 crisis. Where relevant, they should also ensure that Force Majeure &/or Hardship clauses, inclusive of pandemic as a listed event, are included in Commercial contracts with third-parties going forward.

The ICC Force Majeure & Hardship clauses can be used in international contracts in any jurisdiction, regardless of national law. Their purpose is to help parties draft Commercial contracts by providing balanced models and increased legal certainty, along with flexibility about the scope of events constituting force majeure.