International Chamber Of Commerce (Icc) Force Majeure And Hardship Clauses

COVID-19 outbreak, which emerged in the People's Republic of China and declared a pandemic by the World Health Organization, has dramatically affected countries at health, economic, political and social levels with its rapid spread. As a result of the comprehensive containment measures implemented by the states and other impediments, there have been breakdowns in global supply chains and disruptions in production activities, and the obligations of the contracting parties continue to be a subject of heated discussion in the legal dimension. Besides this unfortunate circumstance, lack of similar experience in the recent past makes predictability about the course of the pandemic highly difficult.

Following the containment measures taken gradually in order to flatten the curve of the pandemic, it became necessary to examine the contracts between parties in detail. Thus, force majeure or similar contract provisions have gained importance and solutions are sought in line with the current conditions. In this direction, the provisions of the model contract that can be applied to force majeure or hardship situations such as the COVID-19 pandemic, which prevent or make the parties’ obligations to be fulfilled difficult under the contract, were updated by the ICC in March 2020.

In order to assist parties in drafting and negotiating such clauses, the ICC has created two balanced Force Majeure Clauses, the “Long Form” and the “Short Form”, and also Hardship Clause.

The updated ICC Force Majeure and Hardship clauses are created to assist parties in drafting and negotiating such contract clauses, and also to increase legal certainty. Throughout the text, there are also explanatory guidebooks describing the general situation and highlighting the issues to be considered while drafting the clauses in question.

FORCE MAJEURE

ICC has created two balanced Force Majeure Clauses, the “Long Form” and the “Short Form”.

Short Form contains essential basis of the Long Form version. On the other hand, the Short Form does not include the sub-paragraphs of non-performance by third parties, notification, duty to mitigate and unjust enrichment.

Definition of Force Majeure
In accordance with the ICC clauses, a number of conditions have been set forth in order for an event to be deemed as force majeure, within the framework of the Long Form and Short Form. These are as follows:

• Such impediment is beyond parties’ reasonable control; and
• The impediment in question could not reasonably have been foreseen at the time of the conclusion of the contract; and
• The effects of the impediment could not reasonably have been avoided or overcome by the Affected Party.

Presumed Force Majeure Events

As we may see in the text of ICC 2003, the updated 2020 Force Majeure clauses also include a list of events that are presumed to occur beyond the reasonable control of the relevant party and could not be reasonably foreseen during the establishment of the contract.

It is therefore presumed that in the presence of one or more of listed events below the conditions of Force Majeure are fulfilled, and the Affected Party need not prove the abovementioned conditions (a) and (b) (i.e. that the event was out of its control and unforeseeable), leaving to the other party the burden of proving the contrary. The party invoking Force Majeure must in any case prove the existence of condition (c), i.e. that the effects of the impediment could have not reasonably been avoided or overcome.

• war (whether declared or not), hostilities, invasion, act of foreign enemies, extensive military mobilization;
• civil war, riot, rebellion and revolution, military or usurped power, insurrection, act of terrorism, sabotage or piracy;
• currency and trade restriction, embargo, sanction;
• act of authority whether lawful or unlawful, compliance with any law or governmental order, expropriation, seizure of works, requisition, nationalization;
• plague, epidemic, natural disaster or extreme natural event;
• explosion, fire, destruction of equipment, prolonged break-down of transport, telecommunication, information system or energy;
• general labour disturbance such as boycott, strike and lock-out, go-slow, occupation of factories and premises.

Important to note that the parties may add or delete events from the list, according to the nature of the contract and parties’ will.

Non-Performance by Third Parties

During the COVID-19 pandemic, breakdowns in global supply chains and significant disruptions in production activities are encountered by reason of all measures taken, including states closing their borders. Within this context, failure to obtain the expected performance from third parties, which may constitute an essential part of the parties' obligations for other contracts, may cause the related party to fail to fulfill its contractual obligations with other persons. For this reason, such situations regarding non-performance by third parties are vital and constitute a critical point that the parties should consider and include in their contracts.

According to relevant sub-paragraph concerning this matter, where a contracting party fails to perform one or more of its contractual obligations because of default by a third party whom it has engaged to perform the whole or part of the contract, the contracting party may invoke Force Majeure only to the extent that the requirements under paragraph 1 of this Clause are established both for the contracting party and for the third party.

Consequences of Force Majeure

A party successfully invoking this Clause is relieved from its duty to perform its obligations under the Contract and from any liability in damages or from any other contractual remedy for breach of contract, from the time at which the impediment causes inability to perform, provided that the notice thereof is given without delay.

Under the text of ICC 2003, a fixed period was not adopted, because it was felt that it would be difficult to establish a single period, which would be appropriate for all sectors of industry and in all circumstances. However, it is updated in March 2020 that unless otherwise agreed, the contract might be terminated by either party if the duration of the impediment exceeds 120 days.

The Affected Party shall give notice of the event without delay to the other party. Otherwise, the relief will be effective from the time at which notice thereof reaches the other party.

In addition, as drafted under the sub-paragraph of "Unjust Enrichment", where either contracting party has, by reason of anything done by another contracting party during performance of the contract, derived a benefit before the termination of the contract, the party deriving such a benefit shall pay to the other party a sum of money equivalent to the value of such benefit.

Duty to Mitigate

The Affected Party is under an obligation to take all reasonable measures to limit the effect of the event invoked upon performance of the contract.

HARDSHIP CLAUSE

In some cases, the fulfillment of one of the parties' obligations may be more onerous as a result of the unpredictable subsequent change of the conditions at the conclusion of the contract.

In the text of ICC 2003, it was designated that where alternative contractual terms which reasonably allow for the consequences of the event are not agreed by the other party to the contract as provided in that paragraph, the party invoking the clause herein is entitled to termination of the contract.

With the updated version of ICC 2020 Hardship Clause, the option of the adaptation of the contract is also included.

In the ICC 2020 text, three different options are provided to the parties:

• Party to terminate: Where the parties have been unable to agree alternative contractual terms as provided in that paragraph, the party invoking this Clause is entitled to terminate the contract, but cannot request adaptation by the judge or arbitrator without the agreement of the other party.
• Judge to adapt or terminate: Where the parties have been unable to agree alternative contractual terms as provided for in that paragraph, either party is entitled to request the judge or arbitrator to adapt the contract with a view to restoring its equilibrium, or to terminate the contract, as appropriate.
• Judge to terminate: Where the parties have been unable to agree alternative contractual terms as provided in that paragraph, either party is entitled to request the judge or arbitrator to declare the termination of the contract.

For the avoidance of doubt, under option (a), the party invoking hardship will be entitled to terminate the contract on its discretion - and the other party may thereafter claim the unlawfulness of such decision- , whereas under option (c), either party may request the judge or arbitrator to declare the termination – and the other party may not thereafter claim the unlawfulness of such judge or arbitrator decision.

CONCLUSION

The COVID-19 outbreak has explicitly revealed that all circumstances must be taken into account when drafting contracts, and all possibilities as well as unforeseen events should be addressed in detail. Accordingly, the parties should pay close attention to the events to be listed under the contract regarding force majeure situations that may be occurred in the future. Force majeure situations and events to be defined under the contract should be drafted by allocating the contractual risks attributed to the parties in an equitable manner.

The fact that a pandemic at this level and its severe impact on world order, which could not be foreseen in the recent past, has revealed the necessity to observe all kinds of possibilities in respect of business and risk management, and forward planning. In this context, reviewing existing contracts where Force Majeure or Hardship situations may have impact on, determining the relevant needs and deficiencies, negotiating with the counterparty regarding contracts for which no article has been drafted, determining alternative remedies, and assessing scope and coverage of existing insurances for the damages that may occur have considerable importance for businesses and enterprises.

The Force Majeure and Hardship clauses provided by the ICC may be included under the contracts by direct reference, or also some amendments in the clauses may be made according to the parties’ mutual consent and the nature of the contract. In any case, it would be appropriate to explicitly determine the scope of the clauses in accordance with the parties’ intentions. Otherwise, the lack of such clauses or certain deficiencies can lead the relevant governing law to be applied in unforeseen cases such as COVID-19 pandemic, and thus, the legal provisions of governing law may be contrary to the interests of the Affected Party.

The content herein is aimed at providing a general insight regarding the subject. For customized circumstances or further information, please refer to your lawyer.