Timing is Everything: International Chamber of Commerce Updates Its Model Force Majeure and Hardship Clauses

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Amid the ongoing COVID-19 pandemic there has been much discussion of the utility and function of force majeure clauses. Force majeure clauses are especially prevalent in international commercial contracts. Many businesses incorporate and adapt model force majeure clauses into their contracts, including model clauses from the International Chamber of Commerce (the “ICC”). As such, businesses[1] that use ICC clauses should be aware that in March 2020, the ICC released updated versions of its model Force Majeure and Hardship Clauses (the “new ICC Force Majeure and Hardship Clauses”). These clauses were last updated in 2003.

Below we have provided a brief overview of the force majeure principle generally, and summarized the new ICC Force Majeure and Hardship Clauses specifically, noting in particular any changes from their predecessors.

Brief Overview of Force Majeure

Force majeure, which literally means “superior force,”[2] and is often referred to as “acts of God,” comes from the civil Napoleonic Code. For an in-depth discussion on the definition of force majeure and the different types of force majeure clauses, see our previous blog posts here and here. Force majeure clauses are limited only by the imaginations of the parties drafting them, and as such, courts have often held them to a high standard.

Force majeure clauses require a unique balance of breadth and specificity. Model clauses, such as the new ICC Force Majeure and Hardship Clauses, seek to make the drafting process more straightforward and effective.

Summary of the new ICC Force Majeure and Hardship Clauses

While the concept of force majeure is known by most legal systems, the principles developed in national laws may create substantial differences. Thus, the new ICC Force Majeure and Hardship Clauses allow parties to include “force majeure clauses containing solutions which do not depend on the particularities of national laws.”[3]

Parties can either adopt these model clauses wholesale, or use them as the basis for drafting more bespoke clauses tailored to specific commercial interests and needs.

Notable changes include the addition of a new “Short Form” Force Majeure Clause which the ICC suggests is particularly suited to use by small and medium-sized enterprises as well as expanded options in the Hardship Clause for adaptation and termination of contracts.

ICC Force Majeure Clause (Long Form)

The ICC notes that the ICC Force Majeure Clause “combines the predictability of listed force majeure events with a general force majeure formula which is intended to catch circumstances which fall outside the listed events.” For further clarity, the ICC has also published some general considerations for force majeure clauses in commercial contracts.

The ICC Force Majeure Clause is broken down into nine parts, however the following two sections are particularly relevant:

  1. Definition. “Force Majeure” means the occurrence of an event or circumstance (“Force Majeure Event”) that prevents or impedes a party from performing one or more of its contractual obligations under the contract, if and to the extent that the party affected by the impediment (“the Affected Party”) proves:
    1. that such impediment is beyond its reasonable control;
    2. that it could not reasonably have been foreseen at the time of the conclusion of the contract; and
    3. that the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party.
  2. Presumed Force Majeure Events. In the absence of proof to the contrary, the following events affecting a party shall be presumed to fulfil conditions (a) and (b) under paragraph 1 of this Clause, and the Affected Party only needs to prove that condition (c) of paragraph 1 is satisfied:
    1. war (whether declared or not), hostilities, invasion, act of foreign enemies, extensive military mobilisation;
    2. civil war, riot, rebellion and revolution, military or usurped power, insurrection, act of terrorism, sabotage or piracy;
    3. currency and trade restriction, embargo, sanction;
    4. act of authority whether lawful or unlawful, compliance with any law or governmental order, expropriation, seizure of works, requisition, nationalisation;
    5. plague, epidemic, natural disaster or extreme natural event;
    6. explosion, fire, destruction of equipment, prolonged break-down of transport, telecommunication, information system or energy;
    7. general labour disturbance such as boycott, strike and lock-out, go-slow, occupation of factories and premises.

In light of the ongoing COVID-19 pandemic, note that “plague” and “epidemic” are explicitly included, but that “pandemic” is not. However, also note that the model clause includes “compliance with any law or governmental order”. Parties utilizing these model clauses should always turn their mind to whether they should include additional risk events or clarifying language.

Parties looking to incorporate the new ICC Force Majeure Clause should also be aware that certain presumed force majeure events differ from the 2003 clause as follows:

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2003 Force Majeure Clause

2020 Force Majeure Clause

[a] war (whether declared or not), armed conflict or the serious threat of same (including but not limited to hostile attack, blockade, military embargo), hostilities, invasion, act of a foreign enemy, extensive military mobilisation;

a) war (whether declared or not), hostilities, invasion, act of foreign enemies, extensive military mobilisation;

[b] civil war, riot rebellion and revolution, military or usurped power, insurrection, civil commotion or disorder, mob violence, act of civil disobedience;

b) civil war, riot, rebellion and revolution, military or usurped power, insurrection, act of terrorism, sabotage or piracy;

[c] act of terrorism, sabotage or piracy;

c) currency and trade restriction, embargo, sanction;

[d] act of authority whether lawful or unlawful, compliance with any law or governmental order, rule, regulation or direction, curfew restriction, expropriation, compulsory acquisition, seizure of works, requisition, nationalisation;

d) act of authority whether lawful or unlawful, compliance with any law or governmental order, expropriation, seizure of works, requisition, nationalisation;

[e] act of God, plague, epidemic, natural disaster such as but not limited to violent storm, cyclone, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity, landslide, tidal wave, tsunami, flood, damage or destruction by lightning, drought;

e) plague, epidemic, natural disaster or extreme natural event;

[f] explosion, fire, destruction of machines, equipment, factories and of any kind of installation, prolonged break-down of transport, telecommunication or electric current;

f) explosion, fire, destruction of equipment, prolonged break-down of transport, telecommunication, information system or energy;

[g] general labour disturbance such as but not limited to boycott, strike and lock-out, go-slow, occupation of factories and premises.

g) general labour disturbance such as boycott, strike and lock-out, go-slow, occupation of factories and premises.

Finally, parties should be aware that section 8, which deals with contract termination, has been updated to provide that either party may terminate the contract if the force majeure impediment lasts longer than 120 days. This new default timeline, which can be altered by agreement of the parties, provides more certainty than the previous version of the clause, which did not include a default timeline and only required “notification within a reasonable period to the other party.”

ICC Force Majeure Clause (Short Form)

The Short Form model clause is a condensed version of the Long Form (reducing the clause from nine sections to three) and is limited to essential provisions. It does not cover all issues that may be relevant to specific business contexts. As such, parties should consider various aspects of their contracts, such as value, duration, relationship between the parties and more, when deciding whether to incorporate the long or short form clause.

ICC Hardship Clause

As discussed above, the ICC’s model Hardship Clause was also updated this year. The updated Hardship Clause “provides several options for amendment or termination of the contract when circumstances make performance of a contract untenably onerous.”[4]

At base, the Hardship Clause requires the parties to negotiate alternative contractual terms when continued performance has become “excessively onerous.” If the parties are unable to agree to alternative contractual terms, the Hardship Clause provides three avenues to adapt or terminate the contract.

Specifically, the new ICC Hardship Clause is as follows:

  1. A party to a contract is bound to perform its contractual duties even if events have rendered performance more onerous than could reasonably have been anticipated at the time of the conclusion of the contract.
  2. Notwithstanding paragraph 1 of this Clause, where a party to a contract proves that:
    1. the continued performance of its contractual duties has become excessively onerous due to an event beyond its reasonable control which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract; and that
    2. it could not reasonably have avoided or overcome the event or its consequences, the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms which reasonably allow to overcome the consequences of the event.

 

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3A: Party to Terminate

3B: Judge adapt or Terminate

3C: Judge to Terminate

Where paragraph 2 of this Clause applies, but 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.

Where paragraph 2 of this Clause applies, but 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.

Where paragraph 2 of this Clause applies, but 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.[5]

The most noticeable difference from the 2003 model Hardship Clause is that paragraph three now has three sub-paragraphs which offer expanded options for seeking judicial assistance in adaptation or termination of contracts.

Altogether, the new model Force Majeure and Hardship Clauses provide parties with effective clauses that can work in concert with, or as part of, a contract’s broader dispute resolution provisions. Contract drafters will need to carefully consider all relevant circumstances on a case by case basis before choosing what force majeure and hardship clauses are appropriate to include in their specific agreement.

 

[1] ICC clauses are used in a variety of practice areas, including in arbitrations and mediations, as well as in various industries, including trade finance, information technology, and franchising.

[2] Black's Law Dictionary 718 (9th ed. 2009).

[3] International Chamber of Commerce, “ICC Force Majeure and Hardship Clauses”, March 2020, available at: https://iccwbo.org/content/uploads/sites/3/2020/03/icc-forcemajeure-hardship-clauses-march2020.pdf

[4] International Chamber of Commerce, “ICC Force Majeure and Hardship Clauses”, March 2020, available at: https://iccwbo.org/content/uploads/sites/3/2020/03/icc-forcemajeure-hardship-clauses-march2020.pdf

[5] Note that the new ICC Hardship Clause outlines sections 3A, B and C in table format.

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