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The Concept of Force Majeure and Similar Institutions

April 3, 2022April 3, 2022
The Concept of Force Majeure and Similar Institutions

INTRODUCTION

Force majeure events are defined as certain acts, events or circumstances beyond the control of the parties which are exceptions to the basic rule pacta sunt servanda (“agreements must be kept”). Such as natural disasters, war, riot, crime, revolution, epidemic; general labour disturbance such as boycott, strike and lock-out, go-slow, occupation of factories and premises or act of authority whether lawful or unlawful, compliance with any law or governmental order can be reasons for force majeure which lead to prevents one or both parties from fulfilling their obligations under the contract. Generally speaking, for events to constitute force majeure, they must be unforeseeable, external to the parties of the contract, and unavoidable.

ICC (International Chamber Of Commerce) stated this position in the Force Majeure and Hardship Clauses:

“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. a) that such impediment is beyond its reasonable control;
  2. b) that it could not reasonably have been foreseen at the time of the conclusion of the contract;
  3. c) that the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party.

We can see a similar definition and approach in ‘’UN Convention On Contracts For The International Sale of Goods’’ (Article 79), UNIDROIT Principles of International Commercial Contracts 2016 (Article 7.1.7) and Vienna Convention on the Law of Treaties (Article 61).

In order to better understand the force majeure, I consider it expedient to study it in comparison with similar institutions.

FORCE MAJEURE AND FRUSTRATION

The concept of force majeure originated in French civil law and is an accepted standard in many jurisdictions that derive their legal systems from the Napoleonic Code. It was stated in article 1148 of the Napoleon Code like this ” There is no ground for damages and interest when by consequence of superior force or of a fortuitous occurrence, the debtor has been prevented from giving or doing that to which he has bound himself, or has done that from which he was interdicted”. Henri, a French wine merchant obtained a lucrative contract for the supply of barrels of wine which had to be delivered “until the end of February”. Unfortunately, at the time that he set out to deliver the wine, during the last three days of the month he was faced with a situation in which all the roads were impassable and he could not perform his undertaking. To his good fortune and notwithstanding that this situation existed in 1934, he received help from Napoleon, or more precisely from the Napoleonic Code which stated in article 1148 that “there would not be a claim for damages where “force majeure” prevents the fulfilment by the obligor of an obligation under the agreement or otherwise performs an act or acts which are not permitted under the agreement 1 in that, in response to a claim filed against Henry for damages, the French Court determined that the trader/supplier is excused from performance when force majeure prevents the performance of the contract.

On the other hand, the concept of force majeure is derived from civil law and is not fully recognized under English common law. English Law did not adopt the concept of “force majeure”. The only possibility available under English law permitting the non-performance of a contractual obligation is the concept of “frustration” which allows for the non-performance of a contractual obligation in the sense that performance would render the obligation radically different from that originally contracted for. The English concept related more to occurrences that were not foreseeable at the time of the conclusion of the contract, whilst force majeure circumstances are capable of being foreseen and allow for the parties to suspend performance until the force majeure circumstances have passed, whilst the English frustration is far more limited giving rise to immediate termination of the contract. With that, English law recognizes that if the contracting parties agreed in their contract that extraneous circumstances, not under the control of the parties, allow for the suspension of the contract and even for the possibility of cancellation, the underlying ratio is not based on force majeure as a legal concept, but rather the giving of the effect to a contractual undertaking of the parties. The English decisions are concerned mainly with the interpretation of the parties’ contractual provisions and not with the examination of force majeure as a legal concept or axiom.

There are three main differences between the frustration of contract and force majeure. First, frustration can be invoked by any party to a contract without being referred to in the contract, while force majeure must be included in a contract to be invoked. Second, a party generally has to meet a higher threshold to rely on frustration than on force majeure. Lastly, while a finding of frustration automatically results in the discharge of all parties from their obligations, force majeure offers the flexibility for parties to fashion the responses as they see fit.

To sum up, parties who wish to define a wider set of circumstances when failure to perform a contract will be excused and the consequences of failure are generally free to do so and clauses that deal with these matters are commonly called force majeure. In legal systems that we can classify as the Roman-German system, force majeure includes events of frustration, and as an institution, it regulates relations without reference to contracts when the type of events coincides with frustration. In addition, given its flexibility, it gives the parties the right to add a wider set of terms to protect against risks and to release or defer execution, but this should be stated in the contracts.

FORCE MAJEURE AND HARDSHIP

After World War I, the German economy was devastated by inflation of an almost incredible scale; the mark ultimately sunk to one-trillionth of its former value. Although the German Civil Code explicitly granted relief for hardship only in cases of impossibility, the courts ultimately held that they could give relief for hardship as an emanation of the principle of good faith also found in the German Civil Code. Professor Paul Oertmann developed the theory of the ‘’Wegfall der Geschiiftsgrundlage’’-disappearance of the foundations of the contract. Germany’s high court seized upon this theory and ruled that legal tender no longer had to be accepted in payment of debts, as no debtor could in good faith make such a tender. As the case law has evolved, the party who is unduly burdened because of changed circumstances may obtain a discharge of the contract, or the court can adapt the contract to changed circumstances if both parties want the contract to continue. The changed circumstances must be exceptional and the court must balance the interests of both parties. Courts in other countries started to follow using this institution too, led by Germany.

There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and

  • the events occur or become known to the disadvantaged party after the conclusion of the contract;
  • the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;
  • the events are beyond the control of the disadvantaged party; and
  • the risk of the events was not assumed by the disadvantaged party.

Force majeure, as I mentioned, 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. They are different in their preconditions and in their legal consequences. Hardship 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.

The concept of hardship is projected primarily for application to long-term contracts. It deals with the assumption that the occurrence of the radical change of circumstances after the contract was made, destroys the foundation of the contract or the contractual equilibrium. It also recognizes that a fundamental alteration of the contractual equilibrium entitles the disadvantaged party to demand a good faith renegotiation of the contract and have it adapted to restore an original contractual equilibrium or to have the contract terminated by the court if the attempt to renegotiate were to fail. The institution aims at providing a higher level of flexibility and balances the risk between the parties. It alone never forgives nonperformance, instead compels renegotiation and authorizes courts to “adapt” (revise) the contract to take the hardship into account.

There are different kinds of hardship clauses in international contracts practice aimed at restoring the contractual equilibrium. The general type of clause may refer to economic, political or technical circumstances which probably would be most likely to affect the balance of the contracts. In formulating the impact that the change of circumstances has on their contractual performance, parties usually resort to objective terminology (e.g. ‘contractual equilibrium’), subjective terminology (criteria of fairness, good faith, equity, etc.), and specific terminology (imposing thresholds), or adopt a mixed approach. The parties may provide for the determination of hardship on a unilateral, bilateral or neutral basis. The contract itself may also incorporate a clause providing for the more automatic adaptation of the contract.

In most cases in international contractual practice, the adaptation of the contract to new circumstances is left to third-party interveners (usually arbitrators or experts in a specific branch of industry or commerce). Initially, third-party interveners must determine whether and to what extent the event alleged by one of the parties meet the conditions set forth in the hardship clause. In case such conditions are not fulfilled, the contract shall continue in full force and effect. In case such conditions are met, third-party interveners may proceed to determine the manner in which the terms of the contract should be revised in order to comply with the parties’ objective of restoring the contractual equilibrium. Sometimes hardship clauses give an opportunity to terminate the contract, however, it must be remembered that the termination is usually not the main objective of the parties in case of contracts containing hardship clauses.

To conclude, though a distinction is made between force majeure and hardship clauses their main purpose is the same. They seek to decrease the damage that may result to one of the parties because the contract is performed in changed circumstances. Appropriate force majeure and hardship clauses constitute ordinary commercial safeguards as a way to protect the parties against the unexpected turn of events.

 

FORCE MAJEURE IN LEGISLATION OF THE REPUBLIC OF AZERBAIJAN

The Civil Code of the Republic of Azerbaijan (hereinafter referred to as the “Civil Code”) stated this position about force majeure:

According to article 448.4 of the Civil Code, the debtor shall not be liable for the violation of the obligation, if he proves that the violation was caused by circumstances beyond his control and that he was not able to take account thereof at the time of entering the agreement or wait until he can exclude or eliminate the said circumstance and the consequences thereof. If the debtor knows or is supposed to know of the obstacle, then he is obliged to notify the creditor immediately of the said obstacle and of its influence over the ability to perform. If the creditor did not receive immediate notification, then the debtor shall be liable for the damages caused thereto in connection with the failure to receive the timely notification.

 

As we have seen, the Civil Code prefers to set terms and does not specify specific clauses for force majeure, leaving it to the will of the parties and the will of the court.

 

HARDSHIP IN LEGISLATION OF THE REPUBLIC OF AZERBAIJAN

We see the equivalent of the hardship institution in Article 422. According to article 422.1, Significant change of circumstances, which the parties accounted for in the course of entering into a contract, can serve as the ground for the amendment or dissolution thereof, if nothing otherwise is stipulated in the contract or results from its contents. The change of circumstances shall be deemed significant if they have changed to such an extent, that if the parties had been able to reasonably predict them, they would have not entered into the contract or the contract would have been made under significantly different terms. Mistakes in submissions of parties, forming the basis of agreement, shall be considered the changes of circumstances.

 

Article 422.2 of the Civil Code and ‘Plenary decision of the Constitutional Court on Interpretation of the Article 422 of the Civil Code, 2018’ determine 2 stages of amendment and dissolution of contract in connection with a significant change of circumstances:

  1. First of all, the parties try to agree on new terms or the possibility of termination of the contract due to significant changes in circumstances.
  2. If the parties do not agree, the contract may be terminated or changed by the court at the request of the interested party.

The reasons for the change by the court at the request of the relevant person are determined as follows:

 

  1. at the time of making the contract the parties proceeded from the fact that there will be no such change of circumstances;
  2. the change of circumstances was caused by the reasons, which the interested party could not overcome after their appearance, with the extent of care and caution demanded by the nature and conditions of the contract;
  3. the performance of the contract without changing its terms would so much break the corresponding to contract proportion of parties’ property interests, and result in such damage to the interested party, that it would be significantly deprived of what it was entitled to in the course of entering into the contract;
  4. the business turnover traditions and the nature of the contract do not provide for the interested party to bear the risk of changing circumstances.

Under the grounds envisaged by Article 422.4, the contract can be amended by the court upon a request of the interested party: The contract amendment due to significantly changed circumstances shall be allowed under a court’s decision in exclusive cases, when the dissolution shall contradict with the public interests or lead to a loss for the parties, significantly extending the expenses, required for the performance of the contract under the changed terms, established by the court.

 

REFERENCES

 

  1. The International Institute for the Unification of Private Law (UNIDROIT), ‘’Principles of International Commercial Contracts’’, 2016. Available at https://www.unidroit.org/english/principles/contracts/principles2016/principles2016-e.pdf
  2. Vienna Convention on the Law of Treaties, 23 May 1969. Available at https://legal.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf
  3. 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. The Civil Code of the Republic of Azerbaijan, Available at http://e-qanun.az/framework/46944
  5. The plenary decision of the Constitutional Court of The Republıc Of Azerbaijan on Interpretation of the Article 422 of the Civil Code, 07 September 2018. Available at http://www.e-qanun.az/framework/40088
  6. The Napoleonic Code, officially the Civil Code of the French, 1804.
  7. ‘’Force Majeure and Hardship Clauses in International Contractual Practice’’ by Hubert Konarski, International Business Law Journal ref: 42003405-428 Type: Article, N0: 4 of 2003, Pages: 405-428. Available at https://www.researchgate.net/publication/284968473_Force_Majeure_and_Hardship_Clauses_in_International_Contractual_Practice
  8. ‘’Comparison of Force Majeure and Frustration’’, April 2020, by Cameron S.E. Ford and Christopher Bloch, 37892/04/20, Squire Patton Boggs. Available at https://www.squirepattonboggs.com/en/insights/publications/2020/04/comparison-of-force-majeure-and-frustration
  9. Joseph Perillo, Force Majeure and Hardship Under the UNIDROIT Principles of International Commercial Contracts, 5 Tul. J. Int’L. & Comp. 5 (1997) Available at: https://ir.lawnet.fordham.edu/faculty_scholarship/783
  10. ‘’From the Napoleonic Code to COVID-19’’ by Yoav Harris, The Marker Magazine, November 2020. Available at https://www.lawships.com/en/force-majeure-from-the-napoleonic-code-to-covid-19/

 

The articles on this blog are not, nor are they intended to be, legal advice. You should consult a lawyer for individual advice or assessment regarding your own situation. The article only reflects the views of the author.