4.4 Force majeure
Force Majeure: A force majeure clause is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control occur that make performance inadvisable, commercially impractical, illegal, or impossible.
The provision may state either that performance of a contract is terminated if the force majeure event continues for a prolonged period of time or that performance is merely suspended until the event has concluded. The following elements should be addressed in a force majeure clause:
- Definition of force majeure events;
- What happens when an event occurs;
- Who may suspend performance; and
- What happens if the force majeure event continues for more than a specified period of time.
ITC Model Contracts. The ITC Model Contracts provide for a contractual framework in case of force majeure, Examples may be found in international contractual alliance, Article 13. and the long-term supply of goods contract, Article 10 among other ITC Models. In many cases, especially in industries where an event of force majeure is not exceptional, the termination right of the standard ITC model force majeure clause is too onerous. In such cases, it may be desirable to provide for a less rigorous force majeure clause, as follows:
10.4 If the performance by either party of any of its obligations under this contract is prevented or delayed by force majeure for a continuous period in excess of three [specify any other figure] months, the Parties shall negotiate in good faith, and use their best endeavours to agree upon such amendments to this contract or alternative arrangements as may be fair and reasonable with a view to alleviating its effects, but if they do not agree upon such amendments or arrangements within a further period of 30 [specify any other figure] days, the other party shall be entitled to terminate this contract by giving written notice to the party affected by the force majeure.
The Unidroit Principles also reflect a less rigorous standard in their force majeure clause, Article 7.1.7.
How to use: force majeure v. change of circumstances (hardship). The legal concept of hardship deals with highly exceptional, external circumstances that the parties had not foreseen at the time they entered into the agreement. But there are also circumstances that are (objectively) foreseeable but not actually foreseen in the contract. If (a) the change of circumstances is beyond the affected party’s control and (b) the affected party ought not reasonably to have taken measures to prevent the effect of such change of circumstances, it would be excused.
Although the legal concept of ‘change of circumstances’ (‘hardship’) applies only in rather rare, exceptional cases, the legal concept of force majeure may occur more frequently. Also, a change of circumstances (hardship) does not necessarily prevent performance of the contractual obligations – rather, it significantly changes the economic fundamentals of the contract – but a force majeure event prevents a party from performing or functioning properly. In fact, depending on the type of business, in a long-term relationship the occurrence of an event of force majeure may well be a ‘certainty’.
As events of force majeure are foreseeable to a relatively larger extent, the scope of force majeure and its consequences can both be described in relatively precise contractual terms. In cases of hardship, a description is hardly possible because of its exceptional and unforeseeable nature. A case of force majeure provides for a contractual excuse (and no liability) whereas a case of hardship triggers the renegotiation of the contractual equilibrium.