Force Majeure and Hardship Clauses Updated

The International Chamber of Commerce recently issued 2003 updates for its suggested Force Majeure Clause and Hardship clauses. These are the first revisions to these clauses since 1985 and reflect significant changes. The ICC anticipates that either clause will apply to any contract where the parties expressly incorporate it, or alternatively, where the contract incorporates by reference the "ICC Force Majeure Clause" and/or the "ICC Hardship Clause." With the prospect of incorporation by reference, familiarity with the consequences of these new formulations is especially important for those reviewing any document where an incorporation by reference might appear.

Force Majeure 2003

Traditional formulations of force majeure usually are based on impossibility of performance. The threshold of impossibility is high but, if reached, the contracting party suffering the force majeure event is relieved of contract performance obligations as long as the force majeure event continues. The ICC 2003 clause adopts a considerably lower threshold based upon "impediments" that are beyond the "reasonable control" of the party. A party also may be excused from performance of its contractual obligations as a result of a third party’s inability, as a result of similar "impediments," to perform all or part of the contract that the third party has been engaged to perform.

There is a long list of impediments and many are familiar force majeure events: war, acts of God, insurrection, etc., but others require careful consideration since they may absolve a party from performance of contractual obligations as a result of circumstances quite different from the hostile actions or natural disasters most often equated with force majeure circumstances. For example, "compliance with any law or governmental order" or "prolonged breakdown of...telecommunication" suggest circumstances that may have little to do with unanticipated external events, but might nevertheless relieve a party from its contractual obligations.

A party invoking force majeure must "take all reasonable means to limit the effect of the impediment or event invoked upon performance of its contractual duties" so the new formulation of force majeure is not without limits in the relief a party can reasonably expect to achieve. However, the scope of the ICC 2003 version introduces into force majeure analysis an expansion of subjective considerations, and the possibility of relief from the performance of contractual obligations in circumstances not traditionally associated with force majeure events.

Hardship 2003

The ICC 2003 hardship clause recognizes that parties must perform their contractual obligations even if "events have rendered performance more onerous than would reasonably have been anticipated at the time of the conclusion of the contract." However, where continued performance has "become excessively onerous due to an event beyond [a party’s] reasonable control which it could not reasonably have been expected to have taken into account," the clause obligates the parties to "negotiate alternative contractual terms which reasonably allow for the consequences of the event." Failure to agree to alternative provisions entitles the party invoking the clause to terminate the contract.

The difference in result suggested by an obligation, on the one hand, to perform a contract that is "more onerous" than anticipated while, on the other hand, avoiding performance of the terms of a contract that are "excessively onerous," might encourage the liberal use of the hardship clause by those who perceive that they made a disadvantageous bargain. The use of the hardship clause or its incorporation by reference into a contract could result in unanticipated requests for renegotiation with the ultimate threat of contract termination if renegotiation proves futile. Careful consideration of the possible consequences of the ICC 2003 hardship clause is warranted.

The ICC has members from approximately 130 countries, including companies from all principal industrial and service sectors. The ICC operates the International Court of Arbitration, and the ICC Rules of Arbitration frequently are selected by parties entering into cross-border contracts. The ICC also has developed suggested contractual provisions, and the widely used Uniform Customs and Practice for Documentary Credits. Financial institutions almost universally choose the latter to govern the terms and conditions of letters of credit. The ICC also developed INCOTERMS which provide standard definitions of widely used terms like FOB and CIF, and a number of uniform rules and model forms for instruments such as contract and demand guarantees.

Further information about the ICC Force Majeure Clause 2003 and ICC Hardship Clause 2003 may be obtained in ICC Publication 650 (February 2003). Consult www.iccbooks.com.