What is Force Majeure?

Introduction

The most practical expectation that any commercial entity would expect in entering into any contractual agreement is legal certainty. This allows parties understand and properly anticipate their various obligations, rights and liabilities as stipulated under contract terms. This expectation is embodied in the legal principle of sanctity of contract which demands the exact performance of contracts as expressed in the Latin maxim pactasuntservanda. However, as with many other legal principles, this performance is not necessarily an absolute duty and may be subject to certain exceptions justified on the ground that parties usually enter in contracts on the basis of certain sometimes shared assumptions and where there has been a fundamental change in those circumstances, the effect may well be to discharge such obligation of performance or at the very least, provide an avenue for re-negotiation of terms. This counter-principle is in turn embodied in the Latin maxim rebus sic stantibus.

In both domestic and international commercial contracts, this idea of an ‘excuse’ or ‘discharge’ of a party’s obligation to perform is mainly hinged on the occurrence of a supervening event which is also known (particularly in civil law jurisdictions) as a force majeure event. With the benefit of hindsight, it has become prudent to make adequate provision for a change in circumstance due to unpredictable events which are beyond the contemplation or resistance of the parties, and serve to prevent the performance of obligations under contract. The focus of this essay is on the international approach to the concept of ‘force majeure’as it considers some of the elements which may or may not constitute a force majeure event. A brief examination of the concept under the civil and common law jurisdictions is followed by a critical examination of the excuse doctrine which recognises force majeure events under the provisions of Article 79 of the UN Convention for International Sale of Goods 1980 (CISG) with an analysis of the extent to which, if at all, foreseeability and economic hardship can be considered as constituting elements with a concluding evaluation of what construction should ideally be placed on the concept.

What is Force Majeure?

In general, commercial contracts either of an international or domestic nature, impose legally binding obligations on the parties and a non-performing party will be liable to the other in damages. However, the obligation to perform may be excused if a substantial change in circumstances renders performance practically impossible. The term force majeure is a French phrase and literally translates to mean a ‘superior or greater force’. It originates from old Roman law which recognised unforeseeable and irresistible events which may prevent a contracting party from performance. In commercial situations this would be taken to refer to an irresistible compulsion or coercion that has rendered either or both parties to a contract physically unable to perform their obligations under that contract. According to the British Dictionary of Law, “…it is a phrase used particularly in commercial contracts to describe any event adversely affecting the performance of the contract which is/are completely outside the parties’ control”. A more comprehensive attempt at defining force majeure would be a fundamental change in circumstances brought about by an unforeseen, supervening event not within the control of either party, which would effectively stop a party from performing its contractual obligation.

It is important to note that there are no established or uniform set of events that constitute force majeure but rather its suggestion lies within the surrounding elements that are present when such a situation is declared. The main elements that are recognisable in establishing the occurrence of force majeure is that the event or condition itself must have been (1) irresistible; (2) unforeseeable; (3) external to the parties and (4) must have made performance an impossibility and not merely more difficult or impracticable.The Supreme Court of Canada has also proffered a succinct opinion of the purpose of a force majeure clause as one that,

“….generally operates to discharge a contracting party when a supervening, sometimes supernatural event, beyond the control of either party makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.”

The foregoing would suggest that a force majeure situation operates to discharge a contracting party of its obligation to perform in the face of an irresistible and supervening event that was not reasonably foreseeable and beyond the control of the party. In this regard it would seem only applicable where the delivery or discharge of an obligation has become impossible. However, under various national laws, the force majeure concept has varying scopes of application and some jurisdictions do not even recognise the force majeure concept but have their own doctrines which share similarities in construction and purpose. This above distinction is made clearer with a brief examination of the disparity between civil and common law jurisdictions on the concept of force majeure

Force Majeure under National Law – Civil and Common Law views

Force majeure is a concept widely recognised under the domestic laws (civil codes) of civil law jurisdictions where it constitutes an absolute excuse on the part of the performance debtor of all liability for non-performance of its obligations to the extent that it even operates as a discharge from that obligation even without any express contractual provision in that regard.Thus in countries like France, Germany and Italy; the concept operates more broadly and functions particularly to absolve the defaulting party from liability which is the crux of a claim for performance or damages.This is the normative approach and the performance debtor is only required to foresee or do what is reasonably expected of it to satisfy an excuse for non-performance in a situation of changed circumstances. It would seem irrelevant that the change in circumstance is brought about by reasons peculiar or personal to the performance debtor as this is viewed subjectively.

The common law jurisdiction on the other hand, adopts a stricter approach and is more concerned about preserving the objectives of the contract. There is a much less liberal application of the force majeure concept and it is not an excuse that is normally implied except where it is expressly stated in the contract. It is also irrelevant that performance has become more difficult or onerous than originally anticipated as only an absolute impossibility of performance will be considered as amounting to force majeure. The objectivity of this approach lies within the distinction usually made between situations concerning the performance debtors own internal inability to perform as against an external impediment. This would suggest that liability is more readily excused in the case of the latter.

Under the common law, the development of force majeure as is known today was earlier founded in the concept of ‘legal impossibility’ which subsequently evolved toward ‘impracticability’. These two concepts are rooted within the wider doctrine of ‘Frustration’ – a doctrine common to the UK and US legal systems – which is seen as the common law equivalent to the civil law’s concept of force majeure. Both concepts may seem similar but whilst a force majeure situation arises where performance has been made absolutely impossible by a supervening event, frustration involves a substantial change in circumstance which does not absolutely prevent performance but only renders the obligation much more burdensome to fulfil than originally contemplated or substantially depletes the benefits originally expected from performance.

Force Majeure under Article 79 UN CISG 1990 – (Exemptions)

Under the United Nations Convention on the International Sale of Goods (CISG) 1990, any party that fails to perform its obligations under contract is liable to the other party in damages. However, this obligation may also be excused under certain extraordinary circumstances if an unavoidable and unforeseen impediment beyond the control of the defaulting party is responsible for preventing the said performance. The Convention utilises something similar to a doctrine of excuse but the language used under the Convention is ‘exemptions’. These exemptions are contained under Sec IV of the Convention and although there is no explicit mention of the term ‘force majeure’, the section recognises an excuse for non-performance due to changed circumstances characterised by the same cumulative elements identified earlier in this essay as constituting force majeure. In determining the scope of application of exemption from liability the courts will look to Article 79 (1)-(5) which identifies the circumstances under which a party cannot be held liable for a failure to perform its obligations (even where this failure is caused by a third person), explains the steps that need to be taken by the party seeking to rely on such an excuse, defines the length of time such an exemption would last and also indicates the limit of protection offered by this exemption.

Article 79 states thus:

1. 1. A party is not liable for a failure to perform any of its obligations if he proves the failure was due to an impediment beyond his control and that he could not reasonably be expected to take the impediment into account at the time of the conclusion of the contract or have avoided or overcome its consequences.
   2. If the party’s failure is due to the failure by a third person whom he has engaged to perform the whole or part of the contract, that party is exempt from liability only if:

1. 1. 1. He is exempt under the preceding paragraph; and
      2. The person whom he has so engaged would be so exempt if the provisions of the paragraph were applied to him.

2. The exemption provided by this article has effect for the period which the impediment exists
3. The party who fails to perform must give notice to the other party of the impediment and its effect of its ability to perform. If the notice is not received by the other party within reasonable time after the party who fails to perform knows or ought to have know of the impediment, he is liable for damages resulting from such non-receipt.
4. Nothing in this article prevents either party from exercising any right other than to claim damages under this convention

Foreseeability under Article 79

In responding to the first part of this essay question, the issue of foreseeability would infer the anticipation of that impediment capable of preventing performance which the performance debtor would reasonably be expected to take into account at the time of conclusion of the contract. The wording of Art 79 (1) is quite clear in its stipulation that the event must have been unforeseen or not contemplated by the defaulting party at the time of conclusion of the contract. There is most definitely no room for any other interpretation of this requirement. The attitude of the courts in the general application of Art 79 is focused on the allocation of risk and the main issue for determination is whether the party seeking an exemption assumed or was allocated the risk of the supervening event that caused the failure in performance. Generally, the courts have held that the exemptions provided under Art 79 do not operate to alter the allocation of risks as contemplated by the parties.It follows logically that a party cannot claim exemption from liability under the provisions of this article with respect to an impediment which was anticipated and accepted as part of the contractual risk at the time of contracting and where such risks have previously been identified and allocated before conclusion, exemption will not be available to the defaulting party.This much was established by the Arbitration Tribunal in Russia, where a seller failed in delivering goods within the period prescribed under the contract caused by a problem with his suppliers due to emergency production stoppage at the manufacturing plant. The seller claimed exemption for an impediment beyond his control under article 79. The Tribunal held that this could not be deemed sufficient to discharge it from liability as it was unable to establish that it could not reasonably take into account the said impediment at the time of concluding the contract. Similarly in another case, the buyer tried to invoke Art. 79 as an excuse for non-payment after taking delivery of goods on the grounds that there now existed an acute shortage of demand for the goods. A contention which was thrown out by the tribunal as it was a situation that was expected to be within the reasonable contemplation of the buyer at the time of conclusion of the contract.

The wording of the provision however provides a rather flexible qualification of the term foreseeability as it applies the exemption to an impediment the defaulting party was not ‘reasonably’ expected to foresee. This still remains consistent with the idea that if an impediment (as contemplated by Art 79) was foreseeable, the performance debtor will be assumed as having assumed the risk of its materialisation. This is because the issue of what is foreseeable is established at the time of conclusion. It now becomes a question of whether the defaulting party ought to have reasonable expected or foreseen a possibility that an impediment would arise. In making this assessment of foreseeability, certain subjective factors peculiar to the particular circumstances of the case may need to be considered. These may include;

(1) duration of the contract, as with a long term contract it may be less likely to reasonably foresee an impediment; (2) specific nature of goods that form the subject to the contract, as some commodity markets are prone to fluctuations influence by a variety of factors that may spring up difficulties e.g. the oil industry (case in point, the current civil/political crisis sweeping through Libya will surely have an effect on some international contracts as it is one of the world’s largest exporters of crude oil); (3) a consideration of the fact that indications of a possible impediment had already begun to manifest at the time of conclusion of the contract e.g. a pending insolvency or winding up action against the seller/buyer.

In essence, foreseeability can never amount to force majeure based on the construction of the exemptions under Art 79 (1) which clearly only admits a situation where the impediment was not reasonably foreseeable at the time of conclusion. The burden of liability remains and the onus of proof is on he who claims exemption to prove that he is so entitled.

Hardship under Article 79 CISG

Much unlike the express provisions made on the requirement for an impediment to have been unforeseeable under Art 79, the CISG is silent on the issue of hardship. The basic idea behind this concept is that it allows a party to seek a re-negotiation of the contract terms where the performance or execution of its obligations under the contract become onerous or burdensome only governs impossibility of performance, and it is debatable whether a disturbance which does not fully exclude performance, but makes it considerably more difficult or onerous (e.g.change of circumstances, hardship, economic impossibility, commercial impracticability, etc.) can be considered an impediment, thus calling for the application of CISG Article 79.[57]In these situations, the impossibility theory cannot apply since we do not refer to a contractual obligation that cannot be performed in its entirety, but rather to situations where the promisor’s performance, though not impossible, has become excessively onerous (hardship-economic responsibility),[58]so different that the economic basis on which the contract was made has disappeared due to subsequent change in circumstances (in Germany:WegfallderGeschäftsgrundlage)[59]or impracticable by the occurrence of a contingency the non-occurrence of which[page 277]was a basic assumption on which the contract was made (in the United States: Commercial Impracticability).[60]

Since the majority opinion considers that the mentioned events are not within the scope of CISG Article 79, it is apparent that the CISG does not adopt theclausula rebus sic stantibusdoctrine[61]under which the validity of a contract depends upon the continuance of the surrounding circumstances at the time of its formation.[62]Therefore, events such as a sudden increase in the price of raw materials or a dramatic devaluation of currency, will not allow the seller to avoid his liability for non-delivery of the goods or to require renegotiation of the terms of the contract of sale. Nevertheless, in many business circles such strict interpretation of thepactasuntservandarule is considered too severe, especially in contracts of duration such as cooperation agreements, long lasting construction or project finance contracts, distribution and supply of goods agreements, estate development agreements, etc., where unforeseen events may result in a fundamental change of the equilibrium of the contract, thus rendering performance of the contractual obligation excessively onerous. An example of this situation is where there has been a fundamental increase in the costs of the performance or a fundamental decrease in the value of the performance that is to be received by the disadvantaged party.[63]

Experienced businessmen are normally aware of the possibility that these risks may occur. Since they anticipate the continuance[page 278]of circumstances existing at the time of the contract formation, they normally insert in their contract documentsforce majeure, hardship clauses, or special risks clauses, thus “attempting to anticipate and deal with the situation where unforeseen circumstances fundamentally change the contractual equilibrium such that an excessive, normally economic, burden is thrust upon one of the parties.”[64]

Nevertheless, the contracting parties are frequently not sufficiently sophisticated, or are too careless of their own interests and either neglect to insert such clauses or draft the inserted clauses in an unsatisfactory manner, in that the clauses do not cover specific events or situations.[65]It is at this point that a problem is created; there exist no specific provisions in the CISG that allow renegotiation or adaptation of the contract in the cases of economic impossibility, impracticability or hardship. As a result, commentators have suggested that in relation to these matters there is a gap in the CISG.[66]Thus recourse to the gap-filling methodology found in CISG Article 7(2) becomes necessary.[67]

In this situation, the first methodological step would be to establish whether the aforesaid issue is to be settled in conformity with the general principles on which the CISG is based. It could be argued that the general principle which requires excuse in the case of total impossibility (as incorporated in CISG Article 79) could be of assistance if it is extended by analogy to cover cases of economic impossibility, hardship, or change of circumstances or commercial impracticability. Nevertheless, such a broad interpretation would violate the letter andratioof CISG Article 79, which only provides the non-performing party with a defense against an action for damages and does not[page 279]relate to renegotiation or, alternatively, judicial adaptation of the contract.

Another possibility would be to totally avoid CISG Article 79 and any general principle that it may incorporate and to accept that the aforesaid issues are included in the general principle of good faith as is spelled out in CISG Article 7.[68]Such interpretation would, however, result in: (1) imposing on the parties obligations deriving from the good faith principle,[69]and (2) increasing the risk of different interpretations by national courts thus jeopardizing the aim of the CISG — to promote uniformity in its application.[70]

Since the aforesaid matter cannot be resolved in conformity with the general principles of the CISG, the next step dictates recourse to the relevant provisions of the law applicable by virtue of the rules of private international law of the forum (if the case is being dealt with by a national court) or by the conflict rules that the arbitrators will use. The provisions of the applicable law may determine the validity of the contract depending on the continuation of circumstances present at the time of contract formation, otherwise on the renegotiation and, if the parties fail to reach agreement, on judicial adaptation of the contract. However, due to the disparity among different domestic provisions and theories, resorting to national laws would be undesirable as it would result in different solutions and thus non-uniformity in the application of the CISG.[71]

Taking into consideration all these problems, it is possible to propose that the aforesaid issues should be resolved by applying the relevant rules of other international instruments[page 280]in the field of commercial law (e.g.UNIDROIT Principles, PECL).[72]Although this opinion definitely carries credit, it seems there are serious arguments against its adoption (seediscussioninfraPart V(C)).

C. The CISG and the Gap-Filling Application of the Principles of European Contract Law (with parallel reference to UNIDROIT Principles of International Commercial Contracts)

Regarding the possibility of application of the provisions of PECL Article 6:111 (and similarly UNIDROIT Principles Article 6.2.2)[93]as a means of specifying the meaning of the CISG’s general principles (Article 7(2)) it is suggested that this solution[page 287]should not be adopted for the following reasons. First, the drafters of the PECL aimed to make a major contribution to the formation of a Europeanius commune, i.e.,lex mercatoria, the scope of which is limited to the States of the European Union.[94]In contrast, the CISG may be applied universally. Thus, it is highly unlikely that a non-European Union judge or arbitrator will refer to the PECL in order to interpret the meaning of the CISG’s general principles when applying CISG Article 7(2).[95]Second, even if CISG Article 7(2) is applied by a European Union judge or arbitrator, it is hard to imagine that the latter would refer to PECL Article 6:111 (or to UNIDROIT Principles Article 6.2.2) to justify renegotiation or adaptation of the contract, since CISG Article 7(2) only requires settlement with reference to the general principles on which the CISG is based. Neither the legislative history nor the language of the CISG indicates the existence of any general principle allowing renegotiation or judicial adaptation in the case of changed circumstances or economic impossibility.[96]Only if a general[page 288]principle exists within the CISG’s system (e.g., full compensation), may the PECL provisions be used in order to specify one of the possible meanings of that principle (e.g.the mode of calculation of the rate of interest). Third, the PECL (and the UNIDROIT Principles) deal with the law of contract in general, rather than the law of sales; therefore, provisions dealing with hardship are necessary especially in the light of the existence of long term agreements. Finally, such solution (the application of the PECL and the UNIDROIT Principles) would appear to disrespect the intentions of the contracting parties, which could have provided in their contracts for renegotiation or adaptation in the cases of hardship, economic impossibility, etc.

Based on the foregoing analysis it is thus clear that PECL Article 6:111 (or UNIDROIT Principles Articles 6.2.1-3) may only apply if the contracting parties agree on its incorporation into the contract of sale. In this situation, in accordance with CISG Article 6, PECL Article 6:111 will apply as a special provision of a contractually incorporated a set of terms, as discussed below.