Lawyer in Milan and Turin
Today force majeure or hardship represent a topic of extreme relevance in light of the negative impact caused globally on companies first by Covid-19 (which, however, we still have not completely overcome) and then by the war currently confined in the Ukrainian territory, which have made (and make) in some cases impossible and in other cases excessively burdensome to execute the international contracts signed before these events.
The health emergency, the war and other unforeseeable events beyond the control of the parties involved that make it impossible to provide timely the performance agreed upon in the contract normally have an impact in the context of contracts characterized by the elapse of a certain period of time between the date of their signing and that of their execution.
Impossibility or excessive burden
For example, an Italian seller, due to government restrictions adopted against the pandemic, fails to deliver the goods to its German customer. Or think of the case of a delivery of goods to be carried out from Italy to India, possible only by facing a longer and more expensive sea journey than what was planned at the time of the signing of the contract: in the meantime, the route of the Suez Canal is blocked by a serious accident.
In the two contexts now described, the seller, to avoid claims for damages for breach of contract by the buyer, may, if the relative clauses of the contract are present, invoke:
– in the first case the excuse of the cause of force majeure established by a new norm (such as those that have limited mobility to reduce infections);
– in the second, the excuse of hardship (strong economic imbalance of contractual performance that arose after the signing of the contract).
What if the contract does not provide for anything? Reference is made to the law applicable to the specific case. Based on it, various solutions could be reached.
For example, if the Vienna Convention applies and force majeure is made recourse to (Article 79), in order to be exempted from contractual liability, the affected party will essentially have to prove that the event was unpredictable at the time of the signing the contract, beyond its control and that this made the performance of the contract impossible.
Under English law, however, reference will be made to the institute of frustration, whose scope is however much more limited than the Convention and the corresponding civil law institutions.
Hardship concerns instead an event that has substantially altered the economic balance of the contract compared to the time in which it was signed and making, to an extent, the execution of the commitment by the contractor affected by the event excessively burdensome.
There is no impossibility requirement here: execution (for example, delivery) will still be possible, but its cost for the party affected by the event will be much more onerous than was planned or was foreseeable at the time of the signing the contract.
Consider the hypothesis of a 70% increase in the price of steel after the conclusion of the contract. In such a hypothesis, which is precisely part of a hardship case, the Belgian Court of Cassation has extensively applied Article 79 of the Vienna Convention (see Cour de cassation, Belgium, 19 June 2009 case Scafom international Nv v. Lorraine tubes Sas).
The usual purpose of the excuse of force majeure is usually to obtain a suspension of the performance of the contract for a certain time. If the impossibility persists, termination will be requested without liability to the other party.
The purpose of the hardship is to obtain a renegotiation of the contract in order to bring it back to economic balance or, in the absence of agreement, to terminate it.
Given that other “black swans” may occur in the future, companies should check the force majeure and hardship provisions contained in the contracts in progress. If they are missing, they should write them taking as reference the model clauses of the International Chamber of Commerce (ICC), to prevent and manage potential conflicts. In this regard, the new force majeure clause of the ICC, published in March 2020, provides for the definition of force majeure, which is to be understood as the occurrence of an event or circumstance that prevents a party from performing one or more obligations under the contract, which may be exempted from liability if it proves that:
– the event is beyond his control;
– the event could not be reasonably foreseen at the time of conclusion of the contract;
– the effects of the event could not reasonably be avoided or overcome.
There are therefore three conditions that the affected party must prove in order to be excused for its failure to comply with the provisions of the contract. For the first two, however, the presumption applies that they are satisfied if they fall within the events listed in the clause. To satisfy the third condition, it must always be proved that the effects of the impediment could not reasonably be overcome or avoided. If the clause is invoked, the party affected by force majeure will not be responsible for the failure or delayed fulfillment but will not be entitled to compensation of any kind. The performance of the affected party will be suspended until the impediment is present and the performance of the contract will be resumed when such impediment ceases. Provided that, according to the ICC standard clause, it does not extend beyond 120 days.
The hardship clause of the International Chamber of Commerce provides for the possibility for a contracting party to prove that the performance due under the contract has become too burdensome, due to an event independent of its will, which was not reasonably foreseeable at the time of the conclusion and could not reasonably be avoided. Hence the obligation to renegotiate the contract in order to overcome the negative consequences caused by the event.
The clause provides, then, three options to choose from in case of failure of negotiations aimed at restoring the contractual balance:
– termination of the contract at the request of the party invoking the clause;
– giving both parties the power to request the arbitrator or the competent court to adapt or terminate the contract;
– each party has the right to request termination.