An Update from the ICC: The ICC Force Majeure and Hardship Clauses 2020

March 2020 Prof. Dr. H. Ercüment Erdem
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Introduction

On March 25, 2020, the International Chamber of Commerce (“ICC”) published the new force majeure and hardship clauses: ICC Force Majeure and Hardship Clauses 2020[1] (“2020 Clauses”). The 2020 Clauses update the ICC Force Majeure and Hardship Clauses 2003 (“2003 Clauses”), offering a simpler presentation and expanded options to suit various companies’ needs[2].

The work on the update began with the creation of the short form (“Short Form”) of the ICC Force Majeure Clause 2003 (“FM Clause 2003”) to be directly incorporated into contracts. This was then followed by the revision of the FM Clause 2003, as well as the ICC Hardship Clause 2003 (“Hardship Clause 2003”), to accompany the Short Form. In the ICC Force Majeure Clause 2020 (“FM Clause 2020”) and the ICC Hardship Clause 2020 (“Hardship Clause 2020”), the language and mechanism are simplified.

The 2020 Clauses can be included in contracts, or incorporated by reference, by stating, “The ICC Force Majeure Clause (Long Form) / The ICC Hardship Clause is incorporated in the present contract.” The parties may also use these clauses as the basis for drafting a tailor-made clause, which takes into account their specific needs. Should the parties prefer a shorter clause for force majeure, they can include in their contract the Short Form. The FM Clause 2020, nevertheless, gives guidance on issues upon which the Short Form is silent.

FM Clause 2020

Structural Changes

In principle, the FM Clause 2020 follows the structure of the FM Clause 2003, while bringing certain novelties in terms of its structure. These novelties aim to create a user-friendly and easy-to-understand text, not only for lawyers, but for the parties, as well.

Whereas the FM Clause 2003 formerly only described force majeure, the FM Clause 2020 includes definitions of “Force Majeure” and “Affected Party”, as well as paragraph headings. “Force Majeure” is defined, as follows, in the first paragraph of the FM Clause 2020:

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

As another structural change, instead of the notes that are intended to comment on the provisions, the FM Clause 2020 includes explanations, if needed, after certain paragraphs to highlight various important points of that paragraph.

Main Conditions

As seen, above, the FM Clause 2020 retains the same conditions for the occurrence of force majeure, but makes some changes in the wording. In order for an event to be considered as force majeure, these three conditions must be established, together. There is no difference between the FM Clause 2003 and the FM Clause 2020 in establishing these conditions.

The FM Clause 2020 maintains the system introduced through the FM Clause 2003 for non-performance by third parties. This provision establishes its basis in Article 79(2) of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). The party invoking the force majeure must prove that the conditions set forth in the first paragraph of the FM Clause 2020 are established with respect to itself, and with respect to the third party.

Presumed Events of Force Majeure

Just like the FM Clause 2003, the FM Clause 2020 contains a list of events that are presumed to fulfil the conditions of being beyond the relevant party’s reasonable control, and reasonably unforeseeable. The working group that drafted the 2020 Clauses (“Working Group”), which I had the privilege to be part of, believed that inclusion of a list is more user-friendly and less complicated for SMEs, and provides predictability for users who are not accustomed to drafting these types of clauses in their contracts.

If any event listed is realized, the affected party is released from the obligation to prove that this event is beyond its reasonable control, and could not be reasonably foreseen at the time of conclusion of the contract. Therefore, the affected party must prove only that the effects of this event could not have been reasonably avoided or overcome. If an event is not listed, the party invoking such event as force majeure must establish all three conditions set forth in the first paragraph of the FM Clause 2020.

In the FM Clause 2020, the following events are not listed, contrary to the FM Clause 2003: Armed conflict or serious threat of the same (including, but not limited to hostile attack, blockade, military embargo), civil commotion or disorder, mob violence, act of civil disobedience, curfew restriction, and compulsory acquisition. On the other hand, taking the recent global developments into account, currency and trade restrictions, as well as embargos and sanctions, are now included on the list. Certain other changes and rewordings have also been made for simplification purposes.

For the sake of the principles of party autonomy and freedom of contract, the parties are allowed to add or delete events to and from the list, taking into account their particular needs.

Notification

In the FM Clause 2003, the notice requirement was not structured, independently, but was found within paragraphs 4, 5, 6 and 8 thereof. On the other hand, the FM Clause 2020 includes an explicit paragraph on the notification requirement. According to the newly added paragraph 4, the party affected by the impediment shall give notice of the event to the other party without delay.

Consequences of Force Majeure

The consequences of force majeure remain essentially the same as the FM Clause 2003, except for the changes noted, below:

  • Under the FM Clause 2020, it is clearly provided that the non-invoking party is entitled to suspend the performance of its obligations, if applicable, from the date of the notice. It is an application of the well-established principle of exceptio non adimpleti contractus that finds its place in several national laws (see, for example, Article 97 of Turkish Code of Obligations No. 6098; Article 82 of the Swiss Code of Obligations; for sale contracts, Article 1612 of the French Civil Code; and Section 320 of the German Civil Code) and in Article 7.1.3 of the UNIDROIT Principles of International Commercial Contracts 2016 (“UNIDROIT Principles”).
  • Whereas the FM Clause 2003 provided only a formula, instead of a fixed period for the moment at which temporary suspension of the contract through force majeure would last long enough to lead to termination; in order to increase certainty and foreseeability, in the FM Clause 2020, a maximum duration of 120 days has been provided, which can be changed by agreement of the parties at any time according to their needs. Accordingly, in addition to the general rule to determine each particular case as to when the duration of the impediment is unsustainable, the FM Clause 2020 suggests that, unless otherwise agreed, the contract may be terminated by either party if the duration of the impediment exceeds 120 days. By fixing a maximum duration, the Working Group added a new option to the formula exercised by Article 25 of the CISG, Section 8:103 of the Principles of European Contract Law, and Article 7.3.1 of the UNIDROIT Principles.

Short Form

The reason that led to creation of the Short Form is the fact that the FM Clause 2003 was preferred to be included in the contracts by way of reference, instead of full incorporation, due to its rather long and complex nature. The ICC Commercial Law and Practice Commission considered that reference to a clause outside of a contract is complicated and not user-friendly, and created the Short Form to be directly incorporated into contracts.

The Short Form comprises the main elements of the long form, but does so in only three paragraphs. In order to prevent any discrepancies between the FM Clause 2020 and the Short Form, both texts employ the exact wording. The Short Form does not have paragraph headings and explanatory boxes, and some paragraphs are unified. In addition, some paragraphs are not addressed in the Short Form, such as the non-performance by third parties, notification, duty to mitigate, and unjust enrichment.

Hardship Clause 2020

The main revisions in the 2020 Clauses relate to hardship. In the Hardship Clause 2003, only a termination option was available. Fear that the judge or arbitrator would adapt the contract in such a way that neither party would prefer played a role in shaping this drafting.

This time, the Working Group kept the first and second paragraphs of the Hardship Clause 2003 as is, but provided new options, such as adaptation of contract in the event of the parties’ failure to agree on alternative contractual terms. The Working Group believed that including an option for adaptation by a judge or arbitrator may act as an incentive for the parties to agree to alternative terms by themselves in order to avoid third party intervention.

Taking into consideration the global trend towards attempting to maintain the contract where possible (favor contractus), the Hardship Clause 2020 provides three alternatives: provided that the parties are unable to agree upon alternative contractual terms: (i) The party invoking the hardship clause may terminate the contract, but cannot request adaptation by the judge or arbitrator without the agreement of the other party (Option 3A); (ii) Either party may request the judge or arbitrator to adapt the contract with a view to restoring its equilibrium, or to terminate it, as appropriate (Option 3B); and (iii) Either party may request the judge or arbitrator to declare the termination of the contract (Option 3C).

  • Option 3A is the same as the solution of the Hardship Clause 2003, which provides that the party invoking the hardship clause is entitled to terminate the contract.
  • Option 3B provides for either party to request the judge or arbitrator to adapt or terminate the contract, as appropriate, as allowed for under various national laws, as well as the UNIDROIT Principles. An approach similar to that of the UNIDROIT Principles will prevent any possible discrepancies within the contract in terms of hardship situations.
  • Option 3C is a modified version of the solution of the Hardship Clause 2003 and the new Option 3A. The Working Group considered that termination by the invoking party may be arbitrary and could be misused and, therefore, preferred to involve the judge or the arbitrator in the termination so that either can assess the burdensome conditions that may lead to termination of the contract, since termination should be the last resort.

Conclusion

The FM Clause 2020 mainly follows the FM Clause 2003 in substance, but with certain structural changes to make it simpler and more user-friendly. The most significant changes may be summarized, as follows: (i) Simplification of the list of presumed force majeure events; (ii) Separate paragraph for the notice requirement; (iii) Suspension of the performance by the non-affected party when the affected party invokes force majeure; and (iv) Fixing a time period of 120 days for the duration of the force majeure after which the contract may be terminated.

On the other hand, the Hardship Clause 2003 has gone through a fundamental change through introduction of the adaptation option, in addition to termination. The Working Group took into consideration the UNIDROIT Principles, as well as the recent developments in national laws, and agreed that including an option for adaptation or termination by a judge or arbitrator in the Hardship Clause 2020 could be an incentive for the parties to agree to alternative terms by themselves.

It should be noted that the 2020 Clauses do not abrogate the 2003 Clauses. The parties may continue to use the 2003 Clauses, and will be able to do so by making clear reference thereto.

[1] Clauses are available at https://iccwbo.org/content/uploads/sites/3/2020/03/icc-forcemajeure-hardship-clauses-march2020.pdf.

[2] Erdem, H. Ercüment“Revision of the ICC Force Majeure and Hardship Clause”, Dossier XVII: Hardship and Force Majeure in International Commercial Contracts, Paris 2018, p. 121 ff. for detailed information on this subject.

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