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ICC (ed.), Force Majeure and Hardship, Paris 1985 (ICC Publ No. 421).

Title
ICC (ed.), Force Majeure and Hardship, Paris 1985 (ICC Publ No. 421).
Content

Force Majeure and Hardship

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[Please note: This is an overruled version. For the 2003 Version please click here ]

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Force majeure (exemption) clause

Grounds of relief from liability

1.

A party is not liable for a failure to perform any of his obligations in so far as he proves.

2.

An impediment within paragraph (1) above, may result from events such as the following, this enumeration not being exhaustive.

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3.

For the purposes of paragraph (1) above, and unless otherwise provided in the contract, impediment does not include lack of authorisations, of licences, of entry or residence permits, or of approvals necessary for the performance of the contract and to be issued by a public authority of any kind whatsoever in the country of the party seeking relief.

Duty to notify

4.

A party seeking relief shall as soon as practicable after the impediment and its effects upon his ability to perform became known to him give notice to the other party of such impediment and its effects on his ability to perform. Notice shall also be given when the ground of relief ceases.

5.

The ground of relief takes effect from the time of the impediment or, if notice is not timely given, from the time of notice. Failure to give notice makes the failing party liable in damages for loss which otherwise could have been avoided.

Effects of grounds of relief

6.

A ground of relief under this clause relieves the failing party from damages, penalties and other contractual sanctions, except from duty to pay interest on money owing as long as and to the extent that the ground subsists.

7.

Further it postpones the time for performance, for such period as may be reasonable, thereby excluding the other party's right, if any, to terminate or rescind the contract. In determining what is a reasonable period, regard shall be had to the failing party's ability to resume performance, and the other party's interest in receiving performance despite the delay. Pending resumption of performance by the failing party the other party may suspend his own performance.

8.

If the grounds of relief subsist for more than such period as the parties provide [the applicable period to be specified here by the parties], or in the absence of such provision for longer than a reasonable period, either party shall be entitled to terminate the contract with notice.

9.

Each party may retain what he has received from the performance of the contract carried out prior to the termination. Each party must account to the other for any unjust enrichment resulting from such performance. The payment of the final balance shall be made without delay.

Force Majeure clause - model reference clause

Parties who wish to incorporate this clause by reference in their contracts are recommended to use the following wording:

"The Force Majeure (Exemption) clause of the International Chamber of Commerce (ICC Publication No. 421) is hereby incorporated in this contract".

Comments and observations on Force Majeure clause

1.

Strictly speaking, this type of clause is best described as an "exemption clause" or "relief from liability clause". However, the French expression "force majeure" is frequently adopted in practice, even in non-French speaking countries. This expression has therefore been included in the short name of the clause. There is no intention thereby to introduce into the clause any French or other specific national doctrine of force majeure.

2.

The clause starts from the assumption that a breach of contract or a failure to perform has occurred (Paragraph 1). The failing party is then relieved wholly or temporarily from the sanctions and other effects, such as termination or rescission of the contract, usually following upon a failure to perform, provided that the conditions for granting relief provided for in the clause are met.

3.

The failure must be due to an impediment (Paragraph 1). This expression signifies that circumstances making it inconvenient or more onerous for the obligor to perform are not enough, and much less so circumstances which merely make the other party's performance less valuable for the first party to receive. On the other hand it would be too strict to require that performance has become absolutely impossible. It should, however, be some kind of obstacle which has prevented performance as normally foreseen. 12

4.

The impediment must be beyond the failing 1. party's control. (Paragraph 1).

5.

The word "impediment" may sometimes be understood in a narrower sense, e.g. an ongoing war which cuts off all communications between two states. Sometimes it is used in a wider sense to include the consequences of the initial event, such as shortage of labour, material or restrictions on communications. A party may foresee the initial event but overlook its consequences. It could be argued that almost anything could have been foreseen at the time of the conclusion of the contract. However, the clause is not intended to give only such limited relief to the obligor. The clause refers to what a party could reasonably be expected to take into account and to make contingency plans for when he enters into the contract. Thus, he might be expected to purchase raw material in time or to hire labour for the work, but he would not be expected to take steps which are outside the normal course of business, e.g. already to have bought all the necessary raw material on the first day of a long delivery period.

6.

Even if he would be excused from the point of view of nonforeseeability, he may nevertheless be denied the relief if he could then reasonably have avoided or overcome the impediment or at least its effects upon his ability to perform (Paragraph 1). A test of commercial reasonableness should be applied here as well. A seller whose plant burns down may certainly be excused even if he does not make any efforts to rebuild the plant in order to be able to deliver in time. However, a fire or accident of a limited extent may not excuse the seller if he could reasonably have brought the plant back into shape so that he could have performed the contract - albeit at the expense of some extra cost and labour.

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8.

In Article 79 of the Vienna Convention an attempt has been made to define the seller's responsibility for failure to perform attributable to a supplier's or subcontractor's failure. There are, however, various opinions as to how this paragraph of the Vienna Convention should be14

interpreted. The draftsmen of the present Force majeure clause did not consider it practicable to define the obligor's responsibility when his failure to perform is due to a failure of a supplier or a subcontractor. The circumstances may vary too much from case to case. In general it may be said that failure of a supplier or a sub-contractor is not per se an extraordinary event like those mentioned in paragraph 2 of the clause, unless the failure of the subcontractor or the supplier is also due to such an extraordinary event. It may however also depend on the relation of the supplier and the subcontractor to the two main parties or to one of them, e.g. whether the supplier has been mentioned specifically in the contract and whether such specification took place at the request of the obligor or the obligee. It may further depend on the type of supplier, e.g. whether there is a very specific' product, whether any raw material concerned is commonly available, or whether a public utility such as a water or electricity supplier, which often has a monopoly, is involved.

9.

Acts of authority - or as they are sometimes called, acts of God and the King's enemies - are a common example of force majeure. Such events could take the form of acts of violence but nowadays very often appear in tile form of restrictions on export, import, payments, building, labour and various types of business activities. Such restrictions can almost always be removed by a license or other' form of authorisation. It is advisable to define in the contract which party is going to have the responsibility of applying for such authorisation and which party, in case of refusal or withdrawal of authorisation, has to bear the risk for it. Even if the contract is not specific on this point, a certain risk distribution may be inferred from the nature of the contract or from some of its provisions. Paragraph 3 provides that, in case of doubt, the obligor bears the risk for a refusal or withdrawal of an authorisation when such authorisation has to be granted by authorities in his own country. This may be considered as a reasonable

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distribution of risk if the obligor is a foreign state or a state enterprise whose authorities have to grant the necessary authorisation. If the enterprise has no particular connections with the authorities who have to grant the authorisation, a request by the obligor for a term relieving him from the consequences of a refusal or withdrawal may be more acceptable to the other party. The parties should then amend the present clause accordingly.

10.

A party in breach should try to minimise damages caused by a failure to perform, both in his own interests and in those of the other party. If he does not do so he may be liable to pay compensation for loss or damage which otherwise could have been avoided, even though in principle the exemption clause operates. A party should therefore give notice as soon as practicable to the other party of his intention to rely on the exemption clause (see Paragraph 4).

11.

Failure to give such notice in time would not only make the failing party liable in damages (Paragraph 5), but also deprive him of the right to rely on the exemption clause in respect of time before the notice. The latter is a rather harsh and serious consequence. In some contractual relations it may be difficult for the obligor to realise at once whether he will need to rely on the exemption clause. Parties who feel that such a limitation of the exemption clause is unreasonable may strike out the first sentence of Paragraph 5 ("The ground... of notice").

12.

A ground of relief relieves the failing party not only from damages but also from penalties and other contractual sanctions (Paragraph 6). It should be observed that the clause covers non-performance of all kinds of obligations, including monetary ones. In the case of payment the duty to overcome the impediment is a very absolute and fargoing one, and the conditions for relief will be satisfied only in exceptional circumstances. It may be argued, however, that a refusal or a withdrawal or any other lack of a necessary license exempting

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from currency restrictions in a particular context would qualify as an impediment under the clause. It may also be argued that the duty to pay interest until payment can be made is not a contractual sanction but just compensation for the use of capital. In any event, for the avoidance of doubt the clause specifies that it does not relieve a party from paying interest on a sum due. It should be noted that the clause does not introduce any duty to pay interest - e.g. on an advance on the purchase price - which would not follow from other legal or contractual provisions. However, if restitution of the purchase price is due, the clause does not relieve the debtor from any duty to pay interest on such debt, even if for the time being payment cannot be effected. In addition, exchange rate risks are normally borne by the debtor from the date payment is due. A creditor who wants the debtor to be liable for any fluctuations in the rate of exchange of the money of account, irrespective of force majeure, should protect himself in this respect by a specific clause.

13.

Contrary to the Vienna Convention and a number of national legal systems, force majeure under the clause also protects the failing party from rescission or termination of the contract by the other party (Paragraph 7). Consequently the clause provides that the time for performance is prolonged for such period as may be reasonable. The test of reasonableness has to take into account not only the failing party's ability to resume performance, but also what interest the other party may have to go on with the contract in spite of late performance.

14.

Parties are advised to fix a maximum period at the expiry of which any party may elect to terminate the contract if still unperformed (see Paragraph 8). Since circumstances may vary very much from case to case, it is a delicate task to fix the length of such period in a standard clause. Therefore no attempt has been made to set a definite period in the clause. Failing an express stipulation, a

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"reasonable period" test is applied. What is reasonable depends on the facts of the particular case.

15.

It would be equally difficult to define the parties' precise rights and duties in case of termination. The Vienna Convention gives only the performing party and not the failing one a right to terminate the contract, and most national legal systems adopt a similar solution. This gives the obligee the option of terminating the contract or waiting until performance is possible.

 

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Hardship provisions - Drafting suggestions

IMPORTANT: this is not a standard clause. It cannot be incorporated in a contract by reference.

1.

Should the occurrence of events not contemplated by the parties fundamentally alter the equilibrium of the present contract, thereby placing an excessive burden on one of the parties in the Performance of its contractual obligations, that party may proceed as follows:

2.

The Party shall make a request for revision within a reasonable time from the moment it becomes aware of the event and of its effect on the economy of the contract. The request shall indicate the grounds on which it is based.

3.

The Parties shall then consult one another with a view to revising the contract on an equitable basis, in order to ensure that neither party suffers excessive prejudice.

4.

The request for revision does not of itself suspend performance of the contract.

The Provision may then be continued with any one of the following four alternatives.

First alternative

5.

If the parties fail to agree on the revision of the contract within a time-limit of 90 days of the request, the contract remains in force in accordance with its original terms.

Second alternative

5.

Failing an agreement of the Parties on the revision of the contract within a time-limit of 90 days of the request either Party may refer the case to the ICC Standing Committee for

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the Regulation of Contractual Relations in Order to obtain the appointment of a third Person (or a board of three members) in accordance with the provisions of the rules for the regulation of contractual relations of the ICC. The third Person shall give his opinion to the Parties as to whether the conditions for revision provided in Paragraph 1 are satisfied. If so, he shall recommend an equitable revision of the contract which ensures that neither Party suffers excessive prejudice.

6.

The opinion and recommendation of the third Person shall not be binding on the Parties.

7.

The Parties will consider the third's Person opinion and recommendation in good faith in accordance with Article 11 (2) of the said rules for the regulation of contractual relations. If the Parties then fail to agree on the revision of the contract, the contract remains in force in accordance with its original terms.

Third alternative

5.

If the Parties fail to agree on the revision of the contract within a time-limit of 90 days of the request, either Party may bring the issue of revision before the arbitral forum, if any, provided for in the contract, or otherwise the competent Courts.

Fourth alternative

5.

Failing an agreement of the Parties on the revision of the contract within a time-limit of 90 days of the request either Party may refer the case to the ICC Standing Committee for the Regulation of Contractual Relations in Order to obtain the appointment of a third Person (or a board of three members) in accordance with the provisions of the rules for the regulation of contractual relations of the ICC. The third Person shall decide on the Parties' behalf whether the conditions for revision provided in Paragraph 1 are satisfied. If so he shall revise

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the contract on an equitable basis in order to ensure that neither party suffers excessive prejudice.

6.

The decision of the third person shall be binding on the parties and shall be deemed to be incorporated in the contract.

Comments and observations on Hardship provisions

1.

Contrary to the Force Majeure clause which may be incorporated in a contract by reference, the provisions on hardship are not set out in the form of a standard clause. They have to be completed by the parties as necessary and inserted as express terms in the contract. When doing so the parties will, inter alia, have to choose which of the four alternatives relating to the effects of hardship (Paragraphs 5 and following) they wish to adopt.

2.

Paragraph 1 provides that hardship may be invoked by one of the parties if the occurrence of events not contemplated by the parties fundamentally alters the equilibrium of the contract thereby placing an excessive burden on the party invoking the clause, in the performance of his contractual obligations. The terms "events not contemplated by the parties", "alter the equilibrium" and "excessive burden" are not defined or described in detail in the paragraph. However, the parties may specify the contingencies entitling a party to invoke the clause in their contract. They may particularly wish to do this if they want to avoid a very wide application of the clause.

3.

The requirements for invoking hardship are less strict than those placed upon a party wishing to invoke the Force Majeure clause.

4.

The event invoked must have occurred after the making of the contract. Generally speaking, if the event occurs when the party invoking it is already in breach, and in particular if the event was caused by acts or omissions for which he is liable, he cannot normally rely on it as a ground for hardship. The party invoking hardship must continue to perform the contract (see Paragraph 4).

5.

Paragraph 2 bars a party from invoking the clause if he does not request a revision of the contract within a reasonable time from the

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moment he became aware of the event and its effects on the economy of the contract. The request has to indicate the grounds on which it is based. What is a reasonable time depends upon the circumstances of the case.

6.

When a request for revision has been made the parties have to consult one another with a view to revising the contract on an equitable basis in order to ensure that neither party suffers excessive prejudice (Paragraph 3).

7.

In their contract the parties may opt for any one of four alternatives to be applied if they fail to agree on the revision of the contract within 90 days of the request of revision.

8.

The first and the second alternatives lead to a revision of the contract only if both parties agree. Since there is no obligation to agree, failure to agree does not confer on either party any right to claim damages or other compensation from the other. Paragraph 5, first alternative, lets the contract remain in force in accordance with its original terms if the parties fail to agree on a revision. The party invoking the clause cannot require the other party to continue negotiations beyond the 90 days time limit.

9.

Paragraph 5, second alternative, gives either party an option to refer the case to an independent third person. The ICC Standing Committee for the Regulation of Contractual Relations is requested to appoint a third person (or a board of three members) in accordance with the Rules for the Regulation of Contractual Relations of the ICC (see "Adaptation of

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Contracts", ICC Publication Nº 326). The third person gives his opinion to the parties as to whether the conditions for revision provided in Paragraph 1 are satisfied and, if so, he recommends an equitable revision of the contract which ensures that neither party suffers excessive prejudice.

10.

Paragraph 5, third and fourth alternatives allow either party to apply for a binding decision as to whether the conditions for a revision are fulfilled and, if so, what revision is to be made. Paragraph 5, third alternative, provides that after the 90 days time limit has expired either party may bring the issue of revision before the court or the arbitral tribunal provided for in the contract.

11.

Paragraph 5, fourth alternative, gives either party the same option to refer the case to a third person as does the second alternative. In this case, however, the decision of the third person appointed by the ICC Standing Committee is binding upon the parties, and is deemed to be incorporated in the contract (see Paragraph 6).

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Referring Principles
Trans-Lex Principle: VI.3 - Force majeure
Trans-Lex Principle: VIII.1 - Definition
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