Law
Topic:
The effects of the force majeure in International Commercial Contracts
ArcelorMittal, a company involved in steel and mining operations, announced the suspension of an expansion project in August 2014 to increase their iron ore production in Liberia due to the Ebola epidemic that had hit WestAfrica. Some days prior to this announcement, Cosan SA which is a Brazilian sugar exporter made an announcement of not being in a position to make sugar deliveries to some clients after one of their warehouses in Port of Santos was destroyed by ftre. Royal Dutch Shell made an announcement in July 2014 stating it will be suspending the shale gas exploration project in Ukraine as it was very close to the crash site of the Malaysian Airlines Flight 17. In all the three cases, one thing that was common was the invocation of force majeure (superior force). This is because obstacles happened that could not be controlled by the parties in the agreement, that hindered their ability to fulfil their agreements.
This is a common clause included in international contracts, especially those that run in the long-term. Its objective is to free the parties involved from any obligation or liability whenever an event which they cannot control occurs and impedes the parties from fulfilling their obligations under the contractual agreement. force majeure clause acts as a precautionary measure against the risks associated with unprecedented events whether economic, political or natural disasters. Nonetheless, this clause may be pleaded at the breakdown of an agreement but rarely gets enough attention during the stages of contract negotiation. The involved parties insert the clause in their agreements. This move is risky if they fail to tailor this clause to reflect the particular agreement involved causing challenges if a force majeure event happens in the course of the agreement. It is important that the drafting of this clause is done in consideration of the specificities of that particular agreement.
This research paper intends to discuss the force majeure clause and its effects in international commercial contracts. In advance of discussing these effects, a discussion of iots definition, the process of negotiating and invoking it into the contractual agreement and its underlying principles will ensue. The primary objective is to have a complete understanding of the clause, force majeure, and its impact when present in long term international commercial contracts.
The force majeure Clause
This term, force majeure, was derived from the French which means a greater force or an irresistible coercion or compulsion. The British Dictionary of law has described the phrase as being commonly utilized in the commercial contractual agreements to give descriptions of the possible occurrence of events that will affect the contract and are completely outside the control of the involved parties. The events need to be listed in full to ensure they are enforceable. Some of which include the acts of God, fires, suppliers or subcontractors’ failure to supply a party in the agreement and workforce disputes that become an interference to the performance of a supplier in the agreement. Generally, an express clause could be included to excuse for delay and total failure to perform in an agreement.
In the Romanian Civil Code, article 135 (2) considers force majeure as an event that is externa, unprecedented, absolutely invincible and inevitable. Its narrow definition could be looking into only natural disasters that have no human interventions as the force majeure events. Nonetheless, as time progressed, an extension of these events have been done by the legal scholars to bring in the collective and anonymous human interventions carried out on behalf of public authorities which have extensive and extreme negative consequences. These would bring in issues such as war, national emergencies, general strikes, lockdown among others.
International contractual practice directs that this clause is included in the global business contracts regardless of the governing regulations. Nonetheless, concerns arise on the liability of the obliger, whether the latter could claim a clause of exoneration, what will be the aftermath of the failed obligation, what is the aftermath of the performance of the other involved party or what could happen to the whole contractual agreement. All these concerns are addressed by the different legal systems but those stands are not identical. International trade practitioners generally take preference in organizing the consequences of the events individually. The contractual provisions they choose will then be termed the force majeure clauses.
The Roman Law was the origin of the force majeure clause with some romanistic legal systems still considering it a classical notion, for instance, the French law. On the other hand, these clauses provide distinct characteristics in their inclusion in international contracts. The clauses’ drafters have intentionally chosen to be innovative in terms of the concept and lso accommodating its implications on the contract obligations. It is very essential that the developments from their practices are studied especially in refining legal theory. A critical analysis by the involved practitioners will enable them to point out the disparate aspects in the distinct force majeure clauses. These aspects need to be considered keenly in the negotiation stages together with the potential variations and the drafting traps that should be evaded.
Currently, the common law jurisdictions have no equivalent legal concept to force majeure. However, the parties are allowed to incorporate the clause in the agreements that are governed by the same jurisdictions. The reason behind this is that the reliance on other doctrines of the common law such as frustration may not be in the interest of any of the parties in the agreements. The reasons as to why none of the party’s interests have been considered are numerous but the most significant one is the termination of the agreement.
Drafting of the force majeure Clause in International Commercial Contracts
Traditionally, the criteria that was followed in drafting the force majeure clauses focussed on unforeseeability, unavoidability and the impact of offering the performance being impossible. The long term international contracts typically have just one type of the force majeure clauses; some will expressly give a definition to the concept while others look into an external source of law or choose to not provide any definition at all for some agreements. For instance, in the case ICC International Court of Arbitration 11265, the contract failed to expressly give a definition of the clause and instead chose to refer to a series of events that qualify to be force majeure events. The arbitral tribunal decided that this provision in the agreement needs to be read through the UNIDROIT principles that have a general meaning assigned to force majeure. From the definition provided, the tribunal made a conclusion that the failure of the respondent to perform was not a constituent to force majeure.
Currently, in the drafting of the force majeure clause, it is essential to note that the events listed have to illustrate several important components. These components form up the underlying tests taken in invoking the force majeure clauses in a contractual agreement. The first component is an explicit agreement from all the involved parties on what exactly will constitute the event or the circumstance in the clause. These events will typically vary in terms of how extensive the list could get or what will fall under the scope of the clause. Notably, in reality, it is difficult or even impossible to list every event that may affect the performance of the involved parties. One cannot foresee every event ahead of time. Nonetheless, a well drafted force majeure clause should at least indicate that the event needs to be beyond the control of the involved parties. Failure to have a clear interpretation of the kind of events considered in the clause makes it difficult to focus on the interpretation factor whenever a dispute occurs.
Some of the cases that defined the phrase of an impediment being beyond the control of the parties included the Peckham v Industrial Securities Co., and Lowenschuss v Kane cases. In Peckham’s case, the receiver had been appointed to seize the assets of the seller that included goods subject to the commercial contract. The court would decide the latter had been excused only because the appointment of the receiver had been wrongfully done and was not from the conduct of the seller. In Lowenschuss’ case, the buyer has been issued a temporary injunction that prevented the delivery of shares of stock. The reasoning behind the injunction was that the buyer had allegedly violated both the antitrust and securities laws given to governing the contract. The jury would later indicate that the buyers were to be excused and were not liable for any breach as there were no such violations. In the Canadian Industrial Alcohol Co.,, v Dunbar Molasses Co., OFN, the case involved the seller failing to deliver as promised. However, the seller cited impossibility as the specified refinery was not in a position to produce adequate quantities to fulfill their performance in the contract. The jury did not consider the defense indicating that the latter failed to put in reasonable efforts in attempting to secure another contract of production and delivery of enough molasses from the refinery’s operator.
The second component requires the parties to notify the others involved in the contractual agreement through any method. The notice will la out the particulars of a claimed force majeure event or circumstance. The third component entails the clause providing a remedy to the respective event or circumstance that has occurred. For instance, the agreement could give the affected party a right to cancel the agreement or suspend it. Some agreements could also give the parties involved greater flexibility levels such as being allowed to undertake a contract extension. Its fourth component in the drafting of the clause is that the parties provide ways to thrash the force majeure events. This goes beyond just provision of aremedy to the involved parties. The fourth component entails proving that this clause has a more liberal and wider meaning than the traditional force majeure clause.
The current force majeure clause has compared favourably compared to the traditional force majeure clause in terms of; its utilization in decreasing the damage arising from one of those involved in the agreement failing to perform due to changed circumstances, does not insist on suspending, cancelline of terminating the contractual agreement, brings in the obligation to put in best efforts to find solutions to the force majeure events, its main objective is finding ways to overcome the situations that have arisen from the force majeure events and makes the clause come closer to the meaning and objectives of hardship clauses.
The successful invocation of a force majeure clause by one of the parties in the international commercial contract after they have rendered a notice in time for the event, the party is relieved of their performance obligation in the contract and any liabilities accrued from the damages that arose from the contract breach. The other party is allowed to suspend the contract if it receives the timely notice of the event from the other party invoking the clause.
During the negotiations of the international commercial contract, it is advisable that the parties involved take a number of practical steps to mitigate the risk attached to having a dispute arise from the occurrence of a force majeure clause. The first step is that the parties involved in the negotiation process consider whether the proposed respective clause is broad or narrow enough to meet their obligations. To this effect, they need to consider the words used in the provisions before choosing to depend on them, and keeping the contemporaneous information on the stated relevant events as they can be used as evidence for a respective event in due course. Another step is to ensure that there is no error in a situation of multiple causes but only one of them leads to the force majeure event since it could lead to significant financial implications. There also should not make an assumption that the duty which is part of the force majeure procedure will need one to act in ways that are less profitable or attractive than the original procedure. This duty is typically in relation to exercising the reasonable endeavors in consideration of the contractual agreement.
The Effects of force majeure in International Commercial Contracts
When a force majeure event or a circumstance that portrays traits related to the former case,a series of effects will accrue depending on the duration of the impossibility to perform one’s obligations related to the contract, the nature of the duties that have been affected, the nature of the contractual agreement among other issues. The long term international contracts normally have a suspensive effect from the force majeure clause at least in the initial stages. For instance when a party has successfully applied this clause their duty to perform has been relieved and when the impact of the impediment is temporary, then the consequences applicable to an extent to which the stated event has impeded the performance of the party that has involved their cause for their duties in the agreement.
One of the effects of force majeure in these contracts is the exemption from liability. In this case if the failure to perform arises from an impediment meant to fulfill the conditions set out in CISG’s Article 79(1) or any equivalent provisions, the party affected is relieved from their duty to pay respective damages. These damages are termed as the “liquidated damages”. The penalties from this event are also valid in this circumstance and will not be paid considering the governing domestic law. The law will apply unless the parties have stipulated differently in their contractual agreement. Furthermore, in the Article 8:101(2) of the PECL, it is also indicated that when the party’s lack of performance has been excused together with the obligation to claim any damages, then the exclusion of the right attached to performance is also included. Notably, there have been a number of concerns in relation to whether the exemption stipulated in Article 79 in the CISG does include the prommisee’s right to performance.
The second effect is the right to avoidance of the contract which is among the rights that are influenced by the exemptions. The underlying presumption in this right is however that the failure to perform will lead to a fundamental contractual breach. Therefore, whether the existence of this significant contractual breach will highly rely on the specificities of each case. Some of the governing regulations such as Article 25 in the CISG and Article III in the DCFR 2008 indicates that the fundamental breach in the agreement will have to be one that leads to a detriment on the other party which could deprive the latter of its entitlements in respect to the contract. One of the primary questions used in the case is the possibility of having just and reasonable remedies to the contractual breach.
The force majeure clauses will typically provide suspension, renegotiation and termination for the international commercial agreements. They also provide the option of extending the period of contractual performance or terminating the contract as the last resort taken. Sme of the clauses will stipulate the continuity of the force majeure clause for an extended period, the parties could renegotiate to bring in a reasonable period or a fixed time limit for performance of obligations. Renegotiation is normally utilized because of the nature of the contract in terms of complexity and financial obligations attached to terminating the contract. Inclusion of renegotiation in a contract should lead to including the impact of these negotiations and the failure to hold them. Failing to hold renegotiations could lead to an arbitration while others provide the option of termination in case no agreement can be formulated.
Notably, most long term commercial contracts ignore the duration of the event that should be added to the timeline of the contract. However this issue can be very real and cause some challenges. For instance, challenges may accrue in gas sale agreements that take place in the long term. This is because the parties will lock in new quantities as per the termination date stipulated in the agreement and the party that is to be affected by extending the predetermined date.
Nevertheless, termination of the international contract is normally the last resort taken as it is an exceptional remedy. Its utilization occurs in the exceptional circumstances or the contract has clearly defined this in the agreement. Most of the force majeure clauses have avoided using a particular regime in terminating the contract due to the force majeure events. However, its inclusion is gaining prominence in these contracts. One example is in the many global petroleum agreements whose force majeure clauses avail the right to terminate if a given event goes beyond a particular period of time. Other contracts will indicate that even though contract termination has not been excluded, its utilization should only occur in exceptional circumstances after all those involved are convinced that the venture is not to be pursued and the breaking of the relationship is imminent. force majeure clauses that follow this will enlist the methods for mitigating the implication of the respective events so that the relationship can be saved and also will enlist the duty of the parties to negotiate in pursuit of finding solutions to the obstacles that have arisen from the event.
Litigation Cases Related to the Effects of force majeure in International Commercial contracts
Recently, the developments that have occurred economically and politically have caused several changes to the respective environments. While the changes were suspected to bring in a number of arbitration cases related to ICCs, arbitration courts have handled a few of the cases specifically for the Council of Mutual Economic Helpance (CMEA) nations. Nonetheless some of the cases that arose in relation to the effects of force majeure in the global commercial contracts are as explained below.
A number of arbitration disputes where the parties desire to terminate a contract have been using the argument that performance has become an impossibility. This is because of the control on foreign exchange or the customs regulations. In cases 2216 and 3092, the purchasers of crude oil indicated that they will not be performing their contracts due to failure to get required authorizations in obtaining foreign exchange. The case 2216 further indicated that the facts in the contract were that the prices of the product had reduced and contract performance would actually mean the buyer would face substantial losses. The proceedings from the cases established that the suitable legis;ation on exchange controls were in effect before these contracts were finally enforced. Therefore, the buyers knew that the authorizations could have not been given for just one particular transaction. In the case 2216, it was established that the buyer could have potentially failed to carry out their required steps towards obtaining the proper authorizations. In this case, the element of unforeseeability was not present since the required exchange control legislations were in effect prior to the finalization of the contracts and the buyers needed to have carried out the required steps to get permissions regarding the foreign exchange transfer. Therefore, the buyers were held responsible for breaching their contractual obligations.
Case 3740 involved an Indian defendant who turned down a delivery of a particular commodity quantity because the respective government had made a request to him to first meet the domestic necessities prior to performing the export commitments. The claimant was informed that the defendant had made a request of being relieved of the contractual duty in respect to force majeure clause that had been included in the contract. The arbitrator of this case’s final decision was that the defendant depended only on the private letter between persons that is sine under the Secretary of a Ministry. Therefore, choosing to ban good exports had not been subject to any amendment related to the control of exports. There was no official basis to the decision of not exporting the goods. The arbitrator indicated that the premises of the decision did not have any force of the law that would affect it so that the force majeure clause would be put into effect. The arbitrator clearly took a formal standpoint and did not consider any administrative pressures from the party calling out for the termination.
This decision was also noted in other verdicts that were related to time period for a force majeure situation. Case 1703 established that the party meant to put up a plant on the basis of a turn-key was forced to stop due to a hostilities’ outbreak. By the time the hostilities had been completed, the party declined to go on with their obligations to complete the work on the ground. Their reasons were that the government had withdrawn the required facilities of export financing. It was not going to be possible to get any required visas for the required staff members and also maintenance of the required security was an impossibility. The arbitrators indicated the presence of a force majeure event during the time in which the hostilities had occurred and for at least a period of 20 days from the time it ended. The arbitrator decided that one basic element was evident in the period that followed for it to qualify as a force majeure situation which was irresistibility. This element was missing since the visas could have been gotten if the defendant had taken necessary action to actually obtain them. These could be obtained from the country’s consulate for the defendant as it was still open. There was also a possibility of alternate financial resources. To this effect, the arbitrators affirmed that the defendant did not exhibit any form of willingness to go on with the work and make necessary efforts.
In case 1782, the party that was supposed to deliver trucks to an Arab country and also offer maintenance services had after delivery declined to offer the latter service on force majeure grounds. They stated that the employees who were primarily from Israeli origin, had not obtained the required visas. The arbitrators stated that even when the allegations made were true, the performance of maintenance services was not impossible. The defendant needed to be willing and make arrangements to ensure that tracks were serviced. It is clear that it is not all claims of force majeure that can go through. The defendants need to ensure that the events are valid and also they did carry out all activities which a reasonable party in the same situation could have done. Failure to which, then they will be liable for breaching their contractual obligations.
Conclusion
In general, parties involved in commercial contracts will be protected by the force majeure clauses. However, the need to ensure that the event they bring forth is valid, failure to which they will be liable for any damages that accrue from the non-performance. The cases related to international commercial contracts that have been incorporated in this research paper demonstrate the tendency of the arbitrators to define force majeure. While some cases were clear enough to invoke the clause, most of the arbitrators will also take a restrictive approach in admitting the clause. Furthermore, the drafting of the clause needs to take keen considerations that will ensure all the parties are protected as they have been tailored to meet the respective needs.
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