ICC Force Majeure and Hardship Clauses 2020 in the Wake of COVID-19

To respond the struggles experienced by the businesses in terms of contractual liabilities in the wake of COVID-19, International Chambers of Commerce (“ICC”) has updated the 2003 version of its force majeure and hardship clauses. With the recent update dated March 25, 2020, ICC aimed at bringing an equivalence for the parties’ legitimate expectations of performance that impinged due to COVID-19 outbreak. By virtue of this understanding, the new 2020 version is designated to create a uniform presentation of the respective clauses which is free from differential interpretations of the national laws and expanding the possibilities to constitute force majeure or hardship as per the needs of the parties.

The Approach to Force Majeure

To this end, ICC created a general force majeure formula in order to guide the parties in drafting and negotiating the force majeure clauses. This formula is presented in two coherent forms the “Long Form” cited as the complete ICC Force Majeure Clause and the “Short Form” as the shorter and standard version of the respected clause. While Long Form basically provides a detailed map for the parties on the issues where the Short Form is silent and points out overall major angles in a more brief form. Long Form may be included as whole in a contract or may be solely referenced by the parties in order for the ICC Force Majeure Clause to be interpreted. In case the parties wish to incorporate a shorter clause, the Short Form of the ICC Force Majeure clause could be referred in the contract.

The force majeure event is defined as the occurrence of an event or circumstance 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:

a) that such impediment is beyond its reasonable control; and

b) that it could not reasonably have been foreseen at the time of the conclusion of the contract; and

c) that the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party.

As clarified in the clause itself, the impossibility of performance is not regarded as one of the requirements to constitute force majeure event so that the requirements are deducted. Another significant aspect of the 2020 version of force majeure clauses is regarding the non-performance of the third parties which necessitates the Affected Party to prove that the conditions of force majeure is provided as for the third party in question.

Additionally, a list of force majeure events breeding the force majeure is introduced such as war (whether declared or not), civil war, trade restriction, embargo, epidemic. Having said that, the party invoking the force majeure solely has to evidence the existence of any currency and trade restriction, embargo, sanction in order to assert such event. Indeed, the parties are free to exclude some of the events from the list as per their requirements and requisitions. In further, the notification with regard to force majeure must be made without delay by the Affected Party to the other party.

In the event that all the conditions stated above are met, the party invoking force majeure is deemed to be relived from its performance obligations and its liabilities due to damages under the contract. In case notice thereof is not provided without delay, the relief from the liabilities or obligations shall be effective as of the date of the delivery of such notice by the other party. The other party may suspend its obligations regarding performance as of date of the notice. In such case, the Affected Party is required to take all measures available in order to mitigate the impacts of the force majeure event.

Nonetheless, in case the force majeure event deprives substantially the contractual parties from their reasonable contractual expectations, either party shall be entitled to terminate the contract with a notification to the other party. The 2020 version in that respect brings outs a novel approach to the duration of impediment as specified above in order to enhance the foreseeability and preciseness. With this new perspective, in case the duration of impediment is more than 120 days, the parties may terminate the contract unless otherwise agreed. Since the new clause has left a room for the parties to shape the duration of impediment, it is incontestable to argue that the autonomy of the parties has been boosted.

The Approach to Hardship

The hardship clause is included in many national laws in various models and substances such as in Turkey where the hardship clauses are incorporated in the articles 136, 137 and 138 under the Turkish Code of Obligations numbered 6098. In order to find a balance between the different interpretations of national laws, and to eliminate any inconsistency in applications of the hardship clauses, ICC has declared the new 2020 version. To do so, with the model form presented, the parties may incorporate such clause or execute a separate contract.

In brief, the standard form of hardship clause has set sight on making the parties equal in an event that the national laws make one of the parties disadvantaged as per the respected domestic rules and procedures. ICC clarifies its intent for generating the hardship clause by “to protect the disadvantaged party in case events have rendered performance more onerous than could reasonably have been anticipated at the time of the conclusion of the contract”. Pursuing the same purpose as the force majeure clause, the 2020 version of hardship clause has targeted to promote overall certainty in the times where many contracts are ceases to be unforeseeable. To realize this, for the cases where parties fail to agree on alternative contract terms, ICC has put forward three optional paths to be followed under the paragraph 3 which are i) party to terminate; ii) judge to adapt iii) judge to terminate.

The party invoking hardship clause may terminate the contract however in such case the adaptation by the judge or arbitrator cannot be requested in the absence of any agreement contrary. As for the authorization of judge or arbitrator, the parties may entitle the judge or arbitrator to adapt the contract for an equilibrium or if not applicable, to terminate the contract. In case the parties opt for adaptation, primarily, ICC recommends the judge or arbitrator to invite the parties in order them to provide their proposals which may be needed for resolving the case.

Indeed, these clauses are created to draw a map for the parties while designating their contracts in the face of COVID-19. These clauses will surely shed a light for the contractual parties in negotiating and drafting their contracts in this era when the contractual liabilities are shattered or precluded.

 Author: Ezgi Aysima Kır