New ICC model clauses on force majeure and hardship

30.03.2020

In March, the International Chamber of Commerce (ICC) updated its model Force Majeure and Hardship Clauses. In times of the corona crisis, such clauses, hardly ever relevant in the past, are getting more attention and it makes sense to review own contracts to see whether they can be optimized for the future.

The ICC offers two models of the force majeure clause, a long form and a short form. The ICC suggests to simply incorporate the long form in a contract by reference, whereas the short form could be included in its entirety. The content of the clause is covering what is governed by most force majeure clauses: It defines force majeure and stipulates that the party prevented or impeded from performing one or more of its contractual obligations by force majeure is relieved from its duty to perform its obligations under the contract and from any liability in damages for the duration of the impediment. The clause also provides for an obligation to give notice of the event to the other party. Additionally, it stipulates that a party engaging a third party to perform the contract may invoke force majeure only to the extent that the impediment to performance is established for the contracting party and for the third party. A right of termination is also provided for, which may inter alia be asserted if the duration of the impediment exceeds 120 days. When using the clause, it is advisable to determine in each particular case whether this period is appropriate in the relevant industry or relating to the goods to be delivered or whether a different contractual provision is more adequate. Changes may also be advisable in other respects. As an example, the long form of the clause stipulates that after termination a sum of money equivalent to a benefit derived before the termination is to be paid for to the other party (while the short form does not address this). Depending on the circumstances, however, it may be more appropriate for the object of the benefit itself to be returned. It may also be worth considering whether it would not make sense, in the event of temporary impediment to perform contractual obligations, to provide for an obligation on the party relieved under the clause to return any benefit (usually: money) that may have been received without delay. While these supplementary remarks do not argue against the quality of the clause, they are intended to illustrate that it is not good practice to adopt pre-formulated contractual passages without reflection even if they originate from such a renowned institution as the ICC. The need to adapt such contractual clauses to individual needs should always be considered. If this is done, the ICC clauses are certainly a good starting point, which, given their origin, will also enjoy ready acceptance by the other party.

The model clause on hardship,from the outset, encourages tailoring it to the specific needs of the parties, as it is available in three options. They cover cases in which performance of contractual duties is possible, but excessively onerous due to an event beyond that party’s reasonable control which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract and that it could not reasonably have avoided or overcome the event or its consequences. These are cases which, according to German law, are to be solved via the principles of interference with the basis of the transaction (Section 313 Civil Code). If the prerequisites are met, the clause provides for the parties’ obligation to negotiate alternative contractual terms which reasonably allow to overcome the consequences of the event. In its various alternatives, the clause then provides either for a right to terminate the contract or to adapt it (with different roles of the parties and the judges or arbitrators). If the provision of Section 313 Civil Code is to be applied to the contract nonetheless (this is the case with international contracts where “the laws of Germany in exclusion of the UN Convention on Contracts for the International Sale of Goods” have been agreed; in other cases, this is at least doubtful because the UN Convention on Contracts for the International Sale of Goods is partly considered to have a blocking effect towards Section 313 Civil Code), the ICC clause is not necessary. Section 313 Civil Code is then usually a good option. In other cases, the clause is quite useful and, since it is balanced, chances are good that the other party is willing to accept it.

Status: March 30, 2020