Force Majeure

Contract Design in Uncertain Times

Force Majeure

The current conflict in Ukraine raises difficult legal questions for many international companies. What happens if you cannot fulfil your contracts, or at least not fulfil them on time? Can the contract be legally terminated? Is there a risk of damage claims? What else must be considered in such a situation? 

According to Frank J. Bernardi, a renowned German lawyer specialising in commercial and corporate law, the French term “force majeure” essentially describes “only” circumstances that are referred to in international trade as an “act of God” or “hardship“. The International Chamber of Commerce, on the other hand, understands this term to mean an event that prevents a party from fulfilling one or more of its contractual obligations. 

However, it must be an impediment beyond the party’s reasonable control which could not reasonably have been foreseen at the time the contract was concluded and the effects of which could not reasonably have been avoided or overcome by the affected party. 

The UN Sales Convention (United Nations Convention on Contracts for the International Sale of Goods – CISG) also defines “force majeure” as a cause of impediment beyond the control of a party to the contract, where it “could not reasonably” have been expected of the party “to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.” (Art 79 CISG). 

The Austrian General Civil Code (ABGB) does not refer to force majeure as such, but to the accidental loss of an object (sec 1447 ABGB). However, Austrian case law has recognised the term “force majeure” and defined it as “an extraordinary external event affecting the business, which is unexpected, does not occur with a particular frequency and regularity, and which can neither be averted nor made harmless with the utmost reasonable care”. 

However, it is generally accepted that such events may include not just natural disasters (hurricanes, floods or earthquakes), but also acute threat of war and civil war-like conditions. This must be all the more true for a military conflict such as the one in Ukraine. 

Legal consequences in the event of force majeure 

In international trade, the non-performance of contractual obligations due to force majeure does not constitute a breach of contract. Rather, the contractual obligations are suspended – generally for the duration of the event. Therefore, the debtor does not have to perform and the creditor may not demand performance. The Austrian legal situation also provides for this: the occurrence of an event of force majeure results in the mutual cancellation of the obligations of the contracting parties – that is, the debtor is released from his obligation to perform and the creditor cannot insist on performance of the contract. There is also no culpable breach of contract by the non-performing party, which is why damages cannot be claimed. However, this only occurs if the parties have not agreed on any special contractual clauses. 

Contractual arrangements 

As a rule, however, contracting parties provide for special contractual provisions that regulate cases of “force majeure“. The legal consequences of force majeure are then modified in individual contracts. This is possible because the relevant legal rules – both at international and national Austrian level – are discretionary, i.e. these provisions can be waived. The contracting parties are thus entitled to regulate the legal consequences of a force majeure situation as they wish. It is especially advisable to agree on such a clause (“force majeure” or “hardship” clause) in all contracts with an international element. In this context, the International Chamber of Commerce also provides pre-formulated standard clauses, which then ought to be adapted appropriately for each individual case. 

It is common practice that any impossibility of fulfilment for third parties is also contractually regulated – this is particularly relevant in connection to supply chains, if, for example, the impossibility of contractual fulfilment does not occur between the contracting parties themselves, but between a subcontractor and one of the parties. This shows that a case of force majeure may not only affect the contracting parties, but also third parties involved in the performance of the contract. In this context, it is also generally useful to agree that the contracting party affected by the impossibility of fulfilment must immediately notify the other party of this circumstance. The parties can also provide for possible termination options, for example in the case that the event in question exceeds a certain duration. 

Conclusion 

The legal and contractual regulations on “force majeure” are not a dead letter. Unstable situations – which have become more frequent both during the pandemic and now also due to the Ukraine crisis – lead to legal uncertainty, especially in an international context, which can best be addressed by contractual regulations. In the future, we can expect contracting parties to discuss cases of force majeure much more intensively than before given the background of recent crises, in order to cushion potential economic disadvantages and legal uncertainties as much as possible. 


AUTHORS:

Mag. Valentin Neuser, Attorney-at-Law and Managing Partner at LGP
Mag. Andreea Muresan, Associate at LGP

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