Go to Database Directory || Go to Bibliography || See also Commentary on Kessedjian's "Competing Approaches to Force Majeure and Hardship" by Joseph Lookofsky

Reproduced from 25 International Review of Law and Economics (September 2005) 641-670.
Copyright 2005, with permission from Elsevier

Competing Approaches to Force Majeure and Hardship

Catherine Kessedjian [*]
Université Panthéon-Paris II, France

  1. Introduction
    1.1    Inventory
             1.1.1    The CISG
             1.1.2    The Unidroit Principles
             1.1.3    The European Principles
             1.1.4    The ICC force majeure and hardship clauses
             1.1.5    A few glances at national law
    1.2    How to decide between the application of International or regional /local law?
             1.2.1    The interplay between substantive international and domestic norms
             1.2.2    The interplay between international and regional norms
             1.2.3    What hierarchy between State-made law and soft law?
  2. Conclusion: Is competition between norms a good thing
        Further reading

1. INTRODUCTION

It is quite ironic that at this stage in my professional life, I am asked to work on force majeure and hardship [1] since this is exactly the topic I chose many years ago for a paper as a student in International Commercial Transactions at the University of Paris under the direction of the late Professor Bruno Oppetit. Even though I moved three times since then and did not find a copy of the paper (I probably did not consider it worth keeping), I did find a large box of notes, articles, and research materials which I reviewed for this paper. First, I have to note that the content of the research done at that time is still very relevant, as the substantive law has not changed significantly. However, there was no trace of a discussion of legal pluralism, as I seem to have taken for granted at that time that "real" law could only emanate from the State. The Unidroit Principles did not exist then, and it was only after my paper was drafted that the special working group was established. I also found a draft of the ICC model clauses [2] in the box which were mentioned in passing in the notes and only to the extent they were differing or in accord with national law. Hence, the study was essentially one of comparative law and practice, as I had done a small amount of field research, meeting with house counsel of a few corporations dealing with international trade and some practicing attorneys, as well as interviewing a judge. While I did not interview [page 415] an arbitrator, I did review all arbitral awards published in the Journal du Droit International and the Yearbook on International Commercial Arbitration.[3]

Fortunately, the literature since then has not dried up.[4] This is quite easy to understand as hardship and force majeure go to the very core of the contract (the performance) and reveal, when they are claimed, what conditions the parties had in mind at the time of the conclusion of the contract.[5] Indeed, parties to a transaction are expected to have foreseen events which may interfere in the equilibrium of the contract so as not to impair what is usually referred to as "the sanctity of contract" or pacta sunt servanda. Claiming hardship or force majeure is considered to be an "acte grave" in the life of a contract. Thus, it is not surprising that there are so many competing approaches in force majeure and hardship, competition which is fairly easy to identify and demonstrate. If one starts with the United Nations Convention on Contracts for the International Sale of Goods (CISG), since this colloquium is centered on this instrument, then one needs to quote Article 79 and its sister provision, Article 80. However, these provisions are far from being the only ones available internationally.

In Section 1.1 below, we will have a look at some of these provisions without forgetting the national laws which may be deemed applicable to an international transaction.[6] After having studied each of these principles and rules, we will look at their competition or cooperation or coordination. Indeed, given this multiplicity of norms in this area, market participants need to know whether there are some criteria which allow one to organize these competing ideas, and how they work. Thus, we will look at such issues as the interface between international law and regional/local law and the hierarchy (if any) in Section 1.2, or the coordination between law and soft law in Section 1.3.

1.1. Inventory

In this part of our paper, we will look at the CISG, the Unidroit Principles, [7] the European Principles,[8] the ICC force majeure and hardship clauses,[9] as well as a few domestic systems. [page 416]

1.1.1. The CISG

Anybody who has studied the CISG, even cursorily, knows that the text avoids the words "force majeure" and "hardship" just as it avoids terms which are too culturally linked with any particular country. John Honnold, one of the most prominent drafters of the text, explained that by doing so the drafters wanted to avoid any reference to concepts pertaining to local legal systems. They wanted the Convention to stand by itself and be interpreted to the furthest extent possible under general principles of international law, with due regard to its international character and the necessity to promote uniformity in its application. Thus, any consideration of a domestic system is to be left as a last recourse if all other methods fail to provide an answer to the question at stake.[10] Such a choice by the drafters also followed international practice. For example, the border between force majeure and hardship also tends to blur in FIDIC practice. [11]

The recourse to good faith in the interpretation of the Convention is the axis around which the entire Convention turns and its functioning is organized. This is why we mention this principle at this early stage and we will revert to it from time to time when necessary to clarify the application of the textual provisions.

The provision which is the equivalent of a force majeure clause is Article 79. It is placed in a section entitled "exemptions".[12] It must be noted that the provision is bilateral, i.e. it applies equally to the buyer or the seller. It provides:

There are two cumulative conditions for the exemption to be possible. The first condition is that the party who claims exemption is faced with "an impediment beyond [its] control". The second condition is that either the impediment could not have been reasonably foreseen at the time of the conclusion of the contract; or the party could not reasonably avoid or overcome the impediment or its consequences.[13] These conditions induced one author to speak of the party claiming force majeure as the "truly innocent" party.[14] Indeed, the two branches [page 417] of the alternative in the second cumulative condition refer to more general principles of international trade law. As far as the first branch is concerned, any party to a transnational sales contract is deemed to be a "professional". As such, she is expected to analyze the market, the situation in the country(ies) where the manufacturing of the goods takes place, where the delivery should occur, where the transport passes, and so on for each step in the performance of the contract. Such an analysis would require the party to foresee a large number of events, particularly in the unsettled world in which we are, so much so that the first part of the condition may not be fulfilled very easily.[15] This is why the second branch of the alternative is so important. This part of the condition refers to yet another general principle of international trade law, that each party controls acts which are internal to their structure. Thus, internal excuses connected with business operations, general management of the company, financial structuring of the activities or social management of the undertaking, will probably never be accepted as events beyond the control of that party.[16] In other words, the force majeure provision of the CISG is yet another way to allocate risks inherent to an international commercial transaction. A very good example of this could be the case of a producer whose products contain a defect. He could never claim force majeure, for under no circumstance would a defect in the production process be considered beyond the control of the producer.

The length of time during which the force majeure event takes place is also important. If the event is temporary, the exemption from liability is accepted only during that period. The provision, however, does not deal with the consequences of the event after its end. Supposedly, the contract must be performed as if nothing had happened. However, it may very well be that the event incurred some adverse consequences for one or the other party but the Convention does not say that the contract must be adapted. Could we use Article 7 and the good faith requirement to say that, in such a case, parties are under an obligation to adapt the contract? We are of the opinion that we should since it is difficult to imagine that the force majeure event; however, temporary it may be, would have no impact on the initial equilibrium of the contract.[17] The Convention is also silent with regard to the consequences of a permanent force majeure event. However, an explicit provision does not seem to be necessary as it is clear, by implication, that the party who claims force majeure is then permanently excused. [page 418]

Another silence in the Convention is perhaps more worrisome. The Convention does not provide criteria to distinguish between a temporary and a permanent event. If the parties do not agree to the time characterization of the event, there may be room for the contractual dispute resolution mechanism to be put into activity. However, if the parties have chosen to revert to arbitration it may be too long a process to resolve this simple dispute. It may be advisable for the contract to provide a specific rapid mechanism avoiding the recourse to a complicated arbitration proceeding. We will revert to this question when we study the ICC clauses.

The complementary provision of Article 80 is one of common sense, but it was nonetheless included in the Convention. If the failure of B is caused by A, A cannot rely on that failure to claim exemption or other rights under the Convention. In other words, a self-induced force majeure has no application. It is strange that such a provision was deemed necessary by the drafters since it is hard to understand how a self-induced event could be beyond the control of the party who invokes it. This is why an equivalent provision cannot be found in the other instruments which are studied in this paper.

There is no equivalent to a hardship clause in the CISG. The legislative history is unclear about the reasons why such a provision was not included. One would think that in a sale agreement one can either perform or not perform. However, one can easily imagine circumstances in which a sale agreement may become very onerous. For example, a sharp drop in market prices may render the contractual price too onerous for the buyer, or a sharp increase may render the contract economically non-viable for the seller. Article 79 alone does not provide a solution for such an occurrence.[18] Knowing that, it is clear that the parties must provide for a hardship clause in their contracts, otherwise, they run the risk of a lengthy dispute on the very question of whether the CISG allows for such a defense. Without pretending to fully cover the ground, here are the main arguments in this debate. It runs around the question whether the CISG pretends to be complete. In our view, the CISG is not complete and the drafters have wisely provided a mechanism to supplement its provisions. This mechanism is to be found in Article 7(2) (without forgetting that the entire Convention is based on good faith as provided in Article 7(1)).

According to Article 7(2), we must first look at "general principles" which may be said to form the basis for the Convention. It must be noted that general international law provides for a rebus sic stantibus principle. Indeed, the 1969 Vienna Convention on the Law of Treaties (Article 62) states:

"A fundamental change of circumstances which has occurred with regard to those existing at the time of the conclusion of a treaty, and which was not foreseen by the parties, may not be invoked as a ground of terminating or withdrawing from the treaty unless: (a) the existence of those circumstances constituted an essential basis of the consent of the parties to be bound by the treaty; and (b) the effect of the change is radically to transform the extent of obligations still to be performed under the treaty." [page 419]

But this general principle may not be applied by itself to matters regulated by the CISG. Indeed, the Vienna Convention principle is limited to the instrumentum (the treaty itself) and not its content (the law of sale). Hence, we need to find out whether this general principle of the law of treaties has permeated into international commercial law. So far, the answer is unclear and may still be negative. Without going into the details of the difficulty to ascertain where to find "general principles of international commercial law,"[19] we will assume that, at least, decisions of arbitral tribunals are a good beginning. Very few arbitral tribunals, in a published award, have applied such a principle absent a clear agreement of the parties to do so or a provision in the applicable law.[20] If the parties have referred to the Unidroit Principles in their contract, then it is easy to answer that the hardship rule of these principles must apply.[21] However, if the parties have not referred to the Unidroit Principles, could a tribunal decide that they constitute the "general principles on which [the CISG] is based"? Strictly speaking, this conclusion cannot be obtained for a formal and a substantial reason. Formally, the Vienna Convention having been adopted in 1980, the CISG cannot be said to be "based" on principles adopted in 1994. In substance, the Unidroit Principles accepted a hardship principle when, at the time, it was unknown in a number of systems, at least in civil and commercial matters and not accepted as a principle of international commercial law. Having said that, however, one must reflect on the law as it stands now, particularly with regard to the good faith principle [22] on which the CISG is based (Article 7(1)). It may very well be that, in 2004, international commerce has evolved in such a way as to require that a hardship principle always be underlying transactions. In our view, this question must be answered by the operators themselves, not by legal scholars.

1.1.2. The Unidroit Principles

The Unidroit Principles contain two separate provisions, one on hardship included in Chapter 6 on Performance; and one on force majeure included in Chapter 7 on Non-Performance.

1.1.2.1. The hardship rule

When the Unidroit Principles were adopted in 1994, it was the first time in the development of international commercial legal norms, that a principle of hardship was recognized independently of contractual provisions. Before that, no arbitrator (obviously in a published award) had ever overridden the principle pacta sunt servanda [page 420] to decide that the contract should be adapted to a change of circumstances. Judges only applied a hardship principle if the lex contractus allowed them to do so. Hence, this is an example where the Principles fail to be a "codification" (or a "restatement") of international commercial law and practice as this instrument has been presented so often. It is also strange that Comment 7 to Article 6.2.2 speaks of the fact that contracts "often contain" precise hardship clauses. In a field survey (not pretending to be exhaustive) conducted in 1995, many in-house lawyers had said that they did not include a hardship clause in their contracts because they wanted the risk allocation to be clearly provided and not left to future changes.[23] Some of them justified their position by saying that it was more difficult to obtain insurance coverage for their long term contracts when they included a hardship clause.

Let's have a look at what the provision does provide. First, it must be noted that the drafters were prudent in that they affirmed at the forefront of the section on hardship that the contract must be "observed" (Article 6.2.1) because of the prevailing principle of its binding force. The comment tells us that the changes of circumstances will have an impact on the contract only in exceptional circumstances.

A hardship event is defined as one which "fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished." [24] A contradiction can be noted with the previous statement that only "exceptional circumstances" lead to a hardship. In fact, if that line of reasoning would have been followed, the increase in the cost or the diminution in the value should have been qualified in the black-letter rule, as they are in the commentary where they are characterized as "substantial". The fact that the equilibrium itself must be "fundamental" may not be sufficient to make sure the hardship clause will not be claimed too often, sacrificing security for adaptation.

In addition to the definition ratione materiae of the hardship event, Article 6.2.2 defines the conditions allowing a party to claim the hardship. They are as follows:

One may wonder why the last requirement was formulated since, if indeed, the first requirement is met (all four must be met), it is quite clear that the disadvantaged party could not assume the risk.[25]

The effect of the hardship is somewhat mild. The disadvantaged party is "entitled to request renegotiations" of the contract.[26] The black-letter rule does not incorporate any [page 421] obligation by the other party to participate in the renegotiations. However, the comment suggests that such duty is a consequence of two other principles set forth in the Principles: that of good faith (Article 1.7) and that of cooperation (Article 5.3). The disadvantaged party does not have the right to withhold performance by the sole fact that it requested renegotiations.[27] If renegotiations fail, either party may resort to court.[28] By "court", we assume the Principles mean to resort to the dispute resolution mechanism which has been agreed upon in the contract. This interpretation is not given anywhere in the commentary but we would be surprised if the provision of Article 6.2.3(3) was to be understood as a jurisdictional rule. Indeed, it is not precise enough to fulfill the requirement of such a rule, with no guidance being given to allow the localization of the court at stake. The text ends with some guidance to the "court". If hardship is found to exist,[29] the court may decide to terminate the contract or to adapt it. This guidance will be extremely difficult to follow by courts around the world whose legal/judicial system does not allow judges to adapt the contract. Also, in many countries, judges are not specialized and have very little knowledge of economic relations and conditions. The decision to adapt the contract may thus be very difficult for them to take.

1.1.2.2. The force majeure rule

Contrary to the CISG, the Principles do use the expression "force majeure" in the title of Article 7.1.7. The commentary specifies that this provision deals with common law concepts of frustration and impossibility of performance, but it is not identical to any of these doctrines. It adds that the term "force majeure" was chosen because it is "widely known in international trade practice."[30]

Having said that, the first rule contained in the English version of Article 7.1.7 is, apart from formulation style, identical to the provision of Article 79(1) of the CISG. The same conclusion may be drawn from the comparison of Articles 7.1.7(2) and 79(3); Articles 7.1.7(3) and 79(4); Articles 7.1.7(4) and 79(5). Hence, we would ask the reader to revert to our comments on the CISG's provisions. Article 79(2) of the CISG, however, has no equivalent in the Unidroit Principles. Neither does Article 80 of the CISG. No explanation for this gap is provided in the comments.

1.1.3. The European Principles

For non-Europeans readers, we would like to provide a very brief introduction as to the nature of the European Principles. The project started as a purely academic exercise by a group led by the renowned Professor Ole Lando, who taught the great part of his career at Copenhagen Business School. This is important since Professor Lando was always a pragmatist and viewed this idea of a unified European contract model law as a service to the business community. His project was partly funded by the European Commission in Brussels, but it never became a product of the European authorities. In the European [page 422] Commission's communication on a potential unified European Contract Law of 2001, the status of the "Lando Principles" (as they are known) is very unclear and the Commission does not seem to take full advantage of the work that has been done under the able and pioneering leadership of Professor Lando.

A note on drafting of the European Principles must also be added in this introduction. Very much modeled on American Restatements, they contain three parts for each provision: (1) the black-letter rule; (2) the Comments, which include illustration;[31] (3) notes which are references to domestic case law of Member-States of the European Union. [32]

The European Principles, much like the Unidroit Principles, contain two separate provisions, one for hardship (Article 2.117 -- Change of Circumstances) located in Chapter 2 entitled "Terms and performance of the contract"; and one on force majeure (Article 3.108 -- Excuse Due to an Impediment) located in Chapter 3 entitled "Non-Performance and Remedies in General.

1.1.3.1. The hardship provision

The European Principles have avoided the use of the term "hardship" in the title and text of Article 2.117. Instead, they have adopted the more neutral expression "change of circumstances" which has the merit of describing exactly what the provision's objective is, i.e. try to adapt the contract if some kind of change has occurred since its conclusion.

The definition of events that would trigger the provision is more clearly defined than in the Unidroit Principles. The event must cause such a change that the "contract becomes excessively onerous". The rule does not go into more details such as those given by the Unidroit Principles which tended to blur the initial concept. The other conditions are similar as the ones contained in the Unidroit Principles and thus need not be underlined again here.

As far as the effects are concerned, the burden of renegotiation falls clearly on both parties and it is a duty for them to renegotiate the contract: "the parties are bound to enter into negotiations." This has the merit of reminding parties that even though there may be only one party who suffers from the change of circumstances, they are both in the same boat and they had better steer en bonne intelligencé rather than in contrary directions. In addition, Article 2.117 clearly provides that there may be two goals to the renegotiation -- either adapt the contract or terminate it. The second objective renders this rule closer to a force majeure provision, but it also stems from a sensible business reasoning: if the contract has to be terminated, it is better that its termination be organized smoothly with a common understanding among the parties instead of a unilateral action by one of them.

The last part of the provision provides legal recourse similar to that of the Unidroit Principles. The same remark as was made for the Unidroit Principles is applicable here and the provision must be read as a resort to the dispute resolution mechanism, if any, which has been chosen in the contract. Having said that, there is a difference between the two provisions. In the European Principles, the court not only has the choice to adapt or terminate the contract as is the case in the Unidroit Principles, but it also can award damages "for the loss suffered through the other party refusing to negotiate or breaking off [page 423] negotiations in bad faith." This is a direct consequence of the duty imposed on both parties to enter into renegotiation of the contract. The provision is bilateral and could catch the mala fide attitude of the disadvantaged party as well as that of its partner.

1.1.3.2. The force majeure provision

As for the hardship provision, the European Principles do not use the expression "force majeure", but one which is closer to that used in the CISG of "excuse due to an impediment". The comment explains that Article 3.108 must apply only when the event prevents performance and not in other circumstances.

The conditions under which the provision operates are very similar to the CISG or the Unidroit Principles. Nothing major makes it specific apart from the fact that, as in the Unidroit Principles (and contrary to the CISG), nothing is provided in case the impediment occurs with a third party which has been entrusted by one of the contractual partners to perform part of its own obligation. Thus, there is no equivalent here to Article 79(2) of the CISG. In our view, however, the absence of a specific provision to that effect may not prevent a party from using such an occurrence since force majeure with a third party may very well be covered by the characteristics of force majeure under Article 3.108. All will depend upon the exact circumstances of each case.

As far as notice and effects, the European Principles do not depart really from either the CISG or the Unidroit Principles.

1.1.4. The ICC force majeure and hardship clauses [33]

The main characteristic of these provisions is contained in the fact that they are model clauses to be incorporated by parties who may find it easier to do so than to negotiate clauses on their own. These provisions do not pretend to be self-applying. In some respect, and because they contain some variants or a clear call for contractual deviations, parties may still be inspired to exercise some choice instead of just making a general reference to the ICC clauses. Later in this paper, we will ask whether, even in contracts where they have not been incorporated, these clauses could be used by courts or arbitral tribunals as evidence of a practice in international contracts. For time being, let's discuss the main important features of these clauses.

1.1.4.1. The hardship clause

The hardship clause does not call for long comments. It starts with pacta sunt servanda as did the Unidroit and European Principles provisions, even if the circumstances have rendered the contract more onerous than expected. Hence, the threshold in order to trigger application of hardship is higher than just an increase in the cost or a decrease in value.

The characterization chosen here is the same as in the European Principles: the contractual duties must have become "excessively onerous". In addition, the event must be outside the reasonable control of the disadvantaged party and could not be reasonably expected to have been taken into consideration at the time of the formation of the contract and could not [page 424] reasonably have been avoided or overcome. The same must be true for the consequences of the event.

As far as the effect of the hardship, again the European Principles have been followed by the ICC drafters in the general idea. The hardship results in a duty to both parties to take a seat at the negotiating table in order to come up with "alternative contractual terms which reasonably allow for the consequences of the event."

However, a drastic departure from the Unidroit and the European Principles lies in the fact that the ICC clause provides for the termination of the contract at the will of the disadvantaged party, if the parties could not reach an agreement on the renegotiation.[34] Paragraph 3 seems unfortunate in as much as it does not give a real incentive to the parties (or at least to the disadvantaged one) to try their best in efforts to renegotiate the contract.

In addition, the explanatory note says that the clause "should encourage the parties to work out their own solutions through a general dispute resolution clause" and not with a specific resort to court. We agree with the last part of the statement. As mentioned earlier, the resort to "court" without any more specificity in the Unidroit and European Principles is not very satisfactory either, but there is a case for providing a specific method of dispute resolution in case of a change in circumstances. The method we would favor is one of mediation or arbitral "référé", framed within a short period of time so as not to dilute the contractual benefits. This method should be available after a short period of time when the parties have tried their best to renegotiate by themselves. Termination should occur only as a very last resort and as the worst case scenario, unless it is demonstrated that neither party has an interest in having the contract survive with altered conditions.

1.1.4.2. The force majeure clause

The most interesting feature of the ICC force majeure clause is that the drafting group has decided not to limit itself to a general rule as in the CISG, the Unidroit Principles or the European Principles, but also to draft a list of events. The effect of the list is to alter the evidential balance in favor of the party invoking the clause.[35] In comparison with the ICC 1985 clause, it is not just an illustrative list.

The second feature resides in the fact that, in the definition of the conditions which may trigger the application of the clause, the word "reasonably" appears three times and is used again several times in the core of the clause. We all know how difficult it is to translate a reasonableness requirement into concrete rules of conduct. Nonetheless, it still attracts contract drafters.

The clause incorporates the equivalent of Article 79(2) of the CISG, which was missing both in the Unidroit and the European Principles.

The list of events provided by 3 of the clause is fairly classic. A sign of the current state of affairs is shown in sub-paragraph [c] where "acts of terrorism" are mentioned.

The effect of the force majeure clause is almost identical to that provided in the CISG, the Unidroit and the European Principles, but it is clarified in greater detail than in any of these other rules. If the impediment is temporary, the contract is suspended and no damage can be claimed. In such a case, the contract will most certainly need adaptation and the clause does not provide how this is to be done. If the impediment is "substantial", the [page 425] contract is terminated. It is interesting to note that the drafters have chosen not to define temporally the occurrence when the contract may be terminated, but instead they use a ratione materiae test. The termination is possible only if the impediment would have the effect "of substantially depriving either or both of the contracting parties of what they were reasonably entitled to expect under the contract." The explanatory note says that the drafters were inspired by Article 25 of the CISG and the equivalent provisions in the Unidroit and European Principles (respectively, Articles 7.3.1 and 8.103).

1.1.5. A few glances at national law

In France, force majeure was always part of the civil law and is codified, for contractual obligations, in Article 1148 of the Civil Code, which provides: "Il n'y a lieu à aucuns dommages et intérêts lorsque, par suite d'une force majeure ou d'un cas fortuit, le débiteur est empêché de donner ou de faire ce à quoi il était obligé, ou a fait ce qui lui était interdit."

It must be noted that force majeure is not a public policy theory. Hence, parties may deviate by contract from accepted definitions of what constitute a force majeure event and as to the consequences of that event. Could they altogether exclude force majeure from applying to their contract? This question is hardly dealt with in books on contract law since it seems so evident that the parties cannot do so as it would run against the good faith principle.[36]

In civil and commercial law, hardship does not have application [37] apart from the specific and limited exceptions provided for by the legislator.[38] Pacta sunt servanda is an overriding principle forbidding adaptation of private contracts to economic changes. Now, this rule -- apparently carved in stone -- is probably slowly changing. Indeed, the present Cour de cassation is attracted and influenced by foreign theories. It may very well be that a hardship theory could finally be accepted. Indeed, a decision rendered by the first chamber of the Court on March 16th, 2004 [39] could be one more step to such an acceptance after two decisions from the commercial chamber.[40] The party who claimed that it was confronted with an economic impossibility to perform the contract was nonetheless ordered to pay damages to its contractual partner because, as the Court of Appeals noted, that party did not claim a change in the economic equilibrium of the contract after its formation but as it existed already at the time of its formation. The Cour de cassation approves the Court of Appeals and particularly its reasoning. Implicitly and a fortiori, the decision may be interpreted in the sense that, if the economic circumstances had arisen after the formation of the contract, damages may not have been ordered and the parties would have been bound by a duty to renegotiate. This duty would be stemming directly from the good faith principle which permeates all of French contract law. Having said that, it is much too early [page 426] to say more since in order to apply hardship, one needs to define many more aspects (as explained earlier when we presented the ICC clauses) which so far do not exist in French law.[41]

The European Principles [42] explain that some degree of hardship theory is accepted in Germany, The Netherlands, Italy, Greece, Portugal and Denmark, even though in some of these countries only the judge, and not the parties, can adapt the contract.[43] As far as force majeure is concerned, all European countries whose system has been studied by the Lando Group, know a force majeure theory more or less similar to what is recognized by most norms explored above in this paper.

In English law, the performance of a contract is not generally excused by an adverse change of circumstances. [44] It is the doctrine of frustration which dictates whether impediments to performance created by post-contract events discharge the parties from future performance. A contract is said to be frustrated when a supervening event occurs which so fundamentally affects the performance of the contract that, in the eyes of the law, the contract comes to an end and both parties are discharged from any future duty to perform.[45] If the contract is frustrated, it automatically comes to an end, whether the parties know it or not and whether they want it or not. If it is not frustrated, the parties must perform, however burdensome the contract may have become and however much the circumstances may have changed. There is no duty on the parties to renegotiate and no power on the courts to adapt the contract. Thus, under English law, hardship and force majeure are entirely left to contractual terms.[46]

In the United States, as Gillette and Walt state, "prior to the UCC, these cases were decided under principles of "impossibility" or "frustration of purpose". The UCC integrates these principles into excuse or commercial impractibility under 2-615."[47] As the authors explain, on its face, the provision applies only to sellers, even though some courts have been more generous and have applied it, mutatis mutandis, to buyers as well. In order for 2-615 of the UCC to apply, the "performance as agreed [must have] been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made." For a civil law lawyer, the most striking aspect of the provision is the fact that it is drafted in the negative form. Hence, it seems that the legislator had the intention to have it apply only rarely. Gillette and Walt explain that a narrow construction of the provision is necessary because the test is difficult to prove and the parties are better able to allocate the risks of changed circumstances in the contract itself. If they have not done so, in other words, tant pis pour elles! The examples they provide of cases rendered [page 427] in the United States under the application of 2-615 are significant of the difficulties courts have had to apply the test.

1.2. How to decide between the application of international or regional/local law?

We will limit ourselves to two main problems: (1) the interplay between substantive law and private international law in determining whether international or local norms apply, and (2) determining when regional norms apply.

1.2.1. The interplay between substantive international and domestic norms

In this part of the paper, we will deal with a not-so-classic conflict of laws analysis trying to determine whether an international norm has to be applied directly, without regard to conflict norms, or whether conflict of laws analysis must always precede the application of an international substantive norm. We have already demonstrated elsewhere [48] that an international substantive norm is superior to a conflict norm for many different reasons, the most important being that it requires a simpler analysis which potentially gives an immediate answer to the question at stake.[49] This is why when a substantive norm exists, such as the CISG, operators and judges must look at that norm first and determine whether, according to its own scope of application, it is applicable to the matter in question. It is only when it is not the case, that the reasoning must go back to a conflict of laws analysis and designate a domestic set of rules. The fact that the CISG includes a conflict analysis in its own scope of application does not change our reasoning. Indeed, the CISG innovation was due to the belief that it would permit a larger number of applications of the Convention even at a time when it was not yet largely ratified.

In other words, there is no competition between an international substantive norm and a conflict norm; they do not play the same role. The conflict norm is a second-best rule applicable only when no uniform substantive rule exists. When such a rule does exist, there is no conflict so to speak, and hence no need to use a norm devoted to solve conflict of laws. Operators on the market prefer a uniform rule to a conflict one as they get directly the answer to their question instead of having to go through an indirect conflict analysis which has become more and more complicated.[50]

1.2.2. The interplay between international and regional norms

It would be very easy to give a solution to that kind of a competition if the existing instruments included a clear territorial scope of application. Unfortunately, apart from some international conventions, such as the CISG, which do include a provision on territorial scope, some regional instruments do not. Even the CISG has somewhat blurred its clear territorial scope in Article 1(1)(a) with the details included in Article 1(2) and 1(3), by [page 428] adding the now famous provision in Article 1(1)(b) already mentioned. Even more so when the Convention allowed State Parties to make a reservation.[51]

Apart from that, the CISG itself provides for precedent of regional or local agreements in Article 90 as long as both parties "have their places of business in States parties to such agreement." This is, in a way, a special application of the principle lex specialis generali derogat.

For regional instruments, there are implicit ways to define a territorial scope. For example, if we look at rules on consumer protection, it would be fair to say that these rules are applicable to consumers established on each of the territories which are part of the regional integration issuing the rule. This does not solve all questions though. First, there may be a claim that the rule is contrary to general principles of non-discrimination. Second, what happens when the consumer transaction has been entered into via a modern means of communication such as the Internet and the co-contractant of the consumer is located in a third country? Third, a variant of the second question occurs when the consumer goes to a third country after having been induced to do so by the business with which the transaction has been concluded.

Similarly, difficult questions arise with the European Principles. If one looks at the Preamble, the list of cases in which these Principles apply is so close to that included in the Unidroit Principles that it provides no guidance at all to solve the question of when the European Principles are applicable in comparison with the Unidroit Principles. Note that both drafting groups have refrained from trying to define a territorial scope. This could be understandable for the Unidroit Principles as they want to be truly "universal". It is less so for the European Principles. A safe solution would be to say that the European Principles only apply if both parties to the transaction are European community "citizens",[52] and their contract must be performed in the European Union. Is not this too restrictive? Alternatively, we could say it is enough to have the contract performed in the European Union. This criterion, in turn, may be too large. It has been used by the European Court of Justice for the application of European mandatory rules. [53] However, it may not be adapted to non-mandatory norms.

Finally, we should mention the OHADA system, which favors uniform acts instead of harmonization, is contrary to the name of the organization itself. The Council of Ministers decided in March 2001 (in Bangui) to prepare a number of additional uniform acts, including one on contracts. In February 2002 (in Brazzaville), the Council requested the Permanent Secretariat to contact Unidroit to seek help. Unidroit accepted that request and obtained financial support from the Swiss Government.[54] Thus, the Unidroit Principles are taken as a starting point model but local specificities must be taken into consideration. It is unclear, [page 429] however, whether there will be an applicability rule in the act and if so, what will it be. It would be very important to clarify such a question and not leave it without a solution.

1.3. What hierarchy between State-made law and soft law?

First, let's clarify what we understand by "State-made law" and "soft law". A norm is State made when the State has participated in its creation with its public authority, whether the State acts locally or internationally. An international convention, whether bilateral or multilateral, regional or with a universal aim, is part of State-made law. On the contrary, such a document as the European Principles (the Lando Principles) falls clearly into the second category. The same is true for the Unidroit Principles, even though they have been adopted by the Council of an International Organization.[55]

The very first question to be answered is whether there exists a general principle of law accepting force majeure and/or hardship in international commercial contracts.[56] Indeed, if such a principle does exist part of the difficulty is solved. The details may not be well developed in international law and tribunals may have to revert to some applicable domestic law to decide exactly the conditions and consequences of the changed circumstances.

To my mind, there is very little doubt that a force majeure principle does exist. This is true not only in general international law but also because, even though it may not be called force majeure, all legal systems do have some kind of excuse for impossible performance.

However, the question is not as clear for a hardship principle. There may be a strong policy behind accepting such a principle. Indeed, as François Ost rightfully puts it, the law suffers from excessive opposition to change and undue trust in the established rule of law.[57] If that's so, the competition which may exist between legal systems which accept a hardship principle and those which refuse it may be healthy.

Second, we should not forget that we are dealing with a field in which party autonomy is the supreme principle. Any other rule is to be considered as a default rule, one which will be applied only if the parties have not expressed a different rule to regulate their conduct and activity. The only exception would be if one or more of the rules we have studied in our inventory would take the nature of a public policy rule or a mandatory rule.[58] In domestic law, we have been unable to find such mandatory rules either for force majeure or for hardship. The CISG is almost entirely left to the will of the parties apart from a few provisions, which do not include Articles 79 and 80.[59]

Article 79 of the CISG has a very large scope of application. As long as the Convention is applicable, it will give the solution to an exemption situation even if the obligation which has not been performed is one contained in the contract or in a different text, e.g. a domestic [page 430] law held applicable to the contract.[60] This would be the case for issues which are left out of the Convention such as the transfer of ownership.

Could the ICC model clause on force majeure be used as an example of trade usages? The main specific feature of the ICC clause is that it includes a list of events which are considered, by the drafters, at least as a presumption that they constitute a force majeure event. Such a list has been provided in no other instrument studied in this paper. Because it is issued by a working group established under the auspices of a business organization, having branches in a great many number of countries and the working group was open to all, we are inclined to think that the list could very well be used by courts and arbitrators as an evidence of some trade usage. However, because the list establishes a presumption, it must not be considered as a closed, exhaustive list. If events of the same nature occur in the future, they could still be considered as force majeure even if they have not been specifically mentioned in the model clause.

What about the Unidroit or European Principles? They can be used to complement CISG or domestic applicable law, but in no way could they replace it. In our view, however, they can do so only if they have been clearly agreed upon by the parties to the transaction. It may not be not enough to have a general clause speaking of "general principles of law" or trade usages, even though the Principles themselves specify that this is possible. But they have no authority to say so as they cannot proclaim themselves to have such a nature.

2. CONCLUSION: IS COMPETITION BETWEEN NORMS A GOOD THING?

This very question has been bothering us for a long time. We do not pretend to have a clear and definite position and we only wish to specify a few ideas which will certainly evolve in the future.

Competition, in general, engineers one clear consequence: it lowers the prices of goods and services. Whether that's a good or bad consequence is debatable, and we would not go into this debate here. We only want to stress that competition of norms has exactly the same consequence: it lowers the level of regulation and accepted norms. This is probably the only comparison that can be made between commercial competition and legal competition. Indeed, legal norms have a different function than commercial or technical norms on the market. Legal norms have a regulation function. They are there to ensure that the market works properly and that operators on the market know in advance upon which standards their conduct will be judged. This is why, in a global environment, the idea of uniform commercial rules has prevailed. It is somewhat of an ideal goal which is not always possible to achieve or to achieve fully. Hence, hopefully, uniform conflict of laws norms will be there to help resolve conflicts. The true chaos will remain when neither uniform substantive nor uniform conflict norms will have been adopted at an international level. Domestic conflict rules are not very helpful in solving the conflicts between diverging domestic substantive rules, particularly in a globalized environment, as the uncertainty of the ultimate solution is too important. [page 431]

Having said that, however, we do not deny that, in a field where party autonomy is so important, it is good for a sophisticated negotiator to have so many models from which to get inspiration. It is always better to draft clauses in a contract with many different sources so that the clauses become as close as possible to one's own needs and the special circumstances of the activity which occasions he drafting of the contract. However, this is only true for a sophisticated operator. We should not forget that the great majority of the world's economic system is made of small- and medium-sized businesses which lack the sophistication and the means (financially and in human resources) to "use" the competition.

From the point of view of States, the competition between norms induces a race to the bottom which may be dangerous. First, States [61] lose their ability to create norms in the interest of the people which may give a certain "encadrement" (framework) to business and commercial activities. Second, because of this, States are tempted to characterize most of their legislation as "public policy" (ordre public or lois de police), since this is the only obstacle which is still considered as legitimate (but for how long?).[62] This trend is clearly not in favor of operators and may be considered as an adverse consequence of the competition of norms.


FURTHER READING

Almeida Prado, Mauricio (2003). Le hardship dans le droit du commerce international. Brussels: Bruylant.

Doudko, Alexei G. (2000-2003). Hardship in contract: The approach of the Unidroit Principles and legal developments in Russia. Rev. Dr. Unif., 483-509.

Draetta, Ugo. (2002). Hardship and force majeure clauses. International Business Law Journal, 3-4, 347-358.

Draetta, Ugo. (2001). Les clauses de force majeure et de hardship dans les contrats internationaux. Diritto del Commercio internazionale, 15-2, 297-308.

Farnsworth, E. Allan. (1991). United States Contract Law. Transnational Juris Publications.

Fauvarque-Cosson, Bénédicte, "Le changement de circonstances," in Revue des contrats, 2004.

Fontaine, Marcel, & Filip de Ly (2003). Droit des contrats internationaux: analyse et rédaction de clauses. 2nd ed. Bruxelles/Paris: Bruylant/FEC. Chapters IX (hardship) and X (force majeure).

Gillette, Clayton P., & Walt, Steven D. (2002). Sales law -- domestic and international. Foundation Press.

Goode, Roy. (2004). Commercial law (3rd ed.). Lexis Nexis.

Heuzé, Vincent. (2000). La vente internationale de marchandises -- Droit uiforme. LGDJ.

Honnold, John O. (1999). Uniform Law for International Sales. The Hague: Kluwer Law International, pp. 608.

Konarski, Hubert. (2003). Force majeure and hardship clauses in international contractual practice. International Business Law Journal, (4), 405-428.

Lookofsky, Joseph. (2004). Understanding the CISG in the USA. Kluwer Law International.

Maskow, Dietrich. (1992). Hardship and force majeure. American Journal Comp. L., 657-682.

Nassar, Nagla, (2006). "Change of circumstances: force majeure and hardship under the UNICTRAL Legal Guide on drawing up international contracts for the construction of industrial works and Egyptian Law", Revue libanaise de l'arbitrage arabe et international, no. 10, pp. 9-14.

Ramberg, Jan. (2000). International commercial transactions (2nd ed.). Kluwer Law International. [page 432]

Tallon, Denis, (2003). Hardship, in Towards A European Civil Code. p. 509.

Treitel, G. H. (1994). Frustration and force majeure. London: Sweet and Maxwell, p. 599.

Van Houtte, Hans. (1993). Changed circumstances and pacta sunt servanda. In Emmanuel Gaillard (Ed.), Transnational rules in international commercial arbitration (p. 105). ICC Publications/ILA.

Witz, Claude, (2006). "Force obligatoire et durée du contrat", in Pauline Rémy-Corlay et Dominique Fenouillet, Les concepts contractuels français à l'heure des Principes du droit européen des contrats, Paris Dalloz, p. 175. [page 433]


FOOTNOTES

* Tel.: 3 1 4441 5700; fax: 3 1 4441 5513. E-mail address: <ckessedjian@u-paris2.fr>.

1. We will limit our study to force majeure and hardship as the main concepts, even though we know that a number of similar but distinct concepts exist in domestic law, such as impossibility, impracticability, frustration, change of circumstances, imprévision, Wegfall der Geschäftsgrundlage, eccessiva onerosità sopravvenuta and the like.

2. These were to become the 1985 clauses.

3. For this paper, I have reviewed the Unilex database on CISG Articles 79 and 80 and the Unidroit Principles. For the CISG provisions, very few cases on Articles 79 and 80 (19 and 6, respectively) are reported including arbitral awards and other decisions from specific international bodies of dispute resolution such as the UN Claims Commission. For the Unidroit force majeure provision, one decision of the UN Claims Commission and one ad hoc award are reported. For the Unidroit hardship provision, nine cases are reported.

4. See list of references at back of paper.

5. See, e.g. the foreword to the ICC force majeure and hardship clauses, 2003; See also Gillette and Walt (2002) at 247, in their introduction to the section on "excuse".

6. At that stage, we will not go into the discussion of which domestic law applies, i.e. a conflict of laws analysis. The only thing worth noting here is that there is no specific conflict rule for force majeure or hardship issues. These matters are covered by the lex contractus. We are only dealing with substantive provisions. The only time when we will say something about conflict reasoning is when we will try to sort out how to decide between the application of international norms and the application of domestic ones (see Section 1.2 below).

7. The Unidroit Principles of International Commercial Contracts were first published in 1994. A new extended version was published in 2004. However, the force majeure and hardship provisions have remained unchanged in the 2004 edition, even if the commentaries have evolved slightly.

8. The Principles of European Contract Law (Part 1 -- Performance, Non-performance and Remedies) were published in 1995.

9. The ICC clauses which we will study here are those published in 2003.

10. These ideas were embodied in Article 7 of the Convention, which reads: "(1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. (2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law."

11. Draetta (2001), at 302.

12. Gillette and Watt (2002) say "it accommodates" UCC principles.

13. The alternative is less clear in the French version of the Convention.

14. Lookofsky (2004), at 139.

15. This is particularly true because the text explicitly states that the analysis must be done "at the time of the conclusion of the contract." The one case in which the provision is difficult to apply is if the events which occurred at the time of the conclusion of the contract lead to the nullity of the contract under the lex contractus. Authors differ as to the consequence. Some say Article 79 could be an exemption (Heuzé) while others consider that the event already existing, it can never be beyond the control of the party (e.g. Stoll in P. Schlechtriem, Commentary, Article 79 19).

16. Accord, Heuzé (2000), at 423. For a similar opinion, see Lookofsky (2004), at 127. The author also expresses the opinion that insolvency would not be an excuse for the buyer not to pay the price (p. 140). It is probably true under a strict interpretation of Article 79, but in that case another set of rules, that of insolvency, comes into play which concretely will perhaps prevent the seller from getting a full price unless she can take back the goods. This is why it is so important that any sale transaction be concluded with a provision retaining property unless full payment is made. There is one case in which insolvency could be a force majeure event: if it were caused by a State sequestration measure or another equivalent measure.

17. For a contrary opinion, see Hans van Houtte, "Changed circumstances and pacta sunt servanda," in E. Gaillard (ed), Transnational Rules in International Commercial Arbitration, ICC Publishing, 1993, p. 107.

18. Accord, Lookofsky (2004), at 140; Heuzé (2000), at 425. But Heuzé cites in footnote 443 a number of authors who claim that a hardship event could be covered by the Convention. See also, Colmar 12 June 2001, D. 2003, p. 2367, obs. W.T. Schneider. Here, the Court discusses change of circumstances under Article 79 of the CISG even though, in this very case, it does not allow the exemption claimed by the buyer.

19. See the careful analysis of Almeidea Prado (2003), passim. The author also cites a number of authors who do not hesitate to admit the existence of a hardship rule in lex mercatoria (p. 215, note 41).

20. In 1975, an arbitral tribunal has accepted to adapt the contract price under a different analysis than rebus sic stantibus (see, ICC award in case no. 2291, JDI 1976, p. 989). The case law of the Iran-US Claims Tribunal is not a good example either, since the Alger Accords provided that the tribunal should take into account changed circumstances. An award in the ICC case no. 7365 (1997) (Uniform Law Rev. 1999, no. 3 pp. 796-799) does say that rebus sic stantibus has become a general principle of law because the concept has been "incorporated in so many legal systems". The tribunal also largely based its decision on the admission of hardship in the Unidroit Principles. This is more problematic as we explain in the text.

21. See below for a more general discussion of the role of the Unidroit Principles in supplementing the CISG.

22. In France, under domestic law, many authors (followed by some courts) have advocated that the good faith principle could be the basis for accepting to take into account a change of circumstances. See for example, Ch. Jamin, "Révision et intangibilité du contrat ou la double philosophic de l'article 1134 alinéa l du Code civil", Droit et Patrimoine, March 1998, p. 46.

23. This survey was done before writing the article this author published in the Revue critique de droit international privé in 1995, and was conducted with approximately 100 companies and business lawyers located in France, a little less than half of them had sent back their questionnaire.

24. Article 6.2.2., first paragraph.

25. One may wonder whether commentary to this condition and the illustration clarifies the matter.

26. Article 6.2.3(1).

27. Article 6.2.3(2).

28. Article 6.2.3(3).

29. It is strange that the Court would have to go over the issue of whether a hardship event existed. After all, the parties agreed that there was hardship because they entered into renegotiation. The court should just look at how to adapt the contract, if possible.

30. Comment 1 to Article 7.1.7.

31. This is identical with the Unidroit Principles drafting method.

32. This part is missing in the Unidroit Principles and makes the European Principles an invaluable comparative tool.

33. We will limit ourselves to the 2003 clauses proposed by the ICC without going into an analysis of the INCOTERMS even though they are often quoted as a necessary complement to the CISG. But the INCOTERMS do not deal directly with issues at stake in this paper.

34. See paragraph 3 of the clause.

35. See Introductory note on the force majeure clause.

36. Hence, if we assume that parties to a sale contract submitted to the CISG have excluded Articles 79 and 80, the fall back rule would be the French domestic force majeure principle, if French law were applicable to the contract. It remains to be seen whether a French court would consider it to be against French international public policy if a foreign law were to be applied which does not provide for a force majeure rule.

37. Hardship is applied in administrative law under a reasoning that public services must continue, no matter what, and thus, contracts must be adapted so that there is no disruption of public service.

38. For example, Article L-131.5 of the Code de la propriété intellectuelle.

39. Dalloz 2004, Jur. P. 1754, note D. Mazeaud. The case is a purely domestic one.

40. Com. 3 Nov. 1992, D. 1995, Som. 85, obs. D. Ferrier; Com. 24 Nov. 1998, D. 1999, IR p. 9.

41. For a discussion of the possible ways the reform could take, see B. Fauvarque-Cosson, "Le changement de circonstances," Rev. Des Contrats, 2004.

42. Notes under Article 2.117, pp. 118-119.

43. For a US lawyer, accustomed to the role of courts under the UCC provision on impracticability, it may be difficult to understand how a court could be better equipped than the parties to adapt the contract.

44. See Goode (2004), at 135.

45. Id., at 136.

46. Id., at 139. Goode states, "[t]here can be little doubt that the English doctrine of frustration as currently applied is too strict and narrow to produce that degree of adjustment which the commercial community would regard as fair."

47. Id., at 248.

48. See "Codification du droit commercial international et droit international privé -- De la gouvernance normative pour les relations économiques transnationales," Recueil des Cours de l'Académie de droit international de la Haye, Vol. 300, 2004, pp. 83-308.

49. Another reason is that operators are not familiar with conflict complexities and nuances and cannot readily apply conflict norms.

50. See C. Kessedjian, op. Cit. supra note 48, pp. 202-220.

51. In international private law instruments, it is customary to avoid reservations as they work directly against the objective of uniformity which is usually at the origin of the project.

52. The Treaty of Rome defines what is a legal "citizen" of the European Community (Article 48) unchanged in the proposed Constitution. As far as individuals are concerned, each Member State is free to define its own rules on nationality, provided they do not violate European general principles of law.

53. Case C-381/98, Ingmar, 9 November 2000.

54. M. Fontaine, "Le projet d'acte uniforme OHADA sur les contrats et les Principes Unidroit relatifs aux contrats du commerce international", UniformLaw Review, 2004-2, pp. 253-268.

55. C. Kessedjian. op. Cit. supra note 23, passim.

56. I am dealing with the question generally, as I think the answer would then apply mutadis mutandis to sales contracts.

57. François Ost, Le temps du droit, Paris, Editions Odile Jacob, 1999, p. 35 (our translation). He adds, "Tel contractant inflexible refusera toute renégociation des clauses de l'accord, dussent-elles, en raison du bouleversement des circonstances, conduire son partenaire à la ruine."

58. For the purpose of this paper, we will assume that a public policy rule is the equivalent of a mandatory rule.

59. See Article 6.

60. Accord, Heuzé (2000), at 422.

61. Obviously, I am only concerned by States with legitimacy, abiding by the rule of law and following principles of good governance.

62. In the sector of foreign investments, the development of awards fairly favorable to the foreign investor may trigger a question of the exact margin of maneuver left to the host State. The ILA has created a new Committee whose mandate is partially to study this very question. See the ILA website at: <http://www.ila-hq.org/>.


Pace Law School Institute of International Commercial Law - Last updated November 13, 2006
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