Force majeure, hardship and contractual remedies in international practice
Global crises and international supply contracts
Global health crises, geopolitical tensions, economic sanctions, logistics blockades, and volatile commodity markets are making the execution of international supply contracts increasingly complex and, in some cases, impossible.
Now, more than ever, negotiating or executing a contract with foreign counterparties face legal uncertainty.
The questions our clients ask us most frequently are essentially three: can I suspend or terminate the contract without incurring liability? And if my counterparty fails to pay or deliver, what can I do? Or, who should bear the costs or delays due to external events? What clauses should I include in contracts to ensure peace of mind?
The answers to these questions vary depending on the law applicable to the contract. For international sales contracts for movable goods, the primary legal reference is the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 97 states , including Italy and almost all major industrialized countries (with the notable exceptions of the United Kingdom, India, Venezuela, South Africa, the United Arab Emirates, and other Gulf countries). Where the CISG is not applicable, the national law designated by the parties or the rules of private international law will apply.
Three typical scenarios
Let’s illustrate three recurring cases in the practice of international supplies:
- The goods are ready but — due to new regulatory provisions or sanctions — they are no longer exportable to the destination country.
- The goods are still exportable, but payment has become extremely difficult or impossible due to supervening circumstances.
- The goods are still exportable, but under significantly more onerous conditions than those agreed upon.
A) The goods are no longer exportable: force majeure
If the contract was concluded prior to a conflict, embargo, or other regulatory prohibitions preventing exports, the parties must first review the contractual text. The contract may include a force majeure clause that refers to such external events, and in such a case, the parties must comply with the contractual provisions. Typically, for example, the party affected by the force majeure event must promptly notify the other party, in order to be relieved of any liability for delays in performance.
If the contract does not contain a force majeure clause and is governed by Italian law or the law of a State that has ratified the 1980 Vienna Convention (CISG), force majeure may be invoked pursuant to Article 79 of the CISG, provided that the parties have not contractually excluded the application of the 1980 Vienna Convention. According to this provision, a party is exempt from liability for non-performance if it proves that:
- the failure is due to an impediment beyond his control,
- which could not reasonably have been foreseen at the time of conclusion of the contract and
- that he could not reasonably avoid it or overcome its consequences.
State restrictions on exports or war events — if they occur after the conclusion of the contract and are not foreseeable at the time of signing — are universally recognized as impediments pursuant to art. 79(1) CISG. The most authoritative international doctrine ( Schwenzer , Atamer , Huber) agrees in qualifying such measures as events outside the seller’s sphere of control. This is also confirmed by arbitral jurisprudence: in the CIETAC award relating to the L- Lysine case (2005) , the arbitral tribunal valued the time dimension in the analysis of foreseeability, excluding exemption from liability because the SARS epidemic was already underway two months before the conclusion of the contract. The principle is therefore clear: the impediment must have occurred after the date of conclusion of the contract.
In practical terms, in the event of proven force majeure, the affected party is exempt from liability for damages, the contract may be terminated, and the parties must proceed with the returns. If the goods have not been delivered, or have not otherwise passed into the ownership of the other party, the seller may recover them and, if possible, allocate them for another sale.
It should be emphasized, however, that the burden of proof lies with the party invoking the exemption. The requirement of unforeseeability is considered particularly difficult to demonstrate. The defaulting party must also promptly notify the other party of the impediment, pursuant to Article 79(4) CISG: late notification may give rise to liability for damages caused by the delay in providing information.
B) Payment difficulties: force majeure and hardship
Other situations may arise where the buyer finds himself unable, or in serious difficulty, to pay. Consider the case of a supply already delivered for which the parties have agreed to deferred payment.
In general, according to established international practice, illiquidity or payment difficulties do not, in principle, constitute an impediment under Article 79 CISG. The only exceptions are extreme cases in which the loss of financial capacity is caused directly and exclusively by a force majeure event, and in which proof of the causal link is rigorous. Such proof is, in practice, extremely difficult to provide.
C) The excessive burden that has arisen ( hardship )
Beyond force majeure in the strict sense, global crises urgently raise the issue of hardship , that is, the situation in which the original contractual balance is upset by an extraordinary change in economic circumstances, which makes the performance of one of the parties excessively onerous without making it objectively impossible.
The Vienna Convention does not explicitly regulate hardship and there has long been debate as to whether it falls within the scope of the CISG. Today, however, the majority of doctrine and the most advanced case law favor the inclusion of hardship within the scope of Article 79 of the CISG, due to the objective of uniformity of international commercial law pursued by the Convention (CISG Advisory Council Opinions Nos. 7 and 20). Referring parties to national law for hardship issues would undermine the uniformity of international sales law that the CISG aims to ensure. However, in practice, Article 79 CISG has proven to be an inaccurate and unsatisfactory instrument, because judges have applied it mainly in truly extreme cases.
Jurisprudence on the threshold of hardship
International jurisprudence shows that a high threshold is required to exempt a party from liability for damages.
Scafom International v. Lorraine Tubes (Belgian Court of Cassation, 2009). In this case, concerning the sale of steel tubes, the Belgian Supreme Court held that a 70% price increase could meet the criteria for hardship and provide a basis for exemption from liability, paving the way for contract renegotiation. The decision sparked extensive debate in legal literature, both because of its affirmation of the applicability of hardship to the CISG and because of the threshold—considered by some to be too low—identified by the court.
D2I v. Gabo (French Court of Cassation, 2015). Conversely, the French Court of Cassation denied the existence of hardship in a case involving the sale of heating systems where the price increase exceeded 115%. The court thus indicated that a higher threshold was necessary, highlighting the nature of the goods and the predictability of market fluctuations in the sector.
Iron Case Molybdenum ( Oberlandesgericht Hamburg, 1997). In the case of metals with a strong speculative component, the Hamburg Court of Appeal denied hardship even though the market price had tripled, highlighting that ” for parties operating in a sector with a highly speculative content the limits of reasonableness are very high “. The case demonstrates that the nature of the good and the characteristics of the reference market are decisive in assessing the hardship threshold.
In summary, case law shows that there is no uniform and universally applicable percentage threshold: the valuation depends on the nature of the asset, the volatility of the market, the contractual allocation of risk and the behaviour of the parties .
The legal consequences of hardship : renegotiation and adaptation
The main unresolved issue of hardship under the CISG concerns remedies. Article 79(5) of the CISG merely provides for exemption from liability for damages, but does not state what the consequences are for the parties. This provision does not even provide for an obligation for the parties to renegotiate the contract or to adapt its content in light of new circumstances. Moreover, the parties would be free to resort to other remedies provided for by the CISG, even if, according to the CISG Advisory Council , the judge or arbitrator could not declare the contract terminated because of hardship.
The preferred solution, developed internally by the CISG based on its fundamental principles—good faith, cooperation, favor contractus , reasonableness—is to grant the disadvantaged party the right to request renegotiation of the contract. Refusal to renegotiate could constitute a breach of contract, resulting in a liability to pay damages. Some argue that the party benefiting from the hardship situation may be required to accept an offer of renegotiation by virtue of the duty to mitigate damages under Article 77 of the CISG. Contrary to Article 6.2.3 of the UNIDROIT Principles, however, the CISG does not grant judges or arbitrators any power to adapt the contract. Such “creative” jurisdiction on the part of judges is alien to the common law tradition and contradicts the international character of the Convention.
Practical principles for managing non-compliance
Based on the above, it is possible to state some fundamental operating rules :
- The party claiming to be in a situation of force majeure or hardship must provide proof of their claims. The burden of proof is on them.
- If alternative payment methods exist—even at higher, but not excessively onerous, costs—the party is required to utilize them. The debtor must make every reasonable effort to preserve its ability to perform, even at the expense of significant financial losses.
- If force majeure or hardship are invoked in the absence of the legal requirements, the other party may terminate the contract and seek compensation for damages.
- The impediment has a temporally limited exoneration effect (art. 79(3) CISG): once the cause of impediment has ceased, the party is obliged to perform the contract.
Contractual clauses on force majeure and hardship
In conclusion, as we have seen, once a trade agreement is reached, it does not become law between the parties and, even at the international level, there is a lack of effective tools to modify or adapt it.
Therefore, the fundamental tool for managing uncertainty is the contract.
In times of instability like ours, properly drafted contractual provisions for force majeure and hardship are essential to determine and distribute supply and credit risk, improving the company’s operational management and significantly reducing the risk of default and litigation.
A fundamental rule often ignored by businesses: the entrepreneur’s ability to protect its credit and the commercial transaction is greatest before the contract is concluded and progressively decreases with the passage of time and the length of the international supply process.
But, in practice, how should these clauses be structured?
An authoritative reference is represented by the model clauses of the International Chamber of Commerce (ICC).
The ICC Force Majeure Clause 2020 provides a three-stage mechanism (uncontrollable, unforeseeable, and unavoidable impediment) substantially similar to that of Article 79 CISG, with the clarification that for certain typical impediments—including epidemics and acts of the authorities—a rebuttable presumption of the existence of the requirements applies. The party invoking the clause must limit itself to proving the impossibility of avoiding or overcoming the impediment.
The ICC Hardship Clause 2020, however, offers a more detailed framework than the 2003 version: upon the occurrence of events that the parties must contractually identify as ” hardship “, the parties undertake to renegotiate the contract. If the renegotiation fails, the parties can choose between three different consequences—termination of the contract by one of the parties, termination by a judge or arbitrator, or judicial adaptation/termination—thus ensuring greater flexibility in managing contingencies.
In any case, it’s important to keep in mind that a force majeure or hardship clause produces tangible benefits only if it’s drafted with the necessary care, expertise, and foresight, and, above all, effectively tailored to the situation or operations of the individual company. Generic clauses or clauses copied from standard forms risk fueling disputes rather than resolving them.
Conclusions: prevention is better than cure
The global crises of recent years—health, geopolitical, and logistical—have made uncertainty a constant in international trade. In this context, the lack of adequate contractual protections, the incorrect choice of delivery terms, excessive confidence in the counterparty’s solvency without prior verification, and the failure to obtain export credit insurance are errors that compound the difficulties of operating in unstable markets.
Specialized legal advice during the negotiation and contract drafting phases is, now more than ever, an investment, not a cost: it is at that stage that payment can be contractually secured and the risk exposure be reduced, so that external impediments, have no or limited effects on the international contract’s performance.
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OTHER SOURCES
https://www.lexibc.com/en/international-contracts-and-coronavirus-from-an-italian-perspective/ (2020)