Our article addresses force majeure and hardship in international commercial contracts, explaining impossibility and adaptation under Turkish law, CISG Article 79, the UNIDROIT hardship provisions, ICC model clauses and contractual drafting techniques.
A pandemic, a war, a sudden export ban, the breaking of a supply chain or an extraordinary jump in the exchange rate; all of these may render a commercial contract that appeared balanced at the moment of signature intolerable for one of the parties. In international trade, contracts are often established for the long term, and developments unforeseen by the parties may occur throughout the performance process. The basic question asked in such situations is this; can the debtor be released from the contract, can the contract be adapted to the changed circumstances, or must the contract be adhered to strictly. The answer to this question varies according to whether the event constitutes force majeure or hardship, whether the contract contains a provision on the matter and the applicable law. This article comprehensively examines the concepts of force majeure and hardship in international commercial contracts, the difference between the two, the regulation under Turkish law, the approaches within the CISG and UNIDROIT frameworks, the adaptation of the contract and effective contractual protection techniques.
1. The Principle of Pacta Sunt Servanda and Its Exceptions
One of the cornerstones of the law of obligations is the principle that contracts must be observed. Under this principle, a contract duly established is binding on the parties and the parties are obliged to perform the undertakings they have assumed exactly. This principle is the basis of the foreseeability and security of commercial life; parties invest, carry out planning and enter into undertakings with third parties in reliance on the contract. However, this principle is not absolute. Extraordinary developments arising after the contract is established sometimes render the performance of the undertakings impossible, and sometimes, without rendering it impossible, make it intolerably difficult. The law must, in such situations, strike a balance between blind adherence to the contract and justice. This balance is achieved through two separate institutions. The first is the force majeure and impossibility provisions relating to cases that render performance impossible. The second is the hardship and adaptation provisions relating to cases that, without rendering performance impossible, make it excessively difficult. The correct separation of these two institutions is the first and most critical step as regards determining the legal course to be followed in each concrete case.
2. The Concept of Force Majeure
Force majeure is an extraordinary event occurring outside the debtor's control, unforeseeable and unavoidable in character, which renders the performance of the obligation impossible. This concept has three basic elements. The first element is that the event occurs outside the debtor's sphere of activity and enterprise, that is, remains outside the debtor's control. The second element is that the event is unforeseeable in character at the moment the contract is established; the materialisation of a risk foreseeable by the parties does not constitute force majeure. The third element is that avoiding or overcoming the consequences of the event cannot reasonably be expected of the debtor. Among the typical events accepted as force majeure in practice are natural disasters, states of war and civil unrest, epidemics, general strikes, legal impediments such as an import or export ban imposed by the state, and similar extraordinary situations. However, whether an event constitutes force majeure is determined not by reference to an abstract list, but by having regard to the features of the concrete contractual relationship. The same event may be regarded as force majeure as regards one contract and not as regards another; what is decisive is the concrete effect of the event on that obligation.
3. The Concept of Hardship
Hardship expresses a legal situation different from force majeure. Here the performance of the obligation has not become impossible; performance is still possible, but owing to extraordinary developments arising after the establishment of the contract the balance between the undertakings has been seriously disturbed to the detriment of the debtor and the expectation of performance from the debtor has become incompatible with the rules of good faith. In international trade law this institution is referred to by the concept of hardship. The basic distinction between hardship and force majeure is this; while force majeure covers situations of inability to perform and impossibility, hardship covers impediments that do not render performance impossible but make it excessively difficult. The practical consequence of this distinction is exceedingly important. In the case of force majeure the obligation as a rule ends and the debtor is released from liability; in the case of hardship, on the other hand, the primary solution is not to eliminate the contract but to adapt it to the changed circumstances. That is, hardship is an institution aiming to keep the contract alive rather than to kill it. This approach serves the sustainability of commercial relationships and avoids placing the parties in the position of total losers.
4. Impossibility of Performance under Turkish Law
Under Turkish law, impossibility of performance is regulated in the relevant provisions of the Turkish Code of Obligations. If the performance of the obligation becomes impossible for reasons for which the debtor cannot be held responsible, the obligation ends and the debtor is released from liability. This regulation constitutes the legal counterpart of classic force majeure situations. An important matter requiring attention as regards the consequences of impossibility is that, in contracts imposing reciprocal obligations, the party released from its obligation also loses its right to claim the counter-performance and is obliged to return the performance it has received. Impossibility may be total or partial. In partial impossibility, the performance of only a part of the obligation becomes impossible. However, there is an important detail here; even where a situation of partial impossibility has materialised, if the counter-performance is not divisible in character the provisions relating to total impossibility apply. Moreover, whether the impossibility is permanent or temporary is also decisive; temporary impossibility as a rule does not end the obligation, but where the wait for performance extends beyond what can be demanded of the parties it may produce the result of permanent impossibility.
5. Hardship and Adaptation under Turkish Law
Under Turkish law, hardship and the adaptation of the contract are regulated in the provision of the Turkish Code of Obligations headed excessive difficulty of performance. For this regulation to be applicable, certain elements must exist together. The first element is that the balance between the undertakings has been disturbed to such an extent that demanding performance of the obligation would constitute a breach of the rule of good faith. The second element is that the circumstances have changed after the making of the contract in an extraordinary manner and in a way unforeseeable by the parties. The third element is that this situation does not arise from the debtor's fault. The fourth element is that the obligation has not yet been performed, or that the debtor has performed while reserving its rights arising from hardship. This last element is of great importance in practice; a debtor who performs its obligation without entering a reservation as a rule loses the possibility of subsequently requesting adaptation. Where these conditions are fulfilled, the debtor has the right to request the judge to adapt the contract to the changed circumstances. Where adaptation is not possible, the debtor may withdraw from the contract; in contracts of continuous performance it exercises, as a rule, the right of termination. The priority of adaptation is a clear reflection of the approach of keeping the contract alive.
6. The Legal Basis and Scope of Adaptation
The basis of the request for the adaptation of the contract to changed circumstances is the rule of good faith. The theoretical ground of this institution is termed in doctrine the theory of the collapse of the basis of the transaction. According to this theory, if the unjust situation created by the circumstances that have changed after the contract was established renders performance unexpectable for one of the parties, the contract must be brought into conformity with the changed circumstances. The theory of the collapse of the basis of the transaction covers not only cases of the disturbance of the economic balance, but also cases where the purpose pursued by the contract is shaken; in this respect its field of application is quite broad. Adaptation is carried out by the judge and may take different forms according to the features of the concrete case; it is possible to increase or reduce the price, to extend the period of performance, to change the nature of the undertaking or to rebalance the parties' obligations. The basic criterion to be observed in carrying out adaptation is the purpose the parties pursued in establishing the contract and the arrangement a reasonable merchant would accept under these circumstances. It must always be borne in mind that adaptation differs from cases of impossibility; in adaptation performance is still possible, it has merely become excessively difficult.
7. Exemption under the CISG
In contracts for the international sale of goods, the CISG, also referred to as the Vienna Sales Convention, plays an important role. Under the provision of the CISG regulating exemption, a party is not liable for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond its control and that it could not reasonably be expected 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. This provision is the counterpart of the classic understanding of force majeure in international sales law and requires three elements; that the impediment be beyond control, that it be unforeseeable and that it be insurmountable. This regulation has an exceedingly important feature; the CISG does not contain an express provision relating to the adaptation of the contract in the case of hardship. According to the dominant view in doctrine, this provision essentially regulates exemption from liability and the right to avoid the contract in the case of force majeure. This gap renders uncertain the position of a party facing a hardship situation in a contract subject to the CISG and increases still further the importance of inserting an express hardship clause into the contract.
8. The UNIDROIT Principles and the Hardship Regulation
In the field of international commercial contracts, the most developed hardship regulation is offered by the UNIDROIT Principles of International Commercial Contracts. These principles, although not a binding international agreement, are in the nature of a soft law instrument that may be incorporated into the contract by the parties and to which recourse is frequently had in arbitral proceedings. The UNIDROIT Principles define the situation of hardship in detail and regulate its consequences. Under the principles, hardship arises where the occurrence of events fundamentally alters the equilibrium of the contract; this alteration arises either from an increase in the cost of a party's performance or from a decrease in the value of the performance it receives. Moreover, it is required that the events occurred or became known after the conclusion of the contract, that they could not reasonably have been foreseen by the disadvantaged party, that they are beyond its control and that their risk was not assumed by that party. In a situation of hardship, the disadvantaged party may request renegotiation from the other party. Where the parties do not reach agreement within a reasonable time, the dispute may be taken to a judicial or arbitral authority; that authority may, if it considers it appropriate, terminate the contract or adapt it so as to restore the equilibrium. This structure offers the most mature model of how the institution of hardship may be operated in international trade.
9. Frustration in Anglo-American Law
In Anglo-American law, which comes from a tradition different from the continental European legal systems, similar problems are addressed within the framework of the concept of frustration. The doctrine of frustration applies where an event arising after the conclusion of the contract and not based on the fault of the parties renders the performance of the contract impossible or eliminates the purpose of the contract at its root. The most important feature of this doctrine is that its consequence is the automatic termination of the contract; in the case of frustration the contract comes to an end without the need for a court decision. This approach departs significantly from the understanding of adaptation in continental European law. In Anglo-American law the courts' authority to rewrite the contract on behalf of the parties is extremely limited; the judge prefers to terminate the contract rather than to adapt it. Moreover, the doctrine of frustration is interpreted narrowly; mere economic difficulty, an increase in costs or the contract becoming unprofitable does not as a rule constitute frustration. This difference shows how critical the choice of the applicable law is in an international contract; the same event may result either in the adaptation or in the termination of the contract, according to the law chosen.
10. Contractual Force Majeure Clauses
In international commercial contracts, inserting a specific force majeure clause into the contract rather than relying on statutory regulations is an established and correct practice. A well-drafted force majeure clause must contain several basic elements. First, the events to be regarded as force majeure must be listed by way of example and it must be expressly stated that the list is not exhaustive. Second, the extent to which the event must affect performance must be defined; will it suffice that it renders performance wholly impossible, or that it substantially impedes it. Third, the obligation of the party relying on force majeure to give notice to the other party, and the period and form of the notice, must be regulated; delay in giving notice may be structured so as to lead to the loss of the right. Fourth, the consequences of force majeure must be determined; graduated solutions may be provided for, such as the suspension of obligations, the extension of periods and the arising of a right to terminate the contract where the force majeure situation exceeds a certain period. Fifth, the duty to mitigate loss must be regulated. The model clauses prepared by the International Chamber of Commerce on this matter offer a reliable starting point in practice and are used in many contracts by direct reference.
11. Contractual Hardship Clauses
Alongside the force majeure clause, regulating a separate hardship clause is of great importance in long-term commercial contracts. This is because the force majeure clause covers only cases rendering performance impossible; developments that do not render performance impossible but fundamentally disturb the economic balance may fall outside the scope of this clause. A good hardship clause must first define under which conditions a situation of hardship will arise; here, determining numerical thresholds for the increase in cost or the decrease in the value of the undertaking greatly reduces uncertainty in practice. Second, the consequence of the hardship situation must be regulated; the typical solution is for the parties to come under an obligation to renegotiate in good faith. Third, it must be determined what will happen where the negotiations remain inconclusive; options such as the termination of the contract, its adaptation by an arbitrator or expert, or resolution by way of arbitration may be provided for. Fourth, it must be clarified whether the parties' obligations will continue throughout the negotiation process. The International Chamber of Commerce's model hardship clause, with its structure offering different options, provides a practical framework on this matter. The regulation of these two clauses together and in a coherent manner protects the contract against the risks both of impossibility and of imbalance.
12. Mistakes Frequently Made in Practice
Certain mistakes are frequently repeated in practice as regards force majeure and hardship provisions. The first mistake is not inserting a force majeure clause into the contract at all, or inserting a one-sentence, empty clause; in such a situation the parties are left at the mercy of the general provisions of the applicable law and the outcome becomes unforeseeable. The second mistake is assuming that the force majeure clause also covers hardship situations; whereas these two institutions cover different legal situations and must be regulated separately. The third mistake is neglecting the notice obligation; many contracts require notice to be given within time in order to rely on force majeure, and where this period is missed a loss of rights occurs. The fourth mistake is performing the obligation without entering a reservation; under Turkish law, in order to be able to request adaptation it is required that the obligation has not yet been performed or that it has been performed with rights reserved. The fifth mistake is attempting to treat foreseeable risks as force majeure; the materialisation of a risk known or knowable at the time the contract was established does not as a rule enable reliance on this protection. The sixth mistake is failing to take into account the consequences that the applicable law and the means of dispute resolution will produce as regards these institutions.
13. Conclusion and Practical Recommendations
In international commercial contracts, force majeure and hardship are the provisions that attract the least attention but become the most decisive at the moment of crisis. The basic considerations in this field may be summarised as follows. First, it must be known that force majeure and hardship cover different legal situations; force majeure covers impossibility, while hardship covers cases that do not render performance impossible but make it excessively difficult. Under Turkish law, impossibility ends the obligation, whereas hardship leads primarily to the adaptation of the contract. It must always be observed that, in order for adaptation to be requested, the obligation must not yet have been performed or the rights must have been reserved. It must not be forgotten that the CISG does not contain an express provision relating to adaptation in the case of hardship, and that for this reason inserting a separate hardship clause into international sales contracts is critical. Both a force majeure clause and a hardship clause must be inserted into the contract, and in these clauses the scope, the notice procedure and period, the consequences and the negotiation mechanism must be clearly regulated. In choosing the applicable law, it must be taken into account that that law's approach to adaptation may fundamentally change the outcome. Finally, the first step to be taken at the moment of crisis must be to examine, without losing time, the relevant provisions of the contract and the notice periods.
Force majeure and hardship are closely connected with the other fields of international trade law. Our article on choice of law and jurisdiction agreements in international commercial contracts, which addresses the determination of the applicable law, and our analysis of Incoterms 2020 rules and delivery terms in international sales, which examines delivery and the passing of risk, address the matters connected with force majeure and adaptation.
For advisory services on the preparation of international commercial contracts, the drafting of force majeure and hardship clauses, requests for the adaptation of contracts and the resolution of these disputes, you may contact us at info@guzeloglu.legal.