Reinier Russell

managing partner

Reinier advises national and international companies

reinier.russell@russell.nl
+31 20 301 55 55

International contracts: What to do in the event of force majeure?

Publication date 15 August 2022

COVID-19 and the Russian invasion of Ukraine have caused a shortage in raw materials and means of transport with all its consequences: prices are rising and products cannot be manufactured or delivered. What does this mean for the contractual agreements you have made? Do you still need to deliver products or services? Is that still reasonable? Or can you invoke force majeure?

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Whether you can invoke force majeure, a hardship clause or any other scheme primarily depends on the arrangements you have made. They can be found in the following contractual clauses, for example:

Price escalation clause

A price escalation clause arranges for prices to change automatically when a certain price index changes, such as the consumer price index of the US Bureau of Labor Statistics or index of Statistics Netherlands (Centraal Bureau voor de Statistiek). Such a clause immediately solves the problem for a supplier of sharply increased inflation due to a shortage of raw materials.

Price adjustment clause

This clause gives the seller the right to adjust the price if certain reference values change. It is common to attach to this an obligation to give the buyer a few days’ notice that the prices will be adjusted. This clause may also contain an obligation to renegotiate the price.

Parties would be wise to use such a clause only as a shock absorber for unexpectedly large fluctuations. Neither you nor the other party is likely to look forward to renegotiating the terms of the contract time and again. However, the current situation with a pile of problems is a good reason to invoke such a clause.

Force majeure clause

If the parties cannot perform the contract due to circumstances beyond their control this is referred to as force majeure. In that event, the parties can suspend their obligations or terminate the contract. Usually, the damage due to force majeure is divided 50-50 between the parties.

It is important to invoke force majeure in good time and not wait too long. Otherwise, you run the risk that the other party makes investments in the meantime that will no longer be profitable. The costs for this may then be recovered from your company.

Hardship clause

A hardship clause usually provides that the parties can change the terms of the contract if circumstances beyond their control make it unreasonable, but not impossible to fulfil the contract. This may involve a number of concrete situations, whereby the consequences for the contract are regulated. For example, in the event of extreme price increases or major delays at a supplier. The hardship clause may also be a general clause obliging parties to renegotiate if unforeseen circumstances have drastically changed the balance between the parties.

Force majeure not regulated in the contract

If you have you not regulated anything for force majeure situations, than you fall back on the statutory regulation, while the Dutch court also looks at what is reasonable and fair in the actual case. What the court will decide therefore depends to a large extent on the circumstances of the case.

In international contracts, the Vienna Convention (CISG) applies on the purchase and sale of movable property. Both force majeure and the situation of the hardship clause are provided for in Article 79. That is, if this Convention is not expressly excluded.

Please note: In some countries, such as the United Kingdom, a force majeure clause does have to be explicitly included in a contract, otherwise it is not regulated at all.

Unforeseen and unforeseeable

The Dutch law offers quite some scope to invoke force majeure or a hardship clause. It must concern unforeseen circumstances, i.e. circumstances that were not taken into account when the contract was concluded. Internationally, for example in the Vienna Convention, the bar is often set a bit higher, namely that the circumstances were unforeseeable. So that the parties could not reasonably take them into account when concluding the contract.

Unforeseen circumstances become foreseeable

When the first measures were taken against the coronavirus, it was clear that this was an unforeseen circumstance. But the coronavirus has been with us for more than two years now and new waves keep coming. So are the measures against it still unforeseeable? And does the same apply to the shortage of raw materials after the Russian invasion of Ukraine, now almost six months ago? For newer contracts, other standards can be applied than for contracts concluded before the coronavirus and the invasion. It is therefore recommended to mention these circumstances explicitly in the contract from now on.

The last resort

If none of the aforementioned clauses offers a solution and the contract can no longer be performed, the only way out is termination or cancellation of the contract. If the other party does not agree with it, the matter will have to be referred to a court. Whether termination is allowed, depends on the arrangements made and, if no arrangements have been made, on the applicable law. If parties have not agreed upon which law applies, in principle, the Vienna Convention applies.

Which jurisdiction and which law?

In principle, the arrangements made about the competent court and the applicable law apply. It is important, however, that it is an independent judge who is acceptable to both parties. Also, going to court should be the last resort if you cannot work it out together. After all, you do not want the court in the country against which the sanctions were imposed to rule on the legitimacy of your termination, if, for example, you are no longer allowed to supply or import due to sanctions.

Lawyer for international contracts

Is your supplier not delivering and is the supplier claiming force majeure, but you doubt whether this is justified? Or are you having problems fulfilling a contract and would you like to know what your options are? We will be happy to advise you and, if necessary, assist you in legal proceedings. Please contact us:

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