Force Majeure in Tumultuous Times: as the New It’s Not as Easy to Prove as You Might Believe This article first appeared inThe Journal of World Investment & Trade 13 (2012) by Mark Augenblick and Alison B. Rousseau

Force majeure clauses excuse a party what constitutes a force majeure from performance if some unforeseen event. Impediments to event beyond its control prevents performance frequently occur. performance of its contractual obliga- Arbitration tribunals, however, tions. Although the prior standard rarely enforce force majeure clauses of “impossibility” to invoke force unless the specific impediment is majeure has effectively been replaced defined in the clause, even though by “impracticability,” arbitration the prior standard of “impossibility” Mark Augenblick tribunals rarely enforce force majeure to invoke force majeure has effec- Litigation clauses unless the specific impediment tively been replaced by “impractica- +1.202.663.8393 is defined in the clause. As a result, bility.” The current standard of [email protected] the standard of “impracticability” “impracticability” appears to be is not as easy to prove as it might relatively easy to prove, but it is not. appear to be. Foreseeability, failure International business people are to explore alternate performance, presumed to be aware of the risks and lack of timely notice are common they face. They are held accountable reasons that force majeure defenses if they fail to protect themselves fail. Due to tribunals’ typically nar- specifically in their contract. row and restricted application of There is no universally accepted force majeure clauses, they should be definition of the requirements to detailed, comprehensive, and focus on Alison B. Rousseau successfully invoke force majeure. the particular circumstances of the Litigation Different and jurisdictions take transaction at issue. +1.202.663.9218 different approaches.2 Moreover, the [email protected] Introduction focal point of analysis is on the wording of the specific clause at Mark Augenblick is a senior counsel in the Most international business agree- issue. A definitive summary of the Washington, DC office of Pillsbury Winthrop ments have force majeure clauses. of force majeure is beyond the Shaw Pittman LLP. He has extensive Force majeure means “superior scope of this paper. Instead, we experience handling complex construction, force.”1 These clauses excuse a party focus on what we believe are the technology, telecommunications and real from performance if some unfore- legal and contract drafting points of disputes. seen event beyond its control greatest practical significance in prevents performance of its contrac- Alison Rousseau is a senior associate in light of the challenges faced when tual obligations. Their purpose is to Pillsbury’s Washington, DC office. She has relying on a force majeure clause. allocate risk and to provide notice of specialized experience in complex real events that may delay or excuse The law of force majeure has estate-related disputes, False Claims Act performance. evolved to reflect “…the needs and litigation and investigations, and zoning common practices of the interna- appeals. Parties to a contract expressly tional business community….”3 allocate their risk when they define

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There is an emerging consensus Published arbitral awards suggest To rely on a force majeure clause in about force majeure legal require- that a large majority of all force most jurisdictions, a party must ments that your authors believe is majeure defenses are rejected. The establish that the event was not represented in the International difficulties are demonstrated in an foreseeable. This is likely to become Chamber of Commerce’s (“ICC”) ICC case7 where a dispute arose more and more difficult as the world Force Majeure Clause 2003 (“ICC when the seller did not deliver the sees the far-reaching effects of Clause”).4 The ICC Clause incorpo- goods promised in the contract, recent devastating events. Virtually rates an “impracticability” standard. arguing that non-delivery by a any type of “imaginable” event is It provides that an event must be (1) supplier excused liability under arguably foreseeable. beyond the party’s control, (2) not Article 79 of the United Nations Given the narrow and restricted foreseeable at the time the contract Convention on for the interpretation of force majeure, it is is signed, and (3) an event that could International Sale of Goods essential to draft a detailed and not reasonably have been avoided or (“CISG”)8 or the force majeure comprehensive force majeure clause overcome. These principles and clause in the contract. The tribunal, that addresses the particular their corollaries are discussed below. applying the CISG to the contract circumstances of the transaction at pursuant to applicable German law, Recent dramatic events have caused issue. Due must be said that the risk of non-delivery by widespread commercial loss and given to the market, the relevant a supplier fell clearly on the seller. business interruption. These include jurisdiction, the location of the The tribunal noted that its decision the events of September 11, 2001; project or services, and all external was in line with the consistent Hurricane Katrina in 2005 in the events that may interfere with practice of ICC arbitrators who area of New Orleans, Louisiana; and performance of the contract. This is uphold the force majeure defense the 2010 volcano in Iceland that because unless the type of event is only in “extreme cases such as war, disrupted flights and impacted specifically listed in the force strikes, riots, embargoes or other businesses at airports and those majeure clause, virtually no external incidences listed” (emphasis added) reliant upon air freight. Most event will be deemed unforeseeable in the force majeure clause of the recently, the devastating earthquake and constitute force majeure contract. The tribunal further noted and tsunami in Japan destroyed excusing contract performance. that, in cases of impediments to factories and interrupted the supply performance related to typical We first address the “principles” of chain for Japanese and international commercial risks, arbitrators uphold force majeure; the ICC’s Force businesses. the principle of pacta sunt servanda Majeure Clause 2003, which your One author notes that, although past (preserve the sanctity of contract). authors believe best summarizes the man-made catastrophes (Bhopal, the emerging law of force majeure; and Similarly, under , the Exxon Valdez, and even Chernobyl) then challenges to successfully burden is upon the contractor to had devastating local consequences, invoking the doctrine. We next negotiate limitations on his strict their national and international review contemporary force majeure liability such as by inclusion of a impact was relatively limited.5 He events and how they may be inter- force majeure clause. Under U.S. law, goes on to point out, on the other preted in the context of a force for example, “[c]ontract liability is hand, that a global failure of the majeure defense. We conclude with strict liability. It is an accepted Internet from cyberterrorism or a specific drafting suggestions to deal maxim that pacta sunt servanda, prolonged power grid failure in the with these sorts of events. contracts are to be kept. The obligor U.S. would have national and is therefore liable in damages for international commerce ramifica- Principles of Force Majeure even if he is tions.6 These extraordinary and Background without fault and even if circum- difficult-to-predict events bring The concept of force majeure stances have made the contract more home the need for an effective force originated in the Napoleonic Code.10 burdensome or less desirable than majeure clause. In common law, the concept has he anticipated.”9

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evolved from one of “physical basis for excusing a wrongful act other parties—a requirement wholly impossibility” to “frustration of only when (1) the act is the only missing from the inquiry under force purpose” (U.K.) to “commercial means for the state to safeguard an majeure. impracticability” (U.S.). Initially, the essential interest against a grave or It is now generally accepted in test for impossibility in common law imminent peril, and (2) the act does common and civil law systems that was objective: Was performance not seriously impair an essential contractual performance that rendered absolutely or physically interest of the state or states towards becomes “impossible” or “commer- impossible? which the obligation exists, or of the cially impracticable” under certain international community as a Today, most tribunals and courts circumstances may be excused. The whole.15 Argentina has widely utilize a standard of commercial issue we address is under what invoked the necessity defense in the impracticability.11 Performance is circumstances—recognizing that arbitrations it has faced and is facing excused when it is not practical and there is not unanimity of approach in the International Centre for the could be done only at excessive and in all legal systems. Settlement of Investment Disputes unreasonable cost.12 The U.S. (“ICSID”).16 As a result of a financial The ICC Has Developed a Restatement (Second) of Contracts crisis, Argentina repealed the law on Comprehensive Model Force provides that when, “after a contract which most of its bilateral invest- Majeure Clause is made, a party’s performance is ment treaties had been negotiated, The ICC Clause is a model clause made impracticable without [the leading to dozens of arbitrations that reflects the emerging consensus party’s] fault by the occurrence of an brought against it.17 Although about what is required to establish a event, the non-occurrence of which different tribunals have reached force majeure defense. The was a basic assumption on which the different outcomes, by and large “Introductory Note” and Note (a) to contract was made, [the party’s] duty Argentina has not been able to rely the ICC Clause states it “amalgam- to render that performance is successfully on necessity. ates” elements of the previous ICC discharged as a result, unless the Force Majeure Clause 1985, the language or the circumstances There are a number of similarities CISG, the Principles of European indicate the contrary.”13 Essentially between force majeure and necessity Contract Law (“PECL”) and the the same standard is found in U.S. in addition to the fundamental Unidroit Principles for International Section similarity that they are both invoked Contracts (“UNIDROIT”). 2–615 involving the sale of goods. when catastrophe strikes. With both Section 2–615(a) sets forth a three- force majeure and necessity, the The ICC Clause first provides a part test: (1) a “contingency” (event specific contract or treaty provision, general force majeure formula: a or impediment) occurred, (2) which respectively, will effectively “trump” party relying on the ICC Clause makes contract performance any relevant governing law, whether must prove that (1) its failure to impracticable, and (3) the non- international or otherwise. Further, perform was caused by an impedi- occurrence of the contingency was a the application of a force majeure or ment beyond its reasonable control, basic assumption on which the necessity defense is often restricted (2) it could not reasonably have been contract was made.14 to a limited period of time, instead of expected to have taken the occur- allowing a blanket defense.18 rence of the impediment into Force majeure is similar to the Necessity and force majeure, account at the time of the conclusion doctrine of “necessity,” which states however, require fundamentally of the contract, and (3) it could not may to rely on in the different analyses. Unlike force reasonably have avoided or over- investment context when force majeure, the necessity defense does come the effects of the impediment.19 majeure-type circumstances arise. not include any type of “foreseeabil- The International Law Commission The ICC Clause states in Section 3 ity” requirement. In addition, Articles on State Responsibility that, in the absence of proof to the necessity requires examining the provide in Article 25 that a state may contrary and unless otherwise effect of the state’s “wrongful” act on invoke the doctrine of necessity as a agreed by the parties, if the

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impediment is listed in Section 3(a) Although this evidentiary burden third party did not fulfill its contrac- to (g), a party “shall be presumed” to appears to be easy to meet, in tual obligations. have established that (a) its failure to practice, tribunals rarely agree with perform was caused by an impedi- a party claiming that a force majeure The Three Major “Impediments” ment beyond its reasonable control, event occurred. to Invoking Force Majeure and (b) it could not reasonably have Successfully The ICC Clause, reflecting develop- been expected to have taken the The three primary reasons tribunals ments in the law, adopts a lower occurrence of the impediment into find that a force majeure defense threshold test for invocation of force account at the time of the conclusion fails are that the party invoking the majeure than “impossibility” of of the contract, provided the impedi- event (1) should have foreseen it, (2) performance. Note a) to the ICC ment is specifically listed therein. should have determined an alternate Clause points to use of the phrase The ICC Clause in Section 3 lists way to perform the contract, or (3) “beyond its reasonable control” in dozens of force majeure events, did not comply with the notice Section 1(a) and “could not reason- including, but not limited to, war, requirements in the force majeure ably have avoided” in Section 1(c). In armed conflict, hostilities, terrorism, clause. Further, even when an short, a balancing approach is acts of God, plague, natural disaster arbitral tribunal allows a force adopted—not a hard and fast rule. (including violent storm, volcanic majeure defense, it usually limits the activity, and tsunami), explosion, Section 2 of the ICC Clause defense to a certain period of time, fire, and general labor disturbances addresses the problems that can so a force majeure clause does not such as strike or boycott. The ICC arise when a third party fails to necessarily excuse performance Clause states that successfully perform its contractual duties. In indefinitely.26 invoking force majeure means a this case, the contracting party may 1. Tribunals strictly interpret party is relieved from liability in only invoke the protections of the foreseeability damages or other contractual force majeure clause when it In civil and common law for breach of contract.20 establishes first the general force systems, the event must have been When the effect of the impediment majeure requirements that (1) its unforeseeable at the time of con- is temporary, however, a party is failure to perform was caused by an tracting for a force majeure defense only relieved from its duty to impediment beyond its reasonable to be successful. Tribunals and perform under the contract as long control, (2) it could not reasonably courts reason that failure to protect as the impediment impedes have been expected to have taken oneself against a foreseeable event is performance.21 the occurrence of the impediment an assumption of the risk of that into account at the time of the The Notes to the ICC Clause specify event.27 Foreseeability is a question conclusion of the contract, and (3) it that the mere occurrence of an of fact for the decision maker. could not reasonably have avoided enumerated event does not auto- or overcome the effects of the Because the interpretation of a force matically afford relief to the non- impediment. The contracting party majeure clause turns on the lan- performing party.22 That party must must also prove that those same guage in the contract at issue, an prove, in addition, that he could not requirements apply to the third arbitration tribunal or court deter- have avoided or overcome the effects party, i.e., that the third party was mining whether reliance on a force of the event.23 Even then, the non- also subject to a force majeure event. majeure clause was permissible defaulting party may prevail by Note b) to the ICC Clause explains must make a fact-specific inquiry in proving the event was within control that, without these requirements for light of the governing law of the of the non-performing party or both the contracting party and the contract. In many of the decisions could have been foreseen by it.24 This third party, the contracting party where tribunals reject a force is the “balance of to be would “find it too easy” in most majeure defense, the party asserting resolved between the parties”25 that situations to invoke force majeure the defense could and should have a tribunal must review and decide. simply by demonstrating that the identified the problem that led to

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non-performance and specifically the restrictions imposed by the Incoterms 1990—pre-determined allocated its risk before entering into respondent’s government did not contract terms published by the ICC. the contract. For instance, in ICC No. amount to force majeure, because The tribunal noted that Incoterms 12112/2009,28 the State partner of a the imposition of exchange controls defined force majeure as non-perfor- joint venture for cultivating agricul- was “certainly not unforeseeable” in mance arising out of causes beyond tural products did not perform its that those very regulations were either party’s control and without contractual obligations because it already in force when the contract any fault or negligence by the failed to make available the land, was formed. non-performing party. The seller equipment, and facilities that it was claimed that its failure to obtain the In ICC Case No. 2216/1974,30 the to contribute to the venture. This export license was for reasons market price for petrol fell dramati- was because it made all of the land beyond its control and constituted cally after the parties entered into available to an international organi- force majeure. The tribunal dis- the contract. The respondent zation to accommodate refugees agreed, concluding that the regula- refused to take delivery, arguing that from a neighboring country. The tion upon which the seller relied to the fall in price was so large it tribunal concluded that force justify its failure to obtain the export excused respondent’s performance, majeure did not excuse the State license had been in effect for four and also that intervention of govern- partner’s failure to perform because years. Accordingly, it could not be ment financial authorities to prevent the State partner, as a regional public compared to an event such as a currency losses constituted force entity, must have known about the sudden change in the economic or majeure. The tribunal found that the social climate and forces in its region political situation in Romania. The change in market price risk was that made ensuring performance seller was expected to know national foreseeable and its risk could have difficult. The tribunal noted that “[b] export regulations and procedures been allocated. The tribunal also efore entering an obligation, every- in Romania. Lastly, the tribunal found that the respondent was one must, before, be certain that he noted that obtaining the export generally aware of the legislation has the ability to perform it. If he has license was part of the seller’s allowing the financial authorities to or must have the slightest doubt contractual obligations, and thus the intervene, and indeed had received a about his ability to perform at the seller had full responsibility for not letter from the relevant authority, so given time, he must make all neces- obtaining the license. See also ICC the change in circumstances was sary verifications before promising No. 9466/199932 (concluding that a foreseeable. The tribunal noted that performance.” “loss” of ships by their owner when the respondent could have negoti- impounded by a creditor did not In ICC Nos. 3099 and 3100/1979,29 ated clauses in the contract that took qualify as a force majeure event two companies entered into a into account the effects of the under the contract because there contract for sale of petroleum-based legislation allowing financial was no unforeseeability). products. The respondent sought to authorities to take such action, and avoid payment because its central that no doctrine or case law prec- Under different circumstances, in government agency imposed edent held that such legislation ICC No. 8790/2000,33 the tribunal currency exchange controls that, could constitute force majeure. concluded that the seller’s tempo- through no fault of the respondent, rary suspension of deliveries was In ICC Case No. 112253/2002,31 a prevented it from obtaining the justified based on force majeure. The Romanian company entered into a necessary foreign currency to make seller had procured a certificate contract for the sale of scrap metal payment. The contract included a from the local Chamber of to a German company. The contract clause that listed as force majeure Commerce stating that a drought led provided that the seller would events impediments arising from to a decrease in raw material yield, obtain an export license, which it legislation or regulation by Algeria— and that those circumstances were failed to do. The contract further but not from the respondent’s “beyond human control” and provided that force majeure was to government. The tribunal found that prevented the seller from fulfilling be understood as described in

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its contractual obligations. The force party claiming force majeure to to be delivered into Romania. After majeure provision at issue there did prove it attempted alternate perfor- the contract was signed, an avian flu not specify drought as a force mance before accepting its force outbreak prompted the Romanian majeure event, but the tribunal majeure defense. government to bar all chicken concluded that the provision’s imports not certified by a particular For instance, in Parsons & inclusion of “natural catastrophes” date. The seller raised a defense Whittemore Overseas Co. v. Societe and “other circumstances outside under CISG Article 79. Because the Generale de L’Industrie du Papier,35 control” entitled the seller to invoke contract contained no force majeure the respondent was performing a force majeure. clause, the arbitrator applied the turn-key contract for the supply of a CISG to fill the “gap.” The tribunal It is because most impediments are factory when hostilities broke out in concluded that the seller satisfied foreseeable that force majeure the region. These hostilities led to the first two and possibly the fourth clauses should allocate these risks conflict between the governments of elements of force majeure under the specifically according to the eco- the two parties (the claimant was a CISG—there was an impediment nomics of the transaction and to the state-controlled enterprise), and the beyond a party’s control, that was party best able to manage the risk. respondent’s personnel were unforeseeable by that party, and that required to leave the country. At the 2. Exploring alternate the party’s nonperformance was due end of the hostilities, the claimant performance—and demonstrating to that impediment. However, the asked the respondent to continue its impossibility—is critical tribunal found the seller did not carrying out the contract. It is a generally accepted principle of meet the third element—that the Respondent refused on grounds of law that a party seeking to excuse impediment could not be reasonably impossibility, claiming that it was nonperformance must demonstrate avoided or overcome. The tribunal not able to ensure the safe return of it could not have avoided or over- relied on the substituted perfor- its employees to the country, and come the impediment or its conse- mance provision in the U.S. Uniform that its own government cancelled quences.34 The CISG Secretariat Commercial Code to analyze the the financial backing it had previ- Commentary to Article 79 (i) states: third element and concluded that ously given. The tribunal found that, the seller could have shipped to Even if the non-performing party can due to the conditions arising from another port in a neighboring prove that he could not reasonably have the hostilities, the respondent was been expected to take the impediment country, as the buyer had proposed. excused from performance under into account at the time of the conclu- sion of the contract, he must also prove the contract and the relevant law, In National Oil Corp. v. Libyan Sun that he could neither have avoided the but only for the one month of Oil Co.,37 the parties entered into an impediment nor overcome it nor avoided hostilities. After that month, because oil exploration and production or overcome the consequences of the it did not appear that the respondent sharing agreement in Libya. When impediment. This rule reflects the policy made any effort to obtain the the U.S. government then banned oil that a party who is under an obligation to act must do all in his power to carry required visas for its personnel or imports from Libya and severely out his obligation and may not await explored other staffing alternatives, restricted oil exports to Libya, the events which might later justify his force majeure was not a valid defendant invoked force majeure non-performance. defense. In addition, the tribunal and suspended performance under This approach is also found in the noted that the respondent could the contract. Defendant claimed that ICC Clause at Section 1(c). have obtained alternate financing its personnel, all U.S. citizens, could from claimant as provided in the not enter Libya because the U.S. In other words, when asserting force contract. government declared that U.S. majeure as a defense, a party must passports were no longer valid for The tribunal in Macromex Srl. v. show that there were no reasonable travel to Libya. The tribunal rejected Globex Int’l Inc.36 reached a similar alternate arrangements that would the force majeure defense, conclud- result. The contract there was for have allowed it to perform under the ing that the defendant could have the purchase of chicken leg quarters contract. Tribunals often require a hired non-U.S. personnel to perform

Pillsbury Winthrop Shaw Pittman LLP Force Majeure in Tumultuous Times: Impracticability as the New Impossibility

the contract, so the ban did not the object was not unique and a result, it lost the opportunity to constitute force majeure. irreplaceable. claim force majeure for a certain time period. In ICC No. 1782/1973,38 the respon- 3. An otherwise successful force dent contracted to deliver a fleet of majeure defense can be lost by In short, it is essential to provide trucks to three sites in an Arab failing to give timely notice timely notice of events of force country. After defaulting on its A duty to notify the other party of majeure as early as possible to obligations, the respondent cited the impediment and its conse- preserve the ability to assert your force majeure as a basis for the quences “without delay” is found in rights under the doctrine. default, claiming that its Israeli Section 4 of the ICC Clause. The employees would have been unable same requirement is found in CISG Learning from Contemporary Force to obtain visas. The tribunal deter- Article 79(4); UNIDROIT Article Majeure Events mined that there was insufficient 7.1.7(g); PECL Article 8:108(3); and ICC Force Majeure Clause 2003 proof of force majeure, specifically in both common and civil law. The provides a detailed and thoughtful noting that the delay in obtaining underlying policy and logic are model clause. Nevertheless, a party visas could not account for default straightforward—to give the non- will be best served by customizing over 26 months, and that the defaulting party the opportunity to the clause to the circumstances of its respondent could have hired take all reasonable steps available to contract and business transaction. In employees without the alleged it to overcome or mitigate the addition, of course, there are many restrictions. consequences of the event. other reasons to carefully draft force majeure clauses. For example, these As these decisions illustrate, tribu- Tribunals will not excuse failure to clauses are carefully reviewed by nals demand evidence both that the provide timely notice of asserting a investors and lenders to confirm impediment could not have been force majeure event. For example, they are clear, comprehensive and avoided and that alternate perfor- in ICC No. 2478/1974,39 a French consistent with market practice. mance options were explored but company claimed damages against Lenders will often not make loans were not feasible. There is a reason- a Romanian company that had not unless the force majeure clause ableness limitation to the dual delivered an agreed quantity of fuel clearly indicates who will bear the requirement to “avoid” the impedi- because of a change in the price risk if the project becomes not ment and to “overcome” its effects. of oil and because the Romanian feasible so the lender will know to The test is what a “reasonable authorities cancelled the export whom to look for repayment of its person” would have done in like license concerning the fuel. The loan. circumstances. As Comment C (iii) Romanian company asserted that to PECL Article 8:108 states: the cancellation of the export license As noted above “ordinarily, only if

One cannot expect the debtor to take constituted force majeure, exempt- the force majeure clause specifically precautions out of proportion to the risk ing it from all contractual liability includes the event that actually (e.g., the building of a virtual fortress) for having stopped deliveries. The prevents a party’s performance will nor to adopt illegal means (e.g., the tribunal agreed, saying the event that party be excused.”40 Where then smuggling of funds to avoid a ban on “undeniably constitutes a case of to draw the line in terms of identify- their transfer) in order to avoid the risk. force majeure,” based both on the ing and listing specific events of “Reasonableness” is a question of “general principle of law” and on force majeure? fact which can only be determined the relevant contract. However, the Science fiction writers can envision on a case by case basis. A shipper contract and general legal principles a time when machines controlled by carrying items such as a required the party invoking force artificial intelligence might go awry Michelangelo painting will be majeure to inform the other party and interfere with commerce. Such expected to take far more extensive without delay. The Romanian com- an event, although it can be imag- and costly steps to prevent damage pany did not provide timely notice— ined, is not reasonably foreseeable to the item than would be the case if waiting over six months—and as

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at this time. Most businessmen and vulnerable to these solar storms. To hurricanes are frequent and not their counsel would agree this risk is date, they have not been willing to unexpected, will it be held to a so remote as to be currently unwor- invest the $350,000 to $1 million per higher standard to avoid or over- thy of consideration. transformer to protect their equip- come the impact than a company ment and customers against these located where those types of events There are foreseeable events to storms. Legislation passed by the are a rarity? Likewise, should a consider that, while unlikely, are U.S. House of Representatives in company located in London or New worth analysis. For example, a 2011 said that 350 such transformers York be better and differently “Carrington Event” is a large solar in the U.S. are critical and should be prepared for a terrorist event than a flare—a burst of X-rays spinning out protected.43 company located in Alaska? With from a sunspot.41 The largest such heightened unrest in the Middle event occurred in 1859. A more Severe solar storms are a classic “Act East, should energy companies be recent solar event in 1989 caused of God” and arguably a “violent expected to give more consideration hundreds of millions of dollars of storm” listed in Section 3(e) of the to alternative energy sources and to damage in Quebec, Canada and ICC clause. Nevertheless, will a energy independence? What sort of destroyed huge electric transformers utility’s force majeure defense fail back-up plan should be in place and in South Africa. Scientists currently because (a) the event is foreseeable, ready to be implemented in order to are aware that we are in a two- or and (b) its effects can be avoided for minimize business disruptions when three-year period of increasingly a reasonable cost? faced with these or other force frequent outbursts. A Carrington An asteroid strike is an “” majeure events? scale event could result in a geomag- and presumably a “natural disaster” netic storm that might take down listed in Section 3(e) of the ICC Practical Drafting Suggestions part of the North American power clause. Asteroid strikes are known The ICC model clause, in our view, grid. Indeed, a 2008 U.S. National and foreseeable.44 The threat of an is an excellent effort at defining a Academy of Sciences report stated impending strike is discoverable by clear, analytic framework and that such an event could knock out scientists, but often only with a few specific events that should be listed. power in parts of the country for days notice. This would provide Nevertheless, we suggest a few months or possibly years. The report enough time to evacuate personnel modest changes and questions to estimated that approximately 135 and equipment that are movable, but address. The most important points million Americans could be forced not, for example, in place, finished are to identify and list specifically all to revert to a pre-electric lifestyle or construction. Depending on its size, risks and to revisit foreseeability in move to new location: “Water the strike would likely render the the context of every new contract. systems would fail. Food would site uninhabitable. Unlike a solar spoil. Thousands would die.”42 The In ICC Clause Section 3(c), we and storm’s impact on the electric grid, impact on national and international others suggest adding to “act of there is no way to “avoid” an aster- commerce, assuming the study is terrorism” the words “or threat oid strike or fully overcome its correct, would be catastrophic. thereof.” The facts in the U.S. case effects. Neither party is in a better Sub-Zero Freezer Company v. Cunard Many companies would have to position to manage the risk. We Lines Limited45 are instructive, even claim force majeure. The party assume that is why this rare—albeit though there was no force majeure opposing the defense would argue foreseeable and real—risk is not clause in the contract. The plaintiff that the non-performing party listed in any force majeure clause of reserved well in advance a cruise should both have foreseen the which we are aware. ship to sail the Mediterranean the possibility of a Carrington event and Similar questions can be raised for first week in October 2001, which taken precautions to protect against other types of force majeure events. turned out to be three weeks after its effects. Electric utilities know, for If a company is located in an area the events of 9/11. Many of the example, how to protect their where earthquakes, tornadoes, or plaintiff’s employees and guests transformers which are most

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refused to go because of safety Climate change has become a big One possible solution would be to concerns. The defendant refused to issue for energy vendors and add as a specified impediment “any reschedule or to return the deposit manufacturers (and others). New failure by a government to act as amount. The court found that the greenhouse gas laws and regulations expected in the normal course of parties could have allocated the are being proposed with regularity. time.” Such language, however, may risks, but did not, and therefore It is important for counsel to help not adequately define the ruled against the plaintiff’s claim of clients anticipate and plan for major impediment. force majeure. We can only specu- changes in applicable environmental late whether, if there was a force laws and regulations.46 Companies Conclusion majeure clause and it did list “act of entering into long-term supply It is increasingly important to terrorism” as an event of force contracts have to consider poten- maximize force majeure protection majeure, the court would have tially significant new financiale.g. ( , by carefully drafting—and then interpreted it to include “threats” of capital and operating cost) uncer- preserving—rights under a contract terrorism under the circumstances. tainties resulting from regulatory that will excuse performance if There were threats and real fear of change. In addition, there are an faced with unexpected events additional acts of terrorism in the increasing number of climate change beyond one’s control. The unex- period after 9/11. However, there litigations being filed. These pected should be expected. were no “acts.” Is the “threat” of an foreseeable changes are hard to Endnotes “act of terrorism” an event of force predict and quantify. Nevertheless, 1 Black’s Law Dictionary 718 (9th ed. 2009). majeure in the absence of the they are risks which should be 2 suggested new language? analyzed and allocated, whether in a There are many thoughtful articles that address in detail these different approaches. See e.g., force majeure, price adjustment To deal with Carrington-type events, Chengwei Liu, Force Majeure: Perspectives from and/or termination clause. Many we suggest adding the words the CISG, UNIDROIT Principles, PECL and Case Law existing contracts allocate risks from (2d ed. Apr. 2005), available at http://www.cisg. “atmospheric disturbance” to ICC increased regulatory costs which law.pace.edu/cisg/bibio/liu6.html ; Catherine Kes- Clause Section 3(e). This will avoid might some greenhouse gas sedjian, Competing Approaches to Force Majeure an argument that it is not a “violent laws. An issue is whether existing and Hardship, 25 Int’l Rev. of Law & Econ. 415 storm” listed in 3(e) and the further (Sept. 2005); Dr. Theo Rauh, Legal Consequences of force majeure clauses cover both argument that it was a foreseeable Force Majeure Under German, Swiss, English and local and national greenhouse gas event whose risk was not specifically United States Law, 25 Denv. J. Int’l L & Pol’y 151 regulations as well as international (Fall 1996). allocated and therefore is not force treaty climate change legislation. 3 majeure. W. Laurence Craig et al., International Chamber of There are many situations that are Commerce Arbitration 651 (3d ed. 2001). Another change to consider is less clear to analyze and resolve. For 4 The ICC has also developed the “ICC Hardship whether to add the words “or example, should contract negotia- Clause 2003.” That clause is triggered when the quarantine” after “plague, epi- tors try to address a situation such as contractual duties have become “excessively oner- demic,” in ICC Clause Section 3(e). ous” for a party due to an event beyond its control the U.S.’s recent debt ceiling crisis, Many believe the threat of biological that it could not reasonably have been expected where Congress failed to act until warfare has increased and the threat to have taken into account at the time of the the last minute to raise the ceiling? of some new more virulent threat of contract, and that the party could not reasonably This inaction created turmoil and have avoided or overcome the event or its conse- influenza—terrorist or otherwise— uncertainty in the global economy, quences. When such an event occurs, the parties cannot be ruled out. We think it including stalled deals and delayed are required to negotiate alternative contract terms preferable to make clear that that reasonably allow for the consequences of the financings. Although government quarantine in the course of a plague event. If those negotiations are unsuccessful, the inaction generally is foreseeable, or epidemic, an “effect,” but not the party invoking the clause is permitted to terminate some might argue that the length of the contract. Int’l Chamber of Commerce, ICC Force event listed itself, is covered. Congress’s recent inaction over the Majeure Clause 2003 - 2003, ICC debt ceiling was not foreseeable. Publication 650 (2003).

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5 Robert J. Rhee, Catastrophic Risk And Governance documents. Cf. Flathead-Michigan I, LLC v. The prevented performance. See also 508 F.2d 969 (2d After Hurricane Katrina: A Postscript To Terrorism Peninsula Development LLC, 2011 U.S. Dist. LEXIS Cir. 1974) (award enforced in the U.S.). Rick In A Post - 9/11 Economy, 38 Ariz. St. L. J. 581, 27045 (E.D. Mich. Mar. 16, 2011). See also Jay D. 27 The U.S. Supreme Court explained, “as Justice 583–84 (Summer 2006). Another author has quanti- Kelly, So What’s Your Excuse? An Analysis of Force Traynor said, [i]f [the risk] was foreseeable, there fied the impact and toll from acts of terrorism, Majeure Claims, 2 Tex. J. Oil Gas & Energy L. 91, should have been provision for it in the contract, pandemics and more routine everyday risks. See 93–97 (2006). and the absence of such a provision gives rise to Patrick J. O’Connor, Allocating Risks of Terrorism 12 Transatlantic Fin. Corp. v. United States, 363 F.2d the inference that the risk was assumed.” United and Pandemic Pestilence: Force Majeure for an 312, 315 (D.C. Cir 1966). States v. Winstar Corp., 518 U.S. 839, 905–907 Unfriendly World, 23 Constr. Law 5, 5–6 (2003). (1996). 13 Restatement (Second) of Contracts § 261 (1981). 6 Rhee, supra note 5 at 585 n.23. 28 ICC Case No. 12112 in Albert Jan van den Berg 14 U.C.C. §2–615(a) (1977). 7 ICC Case No. 9978/1999 (Extract), 11 ICC Bull. (ed.), XXXIV Yearbook Commercial Arbitration 2000, 117. 15 International Law Commission Articles on State Re- 77–110 (2009). sponsibility Article 25(1), UN Doc. A/56/10, 2001. 8 The CISG applies to contracts of sale of moveable 29 I ICC Awards 67. goods between parties that have their places 16 Amin George Forji, Drawing the Right Lessons from 30 ICC No. 2216/1974, Award Abstract and Commen- of business in different countries when those ICSID Jurisprudence on the Doctrine of Necessity, tary, Digest of ICC Awards. countries have adopted the CISG or when the rules 76 Arbitration 44, 47 (2010). of private international law lead to the application 31 21 ICC Bull. 66 (2010). 17 of the law of a country that has adopted the CISG. Id. 32 IV ICC Awards 97. CISG Art. 1(1). The CISG is essentially an overlay 18 ICC Force Majeure Clause 2003 para. 6; Forji, supra on the national sales code or sales law of each note 16 at 49 (tribunal finding state of necessity for 33 IV ICC Arbitral Awards 155. country that has adopted it. one-and-a-half years). 34 CISG Article 79 (i), UNIDROIT Principle Article 7.1.7 9 U.S. Restatement (Second) of Contracts, Ch. 11, 19 ICC Force Majeure Clause 2003 para. 1(a)-(c). In (i), PECL Article 8:108 (i). introductory note (1981). drafting the ICC Clause, the ICC Task Force on 35 ICC No. 1703/1971, Pieter Sanders (ed.), I Yearbook 10 The Code Napoleon, or, the French Civil Code, Force Majeure and Hardship took into account the Commercial Arbitration 130–32 (1976). See also Articles 1147 and 1148, 313–14 (Inner Temple previous ICC Force Majeure Clause 1985, CISG Parsons & Whittemore Overseas Co., 508 F.2d 969 Article 79, the Principles of European Contract Law translation) (William Benning London 1827). Article (award enforced in the U.S.). 1147 provided that the “debtor is condemned, if (“PECL”) Section 8:108, and the Unidroit Principles there be ground, to the payment of damages and for International Commercial Contracts (“Unidroit 36 AAA Case No. 50181T 0036406 (Interim Award interest, either by reason of the non-performance Principles”), Article 7.1.7. For a discussion on how dated Oct. 23, 2007). See also 2008 U.S. Dist. of the obligation or by reason of delay in its the CISG, Unidroit Principles, and PECL treat force LEXIS 31442 (S.D.N.Y. 2008) (award enforced in execution, as often as he cannot prove that such majeure, see Liu, supra note 2. the U.S.).

non-performance proceeds from a foreign cause 20 ICC Clause at para. 5. 37 ICC Case No. 4462/1985 and 1987, Albert Jan van which cannot be imputed to him, although there den Berg (ed.), XVI Yearbook Commercial Arbitra- be no bad faith on his part.” Article 1148 provided 21 Id. at para. 6. tion 54–78 (1991). See also 733 F. Supp. 800 (D. that “[t]here is no ground for damages and inter- 22 ICC Clause Note (d). Del. 1990) (award enforced in the U.S.). est, when by consequence of a superior force or of a fortuitous occurrence, the debtor has been 23 Id. 38 Award Abstract and Commentary, Digest of ICC prevented from giving or doing that to which he has Awards. 24 bound himself, or has done that from which he was Id. 39 I ICC Awards 25. See also Kyriaki Karadelis, Thai interdicted.” 25 Id. See also ICC Clause Introductory Note (“It company wins oil claim against Glencore, Global 11 should be emphasized that even where a party A helpful brief overview of the evolution of the Arbitration Review, Oct. 28, 2011, available at invoking the clause does so by pointing towards a doctrine of impossibility under common law is http://www.globalarbitrationreview.com/ news/ listed event, that party still needs to prove that it found in the discussion of “Force Majeure and article/29919/Thai-company-wins-oil-claim- could not reasonably have avoided or overcome the Common Law” in Carlos A. Ecinas, Can A Borrower against-glencore (rejecting force majeure argu- effects of the listed event.”). Use an Economic Downturn or Economic Downturn ments in arbitration of breach of oil sales contract Event to Invoke The Force Majeure Clause In Its 26 For instance, in Parsons & Whittemore Overseas when seller claimed it could not deliver cargo Commercial Documents?, 45 Real Co. v. Societe Generale de L’Industrie du Papier, because Venezuela’s state-owned oil company had Prop. Tr. & Est. L.J. 731 (2011). This is a thought- ICC Case No. 1703/1971, Pieter Sanders (ed.), I been instructed by the Venezuelan government to provoking article that argues that unprecedented Yearbook Commercial Arbitration 130–32 (1976), stop production and export of the crude oil to be economic downturns such as the 2008 credit crisis the tribunal found that the respondent was excused delivered). The tribunal reportedly found the notice in the U.S. are a basis for invoking a force majeure from performance only for one month of time in of force majeure “invalid and ineffective.” clause in a borrower’s commercial real estate loan which the defendant claimed a force majeure event

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40 Kell Kim Corp v. Cert. Mkts., Inc., 519 N.E. 2d 295, 296 (N.Y. 1987).

41 Brian Vastag, As the sun awakens, the power grid stands vulnerable, Wash. Post, June 20, 2011, available at http://www.washingtonpost.com/na- tional/science/as-the-sun-awakens-the-power-grid- stands-vulnerable/2011/06/09/AGwc8DdH_story. html.

42 Id.

43 Id.

44 See, e.g., Steve Tracton, Asteroid to barely miss contact with Earth, Wash. Post, June 27, 2011, available at http://www.washingtonpost. com/blogs/capital-weather-gang/post/asteroid -barely-misses-contact-with-earth/2011/06/27/ AGseRTnH_blog.html.

45 2002 WL 32357103 (W.D. Wis. Mar. 12, 2002).

46 Dane A. Holbrook and Aileen M. Hooks, Climate Change Finds Its Way Into Business Contracts, National L.J., Oct. 25, 2010.

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