The global financial crisis has caused massive economic upheaval and triggered a wide range of business risks.
More frequently than any time in recent memory, parties are forced to terminate or adjust contracts after conclusion. For some, the impact of the crisis has been profound and they either succeed in renegotiating the terms of contracts, or they fail, incurring damages and, in some cases, even moving into insolvency. For this reason, the modification of contractual terms can sometimes be the only way to guarantee a party’s survival.
This problem is by no means limited to the developed, Anglo-American world – it also extends, to varying degrees, to businesses and individuals in Asia, Africa, and Europe.
In view of the impact of the current economic crisis, it is becoming increasingly appropriate to adopt a comparative approach to this problem. The issue centres not only on the fulfilment of contractual obligations, but also on the various theories of contracts originating from continental Europe. Within this context, a special role is played by the concept of force majeure.
Poor performance
The main purpose of a force majeure clause is to excuse non-performance under specified circumstances. The clause is established in most construction contracts and in the Anglo-American world it has become a standard, boilerplate term.
Given that the clause assumes considerable significance in commercial practice, it is not surprising that force majeure events are sometimes the subject of protracted negotiations. However, it in some legal systems force majeure is a doctrine that may apply even if the contracting parties did not insert a special clause into their agreement.
Furthermore, in some jurisdictions there are other, similar doctrines excusing non-performance, such as impossibility and impracticability. In particular, significant discrepancies between the common law system and continental law can lead to problems in employing force majeure and in interpreting contracts containing a provision referring to this concept. This is especially so in contracts affected by the economic crisis.
Therefore, it is highly relevant to ask whether force majeure clauses are effective tools in time of economic crisis.
The doctrine of force majeure and a force majeure clause are widely recognised by jurisdictions, lawyers, and contracting parties across the world. However, not all legal systems treat force majeure in the same fashion, which explains differences in understanding and interpreting the concept.
Different doctrines
The civil law systems give specific force majeure events relief even where there is no express contractual provision to that effect. By contrast, English law has no legal definition of force majeure and labours under the doctrine of contract frustration and elaborate force majeure clauses.
The exploration of various legal systems dealing with the problem of changed circumstances highlights the existence of different doctrines that allow parties to be released from obligations. They have evolved progressively in various jurisdictions and, for instance, include the Swiss idea of impossibility, the American concept of commercial impracticability, and the German doctrine of Wegfall der Geschäftsgrundlage (frustration of contract).
Given that rebus sic stantibus – the principle that agreed obligations remain in force only as long as the core circumstances that existed at the time of creation continue to hold – constitutes an interesting inroad into pacta sunt servanda (the sanctity of contracts) and can be used to erode the binding nature of contractual obligations, it has been applied restrictively and narrowly. Moreover, it must be highlighted that rebus sic stantibus is not the same as force majeure – they are conceptually different, and the two terms cannot be employed interchangeably.
A force majeure clause plays an important role in modern contractual arrangements. Existing discrepancies illustrate why contracting parties should pay attention when drafting international contracts. If the contract makes provision for the event that has occurred, then it is the contract that will regulate the effects of the event on contractual obligations. This is why it is important to draft a force majeure clause properly.
No golden shield
However, a force majeure clause is not a golden shield or a magic wand that can be waved at a contractual obligation that has become merely more onerous. It is almost impossible to imagine these days that a distressed party would successfully claim that the financial crisis is a force majeure event.
A force majeure event is unique, almost unprecedented in nature. This is why contracts concluded before the start of the crisis, and those before the crisis engulfed most parts of the world could have a greater chance of relying on a force majeure clause. Importantly, the term must have been sufficiently precise, stating the kind of crisis – financial, economic, global, euro, etc – that has specifically affected the distressed party.
The current crisis is considered a business risk, of which the parties should have been aware, and which the business professionals should have foreseen. This explains why claimants are failing in their attempts to portray the financial crisis as a force majeure event.
Furthermore, on the basis of rulings from Europe, Asia, North America and Africa, the courts have unanimously decided that the economic crisis is not a lawful reason to extinguish either party’s obligations.
The impact of the crisis may have devastating effects on performance, it may be the cause of severe hardship or commercial unprofitability, but it does not constitute force majeure.
Mateusz Drozdz is an associate in the Warsaw office of French global law firm Gide Loyrette Nouel law and a lecturer at Lazarski University. Robert Rajczewski is a doctoral student at the Goethe University
in Frankfurt
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