Force Majeure in Times of War

The future is uncertain. It would be prudent to act in a risk-averse manner, leaving room for the unknown, particularly in these volatile times. The commercial and legal professions have long since tried to incorporate such risks into contractual agreements, in the form of a Force Majeure clause. From the simple exceptions of unforeseeable events to elaborate and multi-faceted clause(s) in modern contracts, the evolved force majeure clause has sprung into relevance with the occurrence of major global events in recent years.

What is force majeure?

A force majeure or ‘Act of God’ is an event which could not have been foreseen and is beyond the control of the parties. In terms of contracts, a force majeure clause would excuse or free parties from their contractual obligations rendered unperformable or frustrated due to the occurrence of an unforeseen event. Such a clause would generally not extend to events solely causing economic or financial hardship which could have been appropriately dealt with, but would include events which could be called “acts of god” such as floods, earthquakes, plagues, etc. or catastrophic man-made events such as war, riots, strikes, etc.

The origins of the concept of force majeure can be traced back to the Napoleonic Code. In common law, the first application of the Force Majeure clause was in the English case of Taylor v. Caldwell[1], where the court decided that since the purpose of the contract itself had been frustrated due to an event beyond the control of the parties, the parties’ obligation of performance under the contract would be excused. Summarizing and reviewing discussions on this principle in past cases, the court stated: “In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.”[2]

The force majeure clause has undergone significant evolution, expanding from the broad definition of unforeseeable events beyond the control of the parties. Today, parties seeking to invoke a force majeure clause must now demonstrate not only the impossibility/unreasonable nature of performance of their contractual obligations, but also the nature of the impact of the event on such party (whether temporary or permanent) and the unavailability of alternate means to fulfill their contractual obligations in exceptional circumstances.[3]

The necessary conditions to trigger a force majeure clause can be condensed down to the following points:

• An unexpected or unforeseen event has occurred.
• The performance of the contractual obligations has been rendered impossible or unperformable.
• The opposite party in a contract has been duly notified of the effect of a force majeure event.
• All possible measures have been undertaken by the parties to mitigate the effect of such an event (including employing an alternate means for performance, if available)
• The unforeseen event would have to satisfy the conditions precedent established in the contract, if any.

The International Chamber of Commerce has published a draft force majeure clause which could be incorporated in future contracts[4]. The long form clause of the ICC’s draft force majeure clause is quite broad, providing for events ranging from war, invasion, revolutions and riots to acts of authorities such as currency restrictions, seizure of works, nationalization, etc.

Force Majeure in these changing times

In the last two years, we faced a global event the likes of which had not been seen over the last few decades, at the very least. The Covid-19 pandemic has had far reaching repercussions, leading to massive loss of human life as well as a global economic recession. Needless to state, the pandemic and lockdowns instituted by most countries had a major effect on performability of contracts. Although most modern contracts include the term ‘plague’ as a force majeure event, the applicability and interpretation of the same by judicial authorities was highly uncertain.

In order to address this uncertainty, the Government of India released certain executive directives/notifications[5] over the course of the pandemic with respect to the consideration of the Covid-19 pandemic and subsequent lockdowns as force majeure events in commercial contracts (particularly in connection with public-private partnership contracts). In weighing the same against the facts and circumstances of individual cases, Indian courts have laid emphasis on the fact that for valid invocation of the force majeure clause, the impossibility of performance of contractual obligations, beyond the scope of reasonable and practical alternate means, must be demonstrated.

The Delhi High Court has in the case of Halliburton Offshore Services Inc. v. Vedanta Ltd ^[6] highlighted the need for the examination of the facts and circumstances of each matter where such a clause is invoked. It was stated that: “The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non- performance due to the epidemic/pandemic”. Pertinently, the Bombay High Court in the case of Standard Retail vs G.S Global Corp Pvt. Ltd.[7] held that contracts may not be avoided if the event (in this case the pandemic) does not affect performance of the contract or every aspect of the contract. Merely invoking the force majeure clause is not sufficient, but a prima facie case must be established demonstrating the inability of a party from fulfilling its obligations under the contract.

The judiciary will likely hear many cases wherein the force majeure clause of contracts are sought to be invoked, requiring further consideration and discussion of the force majeure clause in relation to the Covid-19 pandemic. However, the pandemic has already caused a change in commercial agreements, with the scope of force majeure clauses now being expanded and specific conditions being elaborated on, with saving statements provided on the occurrence of endemics, epidemics as well as pandemics. This has thrown the spotlight on the force majeure clause, which will only intensify with a major war already underway in Europe.

Force majeure and war

A mainstay in force majeure clauses in modern contracts, the force majeure of ‘war’ has been interpreted to require a lower causation threshold in comparison to other events. Most events specified in force majeure clauses require that such an event should “prevent performance” of the contractual obligations. In comparison, the condition of “war” mostly requires that the war “materially affects” performance, not requiring the prevention of performance by the event. [8]

The recent aggression and hostilities between the nations of Russia and Ukraine is an indicator of the need for further examination of the force majeure clause vis-à-vis war and whether elaboration/broadening of the clause would be advisable for avoidance of future risks.

Taking the example of the Russo-Ukraine war, following are certain hypothetical scenarios which may require invocation of force majeure clauses in the near future:

• When speaking of a major economic force such as Russia, the supply of raw or rudimentary materials from the country could affect the manufacturing and supply of products as obligations under commercial agreements;
• Russia is a major exporter of natural gas and Ukraine is major exporter of neon gas, important for the sectors of heating/infrastructure and semiconductor manufacture respectively. The ongoing war has already had severe economic effects with respect to the same.
• Over the course of the last weeks, Russian banks and financial entities have been banned from accessing and utilizing the SWIFT payment system. The operations of other payment systems such as Visa, Mastercard and Paypal have also been suspended in Russia. This financial embargo will cause delay and difficulty in the transfer and payment of money, and is already affecting recovery and payment in existing contractual arrangements.
• In response to the economic sanctions against it, the Russian Government has also floated the idea of nationalizing foreign assets in Russian territory. This could majorly impact the liquidity and functioning of foreign entities on Russian soil as well as affect their overall financial strength.

With the possibility of such scenarios affecting the performability of contractual obligations, it would be advisable that where plausible, the terms of the force majeure clause with respect to war are revisited and modified. Some commercial contracts go one step further an include a “war clause” in contracts so as to better deal with difficult scenarios. Whether in a force majeure clause or a specific war clause, the following points should be kept under consideration for future international commercial agreements:

• Provide an elaborate, detailed definition of the term war. With the rise of asymmetric warfare, it only makes sense to clarify that it is not essential that there be a declaration of war. Further, other forms of aggressions such as civil war, invasions or military action by foreign/enemy elements should also be specified.
• It is not important that a war between two specific countries or entities should have been declared. It should be clarified that any international conflict which has a major effect on the terms and performability of the particular contractual obligations.
• If the possibility of war is present when entering into a contract, the economic consequences of relying on the war clause should be fleshed out. The issues of part performance, part payment and damages can be incorporated in the terms of a war/force majeure clause to provide for easier resolution in case of invocation of such clause.
• Factors and events connected to wars should also be incorporated in war/force majeure clauses. Events such as troop mobilization, cyber warfare, embargos and sanctions are more likely to occur than all-out military aggression, so such events should be covered.

Sanctions and (Anti) Sanctions Clauses

With the presence of highly destructive weapons in almost every country’s arsenal, the most common and effective non-violent tool used by nations in the current geopolitical scenario are sanctions. Historically, sanctions have been levied not only in cases of international conflicts, but also due to human rights violations. War as well as sanctions can have substantial effects on the performability of the contracts. The current aggression has already caused a repel effect, affecting the supply of raw materials, transport expenditure due to rise in fuel costs, and even payment of consideration, with sanctions having been applied with respect to payment systems, access to currency conversion and causing massive inflation.

It would therefore be pragmatic to consider incorporating a separate sanctions clause in a commercial contract, wherein it be specified that in case of the imposition of sanctions, the parties to the contract do not acquire additional obligations and would be excused from any liability from undue/non-performance on account of the imposition of such sanctions. In essence, the objective of such a clause would be to maintain the balance of the parties’ rights and obligations as originally intended, despite changing and unforeseen circumstances. Accordingly, an (anti) sanctions clause ought to specify and provide for conditions which would render performance the contract of the contractual obligations to be difficult or impossible. Such events may either allow for termination of the contract, or the right to refuse performance and a possible mechanism for calculation of damages.

In terms of the effects of international sanctions, the applicability of sanctions as a force majeure was considered by the English High Court in the case of Lamesa Investments Limited v Cynergy Bank Limited[9].  In this dispute arising from a contract between the two aforesaid parties, Lamesa Investments Limited (LIL) was indirectly impacted by US Secondary Sanctions, in light of which the Cynergy Bank Limited (CBL) withheld payments to LIL, particularly to avoid the risk of loss of its US correspondent banking relationships. Per the savings clause in the contract, CBL would be not be in default of its contractual obligations on withholding payment “in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction..” The English High Court interpreted this provision broadly, holding that CBL was allowed under the contract to withhold payments to LIL while it remained affected by the US Secondary Sanctions, as the framing of the savings clause as “any mandatory provision of law” embraces the US sanctions. A relevant sidenote on the judgement is that due to the particular nature of the sanctions, the clause did not permanently extinguish the contractual obligations, but was applied in a suspensory sense.

Looking to provide standard frameworks for sanctions clauses as they grow more common, sample clauses have been published by the International Chamber of Commerce[10] (ICC) as well as by the Baltic and International Maritime Council[11] (BIMCO). The ICC[12] recommends consideration of factors such as legality of sanctions clauses and avoiding overbroad clauses which might cause conflicts with the applicable statutory requirements. BIMCO has over the last 3 years published sample sanctions clauses for time charters as well as standard affreightment, which provide for avoidance/modification of contractual obligations in case of war, interruption of performance or direct/indirect effects of sanctions on one or both of the parties. These sample clauses can be used as a guiding light for draftsmen looking to incorporate sanctions clauses in contracts.

Conclusion

The most important issue when considering invocation of war or sanctions as a force majeure event in a contract is regarding the interpretation and application of the same by judicial authorities. While some acts of war may be instantaneous, it could be said that circumstances such as buildup of troops along a country’s border could be relevant when considering performance of a contract connected to such region(s). Another factor which would affect interpretation of such clauses is whether alternate means of performance were available to the parties, and the reasonability of using or resorting to such alternate means. The mixed interpretation of force majeure clauses in light of the COVID-19 pandemic shows us that applicability of such a clause remains interpretation-dependent and highly circumstantial.

Draftsmen and parties to contracts should now look to not only include war and sanctions as force majeure conditions but consider providing further elaboration to avoid frustration risks. Keeping in mind both the legality of such clauses in particular jurisdictions and the likelihood of being affected by such circumstances, the inclusion of a distinct war clause and/or a sanctions clause might be a wise option.

Authored by:

[1] 122 ER 309; 3 B. & S. 826 (1863)

[2] Ibid

[3] See Energy Watchdog v. Central Electricity Regulatory Commission, [2017] 14 SCC 80

[4] ICC Force Majeure and Hardship Clauses, International Chamber of Commerce, March 2020, available at: https://iccwbo.org/content/uploads/sites/3/2020/03/icc-forcemajeure-hardship-clauses-march2020.pdf

[5] Notification No. F. 18/4/2020 PPD dated 19-02-2020, The Ministry of Home Affairs, Government of India

Office Memorandum No. 283/18/2020-GRID SOLAR dated March 20, 2020, the Ministry of New and Renewable Energy, Government of India

[6] O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020

[7] Commercial Arbitration Petition (L) No. 404 of 2020

[8] Classic Maritime Inc. v Limbungan Makmur SDN BHD and another, [2019] EWCA Civ 1102

[9] [2019] EWHC 1877 (Comm)

[10]Guidance Paper On The Use Of Sanctions Clauses In Trade Finance-Related Instruments Subject To ICC Rules, International Chamber of Commerce, Document No. 40/178, Available at: https://www.icc-austria.org/en/Service/Drafting-import-export-contracts/Sanctions-clauses.htm

[11] BIMCO Sanctions Clause for Time Charter Parties 2020, BIMCO Sanctions Clause for Container Vessel Time Charter Parties 2021, and BIMCO GENCOA 2022 Standard Contract of Affreightment