Force Majeure In Tumultuous Times: Impracticability As The .

Force Majeure in Tumultuous Times: Impracticability as the New Impossibilityevolved from one of “physicalimpossibility” to “frustration ofpurpose” (U.K.) to “commercialimpracticability” (U.S.). Initially, thetest for impossibility in common lawwas objective: Was performancerendered absolutely or physicallyimpossible?Today, most tribunals and courtsutilize a standard of commercialimpracticability.11 Performance isexcused when it is not practical andcould be done only at excessive andunreasonable cost.12 The U.S.Restatement (Second) of Contractsprovides that when, “after a contractis made, a party’s performance ismade impracticable without [theparty’s] fault by the occurrence of anevent, the non-occurrence of whichwas a basic assumption on which thecontract was made, [the party’s] dutyto render that performance isdischarged as a result, unless thelanguage or the circumstancesindicate the contrary.”13 Essentiallythe same standard is found in U.S.Uniform Commercial Code Section2–615 involving the sale of goods.Section 2–615(a) sets forth a threepart test: (1) a “contingency” (eventor impediment) occurred, (2) whichmakes contract performanceimpracticable, and (3) the nonoccurrence of the contingency was abasic assumption on which thecontract was made.14Force majeure is similar to thedoctrine of “necessity,” which statesmay attempt to rely on in theinvestment context when forcemajeure-type circumstances arise.The International Law CommissionArticles on State Responsibilityprovide in Article 25 that a state mayinvoke the doctrine of necessity as abasis for excusing a wrongful actonly when (1) the act is the onlymeans for the state to safeguard anessential interest against a grave orimminent peril, and (2) the act doesnot seriously impair an essentialinterest of the state or states towardswhich the obligation exists, or of theinternational community as awhole.15 Argentina has widelyinvoked the necessity defense in thearbitrations it has faced and is facingin the International Centre for theSettlement of Investment Disputes(“ICSID”).16 As a result of a financialcrisis, Argentina repealed the law onwhich most of its bilateral investment treaties had been negotiated,leading to dozens of arbitrationsbrought against it.17 Althoughdifferent tribunals have reacheddifferent outcomes, by and largeArgentina has not been able to relysuccessfully on necessity.There are a number of similaritiesbetween force majeure and necessityin addition to the fundamentalsimilarity that they are both invokedwhen catastrophe strikes. With bothforce majeure and necessity, thespecific contract or treaty provision,respectively, will effectively “trump”any relevant governing law, whetherinternational or otherwise. Further,the application of a force majeure ornecessity defense is often restrictedto a limited period of time, instead ofallowing a blanket defense.18Necessity and force majeure,however, require fundamentallydifferent analyses. Unlike forcemajeure, the necessity defense doesnot include any type of “foreseeability” requirement. In addition,necessity requires examining theeffect of the state’s “wrongful” act onother parties—a requirement whollymissing from the inquiry under forcemajeure.It is now generally accepted incommon and civil law systems thatcontractual performance thatbecomes “impossible” or “commercially impracticable” under certaincircumstances may be excused. Theissue we address is under whatcircumstances—recognizing thatthere is not unanimity of approachin all legal systems.The ICC Has Developed aComprehensive Model ForceMajeure ClauseThe ICC Clause is a model clausethat reflects the emerging consensusabout what is required to establish aforce majeure defense. The“Introductory Note” and Note (a) tothe ICC Clause states it “amalgamates” elements of the previous ICCForce Majeure Clause 1985, theCISG, the Principles of EuropeanContract Law (“PECL”) and theUnidroit Principles for InternationalContracts (“UNIDROIT”).The ICC Clause first provides ageneral force majeure formula: aparty relying on the ICC Clausemust prove that (1) its failure toperform was caused by an impediment beyond its reasonable control,(2) it could not reasonably have beenexpected to have taken the occurrence of the impediment intoaccount at the time of the conclusionof the contract, and (3) it could notreasonably have avoided or overcome the effects of the impediment.19The ICC Clause states in Section 3that, in the absence of proof to thecontrary and unless otherwiseagreed by the parties, if thewww.pillsburylaw.com

Litigationimpediment is listed in Section 3(a)to (g), a party “shall be presumed” tohave established that (a) its failure toperform was caused by an impediment beyond its reasonable control,and (b) it could not reasonably havebeen expected to have taken theoccurrence of the impediment intoaccount at the time of the conclusionof the contract, provided the impediment is specifically listed therein.The ICC Clause in Section 3 listsdozens of force majeure events,including, but not limited to, war,armed conflict, hostilities, terrorism,acts of God, plague, natural disaster(including violent storm, volcanicactivity, and tsunami), explosion,fire, and general labor disturbancessuch as strike or boycott. The ICCClause states that successfullyinvoking force majeure means aparty is relieved from liability indamages or other contractualremedy for breach of contract.20When the effect of the impedimentis temporary, however, a party isonly relieved from its duty toperform under the contract as longas the impediment impedesperformance.21The Notes to the ICC Clause specifythat the mere occurrence of anenumerated event does not automatically afford relief to the nonperforming party.22 That party mustprove, in addition, that he could nothave avoided or overcome the effectsof the event.23 Even then, the nondefaulting party may prevail byproving the event was within controlof the non-performing party orcould have been foreseen by it.24 Thisis the “balance of evidence to beresolved between the parties”25 thata tribunal must review and decide.Pillsbury Winthrop Shaw Pittman LLPAlthough this evidentiary burdenappears to be easy to meet, inpractice, tribunals rarely agree witha party claiming that a force majeureevent occurred.The ICC Clause, reflecting developments in the law, adopts a lowerthreshold test for invocation of forcemajeure than “impossibility” ofperformance. Note a) to the ICCClause points to use of the phrase“beyond its reasonable control” inSection 1(a) and “could not reasonably have avoided” in Section 1(c). Inshort, a balancing approach isadopted—not a hard and fast rule.Section 2 of the ICC Clauseaddresses the problems that canarise when a third party fails toperform its contractual duties. Inthis case, the contracting party mayonly invoke the protections of theforce majeure clause when itestablishes first the general forcemajeure requirements that (1) itsfailure to perform was caused by animpediment beyond its reasonablecontrol, (2) it could not reasonablyhave been expected to have takenthe occurrence of the impedimentinto account at the time of theconclusion of the contract, and (3) itcould not reasonably have avoidedor overcome the effects of theimpediment. The contracting partymust also prove that those samerequirements apply to the thirdparty, i.e., that the third party wasalso subject to a force majeure event.Note b) to the ICC Clause explainsthat, without these requirements forboth the contracting party and thethird party, the contracting partywould “find it too easy” in mostsituations to invoke force majeuresimply by demonstrating that thethird party did not fulfill its contractual obligations.The Three Major “Impediments”to Invoking Force MajeureSuccessfullyThe three primary reasons tribunalsfind that a force majeure defensefails are that the party invoking theevent (1) should have foreseen it, (2)should have determined an alternateway to perform the contract, or (3)did not comply with the noticerequirements in the force majeureclause. Further, even when anarbitral tribunal allows a forcemajeure defense, it usually limits thedefense to a certain period of time,so a force majeure clause does notnecessarily excuse performanceindefinitely.261. Tribunals strictly interpretforeseeabilityIn civil and common law legalsystems, the event must have beenunforeseeable at the time of contracting for a force majeure defenseto be successful. Tribunals andcourts reason that failure to protectoneself against a foreseeable event isan assumption of the risk of thatevent.27 Foreseeability is a questionof fact for the decision maker.Because the interpretation of a forcemajeure clause turns on the language in the contract at issue, anarbitration tribunal or court determining whether reliance on a forcemajeure clause was permissiblemust make a fact-specific inquiry inlight of the governing law of thecontract. In many of the decisionswhere tribunals reject a forcemajeure defense, the party assertingthe defense could and should haveidentified the problem that led to

Force Majeure in Tumultuous Times: Impracticability as the New Impossibilitynon-performance and specificallyallocated its risk before entering intothe contract. For instance, in ICC No.12112/2009,28 the State partner of ajoint venture for cultivating agricultural products did not perform itscontractual obligations because itfailed to make available the land,equipment, and facilities that it wasto contribute to the venture. Thiswas because it made all of the landavailable to an international organization to accommodate refugeesfrom a neighboring country. Thetribunal concluded that forcemajeure did not excuse the Statepartner’s failure to perform becausethe State partner, as a regional publicentity, must have known about thesocial climate and forces in its regionthat made ensuring performancedifficult. The tribunal noted that “[b]efore entering an obligation, everyone must, before, be certain that hehas the ability to perform it. If he hasor must have the slightest doubtabout his ability to perform at thegiven time, he must make all necessary verifications before promisingperformance.”In ICC Nos. 3099 and 3100/1979,29two companies entered into acontract for sale of petroleum-basedproducts. The respondent sought toavoid payment because its centralgovernment agency imposedcurrency exchange controls that,through no fault of the respondent,prevented it from obtaining thenecessary foreign currency to makepayment. The contract included aclause that listed as force majeureevents impediments arising fromlegislation or regulation by Algeria—but not from the respondent’sgovernment. The tribunal found thatthe restrictions imposed by therespondent’s government did notamount to force majeure, becausethe imposition of exchange controlswas “certainly not unforeseeable” inthat those very regulations werealready in force when the contractwas formed.In ICC Case No. 2216/1974,30 themarket price for petrol fell dramatically after the parties entered intothe contract. The respondentrefused to take delivery, arguing thatthe fall in price was so large itexcused respondent’s performance,and also that intervention of government financial authorities to preventcurrency losses constituted forcemajeure. The tribunal found that thechange in market price risk wasforeseeable and its risk could havebeen allocated. The tribunal alsofound that the respondent wasgenerally aware of the legislationallowing the financial authorities tointervene, and indeed had received aletter from the relevant authority, sothe change in circumstances wasforeseeable. The tribunal noted thatthe respondent could have negotiated clauses in the contract that tookinto account the effects of thelegislation allowing financialauthorities to take such action, andthat no doctrine or case law precedent held that such legislationcould constitute force majeure.In ICC Case No. 112253/2002,31 aRomanian company entered into acontract for the sale of scrap metalto a German company. The contractprovided that the seller wouldobtain an export lice

makes contract performance impracticable, and (3) the non-occurrence of the contingency was a basic assumption on which the contract was made.14 Force majeure is similar to the doctrine of “necessity,” which states may attempt to rely on in the investment context when force