The conflict in the Middle East is currently dominating global current affairs. It is creating unrest that is being felt not only regionally but also globally. The immediate economic effects are, among other things, rising oil and gas prices, volatile financial markets and a disruption of international freight and air traffic.
This geopolitical instability can also have direct and indirect consequences for your company and your contracts. Your company may, for example, come under pressure as a result of supply or transport problems in the supply chain, or the costs for a certain project may threaten to explode.
This brings us to the core concern: what if the unrest in the Middle East makes, or threatens to make, the performance of a contract impossible or excessively difficult?
Analyse your contractual provisions
Before you fall back on the general statutory rules, a thorough analysis of your contract is of course essential.
Does your contract contain a specific force majeure or hardship clause to deal with the changed circumstances? Your contract may contractually define, limit, expand or even completely exclude situations of force majeure and/or hardship and their consequences. The contractual arrangement is usually part of the overall risk allocation that the parties have agreed in the contract.
Do your contracts contain a notification duty that requires a party to inform its counterparty as soon as possible of certain changed circumstances? Such a notification may therefore already be required now.
Do your contracts contain indexation clauses or price revision clauses? In cases of inflation, those are important clauses, but they are not always (fully) valid.
The legal framework in the absence of a contractual arrangement
If your contract does not contain any relevant specific agreements, you can fall back on the statutory (general or special) rules concerning force majeure and hardship.
Whether there is a situation of force majeure and/or hardship in your case, or whether your counterparty is wrongfully hiding behind those concepts as an excuse for not performing its contractual obligations, will very much depend on the specific context. The type of contract, the contractual risk allocation, and the actual impact of the changed circumstances on performance of the contractual obligations, among others, are important variables in that regard.
Force majeure
According to general contract law, a party will only be able to invoke force majeure when the conflict in the Middle East makes performance of a contractual obligation impossible (and the other requirements for force majeure are met). The fact that performance becomes more difficult or more expensive due to the crisis in the Middle East is therefore, as a rule, not sufficient for force majeure. In this, a force majeure situation differs from a hardship situation (which is discussed below).
If a claim of force majeure succeeds, this can lead to suspension and even termination of the contractual obligations.
Again, sufficient attention must be paid to potential notification duties. The Civil Code requires that, as soon as a contractual obligor has, or ought to have, knowledge of a cause of impossibility of performance, they must notify the creditor of this within a reasonable period.
To mitigate the loss, it may also be advisable in certain cases to examine possible alternatives to the situation that has arisen.
Hardship
If the performance of contractual obligations has not become impossible but has become excessively onerous, it may be possible for parties to contracts entered into on or after 1 January 2023 to invoke the hardship rule from Book 5 of the Civil Code, at least insofar as they have not contractually excluded it. The rule is considered one of the most important innovations in the new law of contract, but it does presuppose that a number of strict application requirements are met.
Whether the bar for the hardship rule is met will again depend on the specific circumstances of the case.
If the legal conditions of the hardship rule are fulfilled, the obligor can ask the obligee to renegotiate the contract, by either adapting or terminating it. In the event of a rejection or failure of the renegotiations within a reasonable period, either party can turn to the court, which may adapt the contract or even terminate it in whole or in part. Such court proceedings can be relatively speedy because they are dealt with "as in summary proceedings". Apart from that, various arbitration rules (such as those of the ICC and CEPANI) also provide for specific procedures to deal with urgent situations.
If you wish to discuss your specific situation, please contact one of the authors of this contribution or your usual Eubelius contact. Our contract litigation team, along with other members of the firm, have gained extensive experience with questions and disputes following global crises in recent years (COVID-19, the war in Ukraine, etc.).
