COVID-19: Force Majeure or Hardship?

Unforeseen circumstances are possibly one of the key hurdles contracting parties (especially those in long-term contracts) may encounter in international trade. The very foundation of contracts concluded between parties could be significantly impacted by natural disasters or shifts in political and economic conditions.

An earthquake or civil war in one of the producing countries may compel a producer to resort to other countries with significantly higher production costs; bans on imports or exports in a country would prevent goods from reaching to their buyers; or unforeseen fluctuations in the prices of raw materials at the time of concluding a contract make performance thereof by the seller unduly burdensome. The recent COVID-19 pandemic has been characterized as “the darkest hour of humanity” since World War II. Due to its unparalleled impact on the global economy, two classic doctrines of contract law, force majeure and hardship, have been revived with both principles providing legal tools to address the effects of unexpected and unforeseen future events in the context of contractual relationships.

This article will attempt to provide an assessment of the force majeure and hardship doctrines as they operate today under Bahraini law, in order to make them workable in the context of the COVID-19 pandemic highlighting the differences between these two doctrines and the conflict that exists between them and the ancient fundamental legal maxim of ‘pacta sunt servanda’ placing the burden of such unforeseen change of circumstances solely upon the party on which it falls.

The Pacta Principle

The principle of ‘pacta sunt servanda’ (Latin for “agreements must be kept”) is a prevailing principle under Bahraini law according to which the provisions of a contract are binding on the Parties to the extent that they do not contravene mandatory or public policy rules. The binding effect of the contract is a sacred principle that is expressed in Article 128 of the Bahraini Civil Code. Article 128 of the Bahraini Civil Code stipulates that “The contract makes the law of the parties, it cannot be revoked or amended unless by the parties’ mutual agreement or for the reasons prescribed by the law”. This sacred principle implies that each of the contracting parties is bound to perform its contractual obligations as stated in the contract, and that if any of the contracting parties is in delay in the performance of its obligations or refrains from performing the same, it shall be held contractually liable. It also means that a contract validly formed between the parties cannot be amended or modified unilaterally by one of the parties.

The binding effect of contracts has always been an established principle in the Bahraini jurisprudence and applied even before the enactment of the Bahraini Civil Code as it is also a general principle of Islamic Shari’a. See Bahraini Court of Cassation, Challenge No. 530 of J.Y. 2015, Challenge No. 134 of J.Y. 2005, and Challenge No. 954 of J.Y. 2015.

The Clausula Principle

The ‘clausula rebus sic stantibus’ principle (Latin for “things thus standing”) advocates a more flexible response to unexpected and unforeseen future events in the context of contractual relationships. The clausula principle allows the parties to free themselves from the strict application of the pacta sunt servanda principle. It is based on the premise that the continued enforceability and performance of a contract is always subject to the continued existence of the circumstances which existed at the time when the parties concluded their contract, and which formed the basis for the parties’ bargain.

The clausula doctrine is based on the principle that contracts derive their legitimacy not only from the will of the parties, but from their relationship in a variable context comprising the industry, the parties’ prior dealings and the nature and subject matter of the contract. The contract is considered a ‘living organism’ in which rights and obligations are flexible to accommodate the parties’ legitimate expectations considering unexpected and unforeseen future events.

The Balance & Confusion

The determination of which of the two doctrines prevails in any given case of changed circumstances depends on the strength of the pacta sunt servanda principle in the particular jurisdiction and the ability of the courts and the parties to accommodate equitable exceptions to the pacta sunt servanda principle such as force majeure and hardship.

Although the distinction between force majeure and hardship is very clear at least on a doctrinal level, such distinction is not so obvious when the doctrines are applied in the context of contractual relationships. While the two doctrines are based on different rationales – one on impossibility and the other on changed circumstances – and are therefore distinguishable in most cases, force majeure and hardship clauses in contracts are rather indistinguishable.

When force majeure and hardship clauses feature in contracts, their relationship and overlap is frequently unclear because they are so frequently understood to operate in the same way. Such unclarity may be attributed to the fact that the common law legal tradition, which has a considerable influence on international contracting, does not differentiate between a force majeure and a hardship clause in a contract. The confusion is increased further when considering that both force majeure and hardship clauses are similar in their objective: to provide excuse when unforeseen events interrupt performance of the contract by the parties.

Force Majeure: The General View

The force majeure doctrine concerns supervening and unforeseen events that render performance of the contract impossible. An event of force majeure could be said to have come into existence where performance of the contract has become impossible as           a result of an external supervening event occurring after contract formation, that is beyond the control of the aggrieved party which renders the performance of a party’s contractual obligations not just excessively onerous as in hardship-type situations, but impossible, whether temporarily or permanently. Typical examples of force majeure events seen in contracts include fires, floods, droughts, earthquakes, civil riots, terrorist attacks, etc.

The COVID-19 pandemic emerges as a typical example of a force majeure event. However, it is important to distinguish between the general perception of the COVID-19 pandemic from a political, socio-economic or health-related perspective, and the legal qualification of a COVID-19 related situation as a force majeure event. Despite the World Health Organization declaring the   COVID-19 pandemic in January 2020 to be a “Public Health Emergency of International Concern”, the question whether a force majeure event does exist in COVID-19 like circumstances remains  a legal issue which must be assessed and determined by a court or an arbitral tribunal in each individual case by reference to the facts and circumstances of each case.

More often than not, the force majeure event is not the pandemic itself as such, but the factual or legal effects of the pandemic. Factual effects may involve illness or quarantine or even death of key personnel, production facility closures, or interruption of supply. Legal effects relate to lockdowns, curfews, travel restrictions and other measures implemented by governments and public authorities in reaction to the pandemic. It is this distinction to be made between the outbreak of the COVID-19 pandemic on the one hand and its factual or legal consequences on the other, as well as the limited effect of declarations or similar statements by governments or public authorities that operate to prevent abuse of the force majeure defense and defeat attempts by contracting parties aimed at renegotiating unfavorable contractual deals when a real force majeure event does not exist under the pretense of a well-recognised legal principle.

The notion of force majeure in its modern form – both as a contractual clause and as a part of the body of law in numerous jurisdictions – derives from the French Civil Code, Code Napoléon or Code Civil of 1804, which included force majeure as an excuse to contractual performance. Until the recent reform of its contract law in 2016, Article 1148 of the French Civil Code exonerated a party from paying damages for failure to perform resulting from a force majeure event stating that “There is no occasion for any damages where a debtor was prevented from transferring or from doing that to which he was bound, nor did what was forbidden to him, by reason of force majeure of a fortuitous event”.

However, while the French Civil Code contained a provision addressing the legal consequences of force majeure, it did not include a definition of what would constitute force majeure until its reform of the contract law in 2016 addressing the uncertainty resulting from the lack of such definition. The new Article 1218 of the French Civil Code now defines force majeure stating that “In contractual matters, there is force majeure where an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of conclusion of the contract and whose effects could not be avoided by appropriate measures, prevents performance of his obligation by the debtor. If the prevention is temporary, performance of the obligation is suspended unless the delay which results justifies termination of the contract. If the prevention is permanent, the contract is terminated by operation of law and the parties are discharged from their obligations under the conditions provided by Articles 1351 and 1351-1”.

Force majeure under Bahraini Law

The position taken by the Bahraini Civil Code towards force majeure does not differ from that of the French Civil Code, having been heavily influenced by the Egyptian Civil Code of 1948 which drew upon the French and German Civil Codes. The notion of force majeure is recognised under Bahraini law; it is a manifestation of the “alien/foreign cause” as enshrined in Article 165 of the Bahraini Civil Code which provides that “If a person proves that the injury resulted from a cause beyond his control, such as unforeseen circumstances, force majeure, the fault of the victim or of a third party, he shall not be liable to make reparation unless there is a provision to the contrary”.

As a matter of Bahraini law, an event is deemed force majeure if two conditions are satisfied, namely: (i) the event in question must exceed what is ordinarily expected to happen; and (ii) there must be an inability to resist that risk that results. This position has been confirmed by the Bahraini Court of Cassation in Challenge No. 206 J.Y. 1995 wherein the Court held that for an event to be considered force majeure it must “… exceed what is ordinarily expected to happen, and there must be an inability to resist the risk that results therefrom”. In clarifying these conditions, the eminent Egyptian scholar Abdel Razzaq Al Sanhoury maintained that force majeure is an event that is not attributable to the debtor, and satisfies collectively the conditions of being both unforeseeable and inevitable which results in the impossibility of performance.

The assessment of whether an event qualifies as force majeure is therefore a fact-sensitive test that a court or an arbitral tribunal has the discretion to consider and decide. It does not automatically follow declarations or similar statements by governments or public authorities. In this respect, the Bahraini Court of Cassation, in a recent decision, has rejected the appellant’s argument that the 2008 economic crisis and the 2011 unrest events are events of force majeure. The Court did not characterise the said events as force majeure in the context of the case.

Notwithstanding the restrictive approach taken by the Bahrain courts towards force majeure, non-performance of contractual obligations as a result of the effects of extraordinary and systemic events such as the COVID-19 pandemic are considered as falling within the ambit of the force majeure doctrine under Bahraini law.

The effects of force majeure depend on whether the impediment is temporary or permanent. In case of a temporary impediment, performance of the obligation is suspended unless the resulting delay justifies termination of the contract. This may apply in many cases regarding the consequences of the COVID-19 pandemic, for example if the production of the goods sold and to be supplied can be resumed after the end of the effects of the pandemic, unless the nature of the performance is such that catching up on it at a later date makes no sense for the buyer. In case of a permanent impediment, both the obligor and the other party are freed from their obligation to perform, unless the aggrieved party has assumed the risk for the force majeure event.

Force Majeure Clauses

An important question which begs to be asked is whether the list of force majeure events appearing in a contractual clause is exhaustive or merely provides examples of events with general characteristics which may extend to encompass other unlisted force majeure events sharing the same characteristics as those listed in the clause.

Impossibility to perform a contractual obligation by reason of the COVID-19 pandemic will very likely be covered by a typical force majeure clause even where the said clause does not expressly list diseases, plagues and epidemics as force majeure events.

In the absence of evidence to the contrary, and provided that the party invoking force majeure is able to prove that the effects of the impediment could not reasonably have been avoided or overcome, such events will be presumed to be both uncontrollable and unforeseeable satisfying the conditions for force majeure as confirmed by the Bahraini Court of Cassation in Challenge No. 206 J.Y. 1995 referred to earlier in this article.

It is also worth noting that as the COVID-19 pandemic has globally been recognised as a ‘natural’ disaster, it could be argued that a simple clause that makes reference to ‘natural’ events beyond the reasonable control of the contracting parties will extend to cover COVID-19 pandemic scenarios as possible force majeure events.

Hardship under Bahraini law

In the present COVID-19 pandemic era, contracting parties may not always be able to perform their contractual obligations with the constantly changing measures adopted by governments worldwide in response to the COVID-19 pandemic. However, performance of the contract, albeit in a modified form, might still be possible to adapt to these changed circumstances under the hardship principle.

The Bahraini Civil Code regulates the hardship principle in Article 130 stating that “Where, however, a change of circumstances that was unforeseeable at the time of the conclusion of the contract renders fulfilment of the contractual obligation, though not impossible, excessively onerous for the debtor in such a way as to threaten him with exorbitant loss, the judge may, after taking into consideration the interests of both parties, reduce the excessive obligation to a reasonable level or increasing the other party’s obligations. Any agreement to the contrary is void.”

Unlike force majeure, hardship does not concern situations where performance of a contractual obligation has become impossible after formation of the contract, rather situations where performance is still possible albeit more burdensome as a result of events which were not within the contemplation of the contracting parties at the time of concluding the contract. The possibility to continue specific performance of the contract, despite the excessive impact of the change of circumstances, is a characteristic feature of hardship.

While both hardship and force majeure address extraneous events that are beyond the contracting parties’ control. In both cases, the invoking party may be released, either temporarily or permanently depending on the nature of the event, from the contractual obligations. There are nevertheless two very important differences between the two, namely:

First: In case of hardship, the decision of suspending or amending the contract is conferred on the judge or the arbitral tribunal. Any suspension or amendment to performance will not be automatic by operation of the law. Pursuant to Article 130 of the Bahraini Civil Code, a judge or arbitral tribunal will, in its absolute discretion, decide the measure(s) required to restore the economic equilibrium of the contract and mitigate the effects of the exceptional circumstances. The judge may deem that the circumstances do not necessitate the reduction of the onerous obligation, nor an increase of the counter-obligation, but instead suspend performance of the contract until the unforeseen event ceases to exist. The judge may also deem it necessary to increase the counter-obligation, or reduce the onerous obligation.

Second: While hardship applies to all cases where an execution of an obligation has become onerous, impossibility requires that there is a permanent impediment to the performance of the contract. The rules on impossibility only apply where the execution of the project or contract is permanently impossible. In this case, the permanent impossibility has the effect that the obligations of both parties extinguish. Article 145(a) of the Bahraini Civil Code thus provides that “Where performance of an obligation in a bilateral contract becomes impossible due to foreign cause beyond the control of the contracting party, such obligation is extinguished, and corresponding obligations of the other party are also extinguished, and the contract is terminated ipso facto”.

Hardship as per the Bahraini courts

In practice, when determining whether or not an event of hardship exists, Bahraini courts adopt a rather strict and rigid position by setting out additional requirements to ascertain the ‘exceptional’ nature of the event in question. The rigidity of the approach taken by the Bahraini Court of Cassation is evident in its rulings . The Bahraini Court of Cassation, for instance, has in Challenge No. 458 J.Y. 2006 ruled that the exceptional event is not considered as such unless ‘the event is exceptional, of general character, to be determined by the judge”. In order to demonstrate the existence of an event of hardship, a party seeking to invoke the application of Article 130 of the Bahraini Civil Code in any case or arbitral proceedings, the following must be established: First: the party must establish that the impediments to the performance of the contract is a direct consequence of the events, which may not be an easy task to accomplish; and Second: the impediments to the performance of the contract must potentially result in a material loss. Whether a loss is material will depend solely on the aggregate volume of the contract, regardless of the financial position of the aggrieved party. Not every increase in cost will justify the request of amending a contract. Normal or ordinary losses will not succeed in triggering the application of the hardship principle.

Even where the above conditions are satisfied, the decision to suspend performance or amend the contract in light of any COVID-19 related event lies exclusively within the competence of the judge or arbitral tribunal, who enjoy a wide discretion in restoring the contractual equilibrium if an event of hardship is established.

Conclusions & Practical Considerations

The COVID-19 pandemic presents the biggest test for the viability and maturity of the doctrines of force majeure and hardship. While it is safe to say that in most cases where performance of the contract becomes impossible as a result of the effects the COVID-19 pandemic, the force majeure doctrine will be very relevant in establishing the legal positions of the contracting parties. There will be other cases where some form of modified performance might still be possible by bringing into play the hardship doctrine to determine the contracting parties’ legal positions.

The un-foreseeability and unavoidability of the effects of the COVID-19 pandemic on contracting parties cannot be questioned in view of the uniqueness and severity of such effects. No person could have imagined a global health crisis of this magnitude, not even the most prudent of persons. Nor could its consequences have been avoided. Both doctrines will present serious challenges to the pacta sunt servanda principle enshrined in Article 128 of the Bahraini Civil Code during these unprecedented and extraordinary times.

In such unprecedented and extraordinary times, the doctrines of force majeure and hardship are very likely to become the norm rather than the exception in distributing evenly the risks resulting from the COVID-19 pandemic. Contracting parties intending to invoke force majeure or hardship to address the effects of the COVID-19 pandemic on their contractual relationships must consider the following:

The effects that the COVID-19 pandemic has on the contract should be clearly documented. Bahraini courts will not accept the declaration of force majeure or hardship based on the general effects which the pandemic has on the general public. It will be necessary to establish a causal link between the pandemic and the interruption or suspension of the contract.

The force majeure clause contained in the contract (if any) paying close attention to the notification requirements and any stipulated timelines.

Procuring a third-party expert’s report documenting the effects of the pandemic on the contract. A court or an arbitral tribunal will evaluate risks differently when obtained from a third party than if presented using self-created evidence.

Conduct an assessment of the potential financial impact of the effects of the pandemic on the contract to evaluate if the contracting party can invoke the hardship doctrine.

Where the contract does not include a force majeure clause, attempt to reach an agreement on the suspension or amendment of the contract with the other party, to the extent this is possible.

Declaring force majeure is unusually controversial given the exceptional situation but the continued reliance on a declaration of force majeure often is a source of disputes. Careful consideration of the end of the state of force majeure should be carefully monitored.

For more information, please contact us on [email protected].