Mohammed Salah Uddin :
The war between Ukraine and Russia has created a great disruption, and twisted the supply chain dismantling an end to end visibility of basic fabrics of the supply chain management. With the invasion of Russia over Ukraine, the Ukrainian companies together with other counterparts can’t perform their contractual obligations, shipments are delayed, contract delivery period is lapsed and so many problems are created. In short, this war shattered the upstream and downstream of the skeleton of supply chain. With the backdrop of the belligerent situation, it is attempted to explore the scope and extent of the Force Majeure (FM) clause and performance of contractual obligations in the context of both national and international perspectives.
In general, Force Majeure (FM) clause defines the French for discharging their contractual obligations in case of certain events/circumstances beyond control. Section 56 of Contract Act-1872 (Bangladesh) states the scope of doctrine of frustration of contract. In the illustration (d) of section 56 states that-“A contract is in force to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared”. Section 12 of the Bangladesh Labor Act-2006 states that (1) “An employer may, at any time, if necessary in the event of fire, sudden catastrophe, breakdown of machinery, stoppage of power supply, epidemics, widespread riots or any other cause beyond his control, stop any section or sections of his establishment, wholly or partly, for such period as the cause for such stoppage continues to exist [Stoppage of work]. General Terms and Conditions of World Trade Organization (WTO) which shall apply to all contracts state that “In the event of force majeure or other situations that lie beyond the control of the Parties, are irresistible, do not result from their own negligence and prevent the normal performance of this contract, the Parties may agree to modify or temporarily suspend the supplies or services for which this contract provides.”
However, clause 38-41 of General Conditions of Contract (GCC) of Standard Tender Document (STD), PG-4 (International) published by the Central Procurement Technical Unit (CPTU, IMED, Ministry of Planning, Bangladesh defines the modality of application of Force Majeure(FM) clause. It states that FM means an exceptional event or circumstance: (a) which is beyond a Party’s control; (b) which such party could not reasonably have provided against before entering into the contract; (c) which, having arisen, such party could not reasonably have avoided or overcome; and (d) which is not substantially attributable to the other party. Subject to the fulfillment of the above four conditions the following events may be included as FM: war, hostilities (whether war be declared or not), invasion, act of foreign enemies; rebellion, terrorism, sabotage by persons other than the contractor’s personnel, revolution, insurrection, military or usurped power, or civil war; riot, commotion, disorder, strike or lockout by persons other than the contractor’s personnel; munitions of war, explosive materials, ionizing radiation or contamination by radio-activity, except as may be attributable to the contractor’s use of such munitions, explosives, radiation or radio-activity, and natural catastrophes such as cyclone, hurricane, typhoon, tsunami, storm surge, floods, earthquake , landslides, fires, epidemics, quarantine restrictions, or volcanic activity; freight embargoes; acts of the Government in its sovereign capacity.
The 1999 FIDIC (Red, Silver and Yellow) Books refer to “Force Majeure” (Cl. 19). The 2017 editions have moved away from that term, now referring to “Exceptional Events”. Under FIDIC (1999), Sub-Clause 19.1 defines “Force Majeure” as “an exceptional event or circumstance”: “(a) which is beyond a Party’s control; (b) which such Party could not reasonably have provided against before entering into the Contract; (c) which, having arisen, such Party could not reasonably have avoided or overcome, and (d) which is not substantially attributable to the other Party.”
On 28 February, 2022 in view of the current situation in Ukraine, the Chamber of Industry and Commerce of Ukraine (CCI) issues certification for force majeure. CCI announces “force majeure circumstances: military aggression of the Russian Federation against Ukraine, which led to the imposition of martial law from 05:30 on February 24, 2022 for 30 days, according to the Decree of the President of Ukraine of February 24, 2022 ? 64/2022 ‘On the imposition of martial law in Ukraine’.” Through this official letter CCI of Ukraine confirms that “these circumstances from February 24, 2022 until their official ending, are extraordinary, unavoidable and objective circumstances for business entities and / or individuals under the contract, separate tax and / or other obligations the fulfillment of which occurred in accordance with the terms of the contract, agreement, legislative or other regulations and the fulfillment of which became impossible in the set deadline due to the occurrence of such force majeure circumstances (force majeure).”
It is worth mentioning that “acts of war” was included in force majeure clauses. Different courts opined differently regarding the application of the term. The interpretation also changes over time. Prior to World War II, a “war” meant a formally declared war between two or more nations, and courts differentiated between an act of war and a state of war, and considered state of war as FM event. However, after the shocking attack on Pearl Harbor on December 7, 1941, the concept started to change. The U.S. Court of Appeals for the Tenth Circuit summarized the legal paradigm shift war clause in 1946 as- “The parties did not specify any particular type or kind of war, rather they used the all-inclusive term, and we think it only fair to assume that they had in mind any type or kind of war in which the hazard of human life was involved.” New York Life Ins. Co. v. Bennion, 158 F.2d 260, 265 (10th Cir. 1946), cert. denied, 331 U.S. 811 (1947). We can cite the example of Iraq. The Southern District of New York excused the Iraqi government’s non-performance of a contract to purchase yarn from a Spanish manufacturer when UN inspectors who were required to issue credit conform documents were withdrawn due to the impending Iraq war; hostilities prevented required inspection and acceptance of the goods; and the manufacturer never tendered reasonable substitute performance. Hilaturas Miel, S.L. v. Republic of Iraq, 573 F. Supp. 2d 781 (S.D.N.Y. 2008).
From the above discussion, we may follow some steps to face the unpleasant situation arising out of the FM clause:
Assessment of the situation: The prevailing situation to be analyses closely and review the strategic and high value contracts and measure the effect on the non-performance of the contract together with the potential liability which may arise.
Careful interpretation of the term: The term FM need to be interpreted considering the surrounding facts which will support that with the existence of FM and this is beyond the reasonable control of the affected party which could not be avoided.
Incorporation of clause in the contract: It is needed to check whether the existent contract contains the FM clause and at the same time it is also important to review the execution modality of the clause and understand rights and responsibilities of the contracting parties.
Purposes need to be clarified: The application of FM is case and situation specific. There is no room for ambiguity in the use of the term. For example, In Great Lakes Gas Transmission, Ltd., v. Essar Steel Minnesota, LLC, case which lodged after 2007 world crisis, the court held that financial crisis didn’t fall under the purview of FM clause and market forces are not considered in FM. In that suit, the court also held that the inability to obtain financing “was a foreseeable event”
Need to be sure whether the supplier truly unable to perform: We need to be sure whether the supplier is truly in a position not to supply. For example, for a supplier having a factory in Ukraine, in this case performance of contractual obligation may not be possible. However, if it seems that the supplier has some other factories located in other counties, in that case FM clause may not be applicable. As a buyer one can insist on the stick to the contract.
Risk transfer through Insurance: Contractual provisions regarding the insurance coverage need to be revisited to check the sanction clauses: inclusion and exclusions clauses meticulously.
Reviewing the dispute resolution provisions: Before working on the application of FM clause, it is of paramount importance to review the dispute resolution conditions contained in the contract.
Finally, it can be said that military operations or declaration of war may not be a blank check for application of FM clause. The nature and extent to which FM clause will be applied is case to case and contract to contract specific.
Disclaimer: This article does not constitute any legal opinion or advice. It’s only the personal opinion regarding the issue and is written only for academic purpose only.
(The writer is an MCIPS, PMP, PRINCE2 and Procurement Consultant at aspire to Innovate (a2i) Program).
