The case for hardship clauses in Corona times
One of the most often heard legal questions in relation to the COVID19 pandemic is how it affects parties' contractual obligations under circumstances that were all but foreseen at the time of contracting. Typically, the response focuses on the applicability and interpretation of "force majeure" (or "Act of God") or hardship clauses that may be included in agreements. This blog posts takes the position that whatever you have in your contract templates today may be up for scrutiny and review once we collectively exit the lockdown.
Force majeure is the French term for “superior force” and is applied when an obligation becomes impossible, and the event that caused that impossibility was unforeseeable. Surely, a global pandemic like COVID19 should be a textbook example triggering the force majeure clause in your contract, right?
In most European continental law systems, you can rely on force majeure only subject to the following two, cumulative conditions:
1. the occurrence of the invoked extraneous event must have the consequence of making your performance of the contractual obligation impossible. It is not sufficient that the occurrence of the extraneous event has rendered the performance of the contractual obligation only more difficult or costlier for you;
2. the occurrence of the invoked extraneous event or the ensuing impossibility of contractual performance may not be due to or related to your own fault. Moreover, the extraneous event (and its consequences) must be unforeseeable, i.e. you could not have taken the extraneous event into account upon conclusion of the contract. It also has to be inevitable, i.e. you were not reasonably able to prevent or avoid the event (or its consequences).
With these two conditions, the assessment of the applicability of a standard force majeure clause in your contract quickly becomes a tricky and complex, case-by-case analysis. Granting that the Corona pandemic will likely have been unforeseen at the moment of contract conclusion (unless you contracted in, say, March 2020) and has proven quite inevitable, the case specific debate is likely to revolve around the first condition: does the pandemic (and everything related to it, including the lockdown and ensuing limitations on business) render your specific contractual obligations impossible to perform - or do they just become more burdensome?
For instance: let's say you were all set to airdrop an important order to your customer when suddenly the lockdown hit and air traffic ceased to be an option. However, the ordering process detailed in your contract does not mention that deliveries are made by plane. So in principle, you could still deliver the order by having it shipped via other transport channels, even if that would be more costly or burdensome. In such case, while the impact of the pandemic on your business is clear, it is unlikely that you will be able to rely on force majeure to escape liability for late or no delivery.
In cases where an obligation is still possible but unforeseeably becomes burdensome, possibly requiring more costs or time or resources, it becomes a hardship. In contracts and law, the event causing the more burdensome obligation is referred to as a hardship event. The issue is that most textbook "force majeure" clauses do not apply in case of hardship. To avoid overly burdensome (but not altogether impossible) contractual obligations due to an unforeseeable event, you need a hardship clause in your contract.
Not every jurisdiction is as enthusiastic about the theory of hardship. While it is commonly accepted in The Netherlands and Germany for instance, Belgian case law remains reluctant to embrace it outside an explicit contractual provision. All the more reason to make sure your contract covers the eventuality of a situation where fulfilment of obligations may be exceedingly difficult but not altogether impossible.
Bottom line: inserting a robust hardship clause into your contact templates (next to or instead of a textbook "force majeure" clause) may save you a lot of ... hardship when the next calamity hits us.