In these uncertain times – a reminder to check your company’s commercial contracts

The world is facing the reality of another war, this time in the Middle East. The Strait of Hormuz is essentially closed, oil prices have risen, and there is a clear and potentially lasting impact on global trade.

In this time of uncertainty, now is a good time to check your company’s commercial contracts. Many contracts have “force majeure”, “hardship” and other similar clauses. Force majeure and hardship clauses are both used in contracts to deal with unexpected events after the contract is signed, but they address different levels of disruption. Force majeure clauses typically apply when it is impossible for a party to perform its contractual obligations due to an unforeseen event outside the party’s control, such as a war or a natural disaster. By contrast, hardship clauses may apply when a party’s performance is theoretically possible but excessively difficult or expensive, for example due to extreme price increases or supply-chain disruption.

Both clauses usually allow for contractual obligations to be adjusted, renegotiated or excused.

However, as always, the devil is in the details. Many clauses have specific requirements that need to be fulfilled. Below are a few points of general advice:

• It is often necessary to give notice of force majeure and/or hardship within a defined timescale, and updates need to be given as the situation progresses.
• Where force majeure and/or hardship can be shown, there can sometimes be a contractual right to renegotiate or even to terminate the contract, but again timing issues often arise.
• There can also sometimes be a right to renegotiate prices or other essential contract terms. However, such renegotiations are never easy, and careful reasoning and preparation is required.
• When an unforeseen event occurs, such as a war, it is advisable for a company to keep evidence of how the event is affecting the company’s business and the company’s ability to perform its obligations. Emails, pricing information, internal notes, media reports, and other contemporaneous documents can all provide helpful evidence. Simply alleging force majeure or hardship, without any evidence, is generally not sufficient.

For more information, and to discuss these issues further, please contact: