1. Hardship situations giving recent rise to international commercial and investment arbitrations

Members of the panel: Nathalie L. Reid (moderator) (Partner, Debevoise & Plimpton LLP, New York), Prof. Dr. Mohamed Abdel Wahab (Founding Partner & Head of International Arbitration, Construction and Energy, Zulficar & Partners, Egypt; Chair of Private International Law & Professor of Dispute Resolution, Cairo University; Vice President, ICC Court), Alexander Fessas (Secretary General, ICC Court; Director, ICC Dispute Resolution Services, Paris).

The panel focused on how traditional legal doctrines and contractual provisions cope with the effects of the COVID-19 pandemic, more than a year into an extraordinary situation at the global level.1

On the theoretical framework of the debate, Prof. Dr. Abdel Wahab submitted that we must now consider a multidimensional approach concerning the change of circumstances, and take into account three main elements.

  1. The drafting of the clause, as parties should move from a ‘boilerplate’ (i.e. standard wording) to a ‘bespoke’ clause (i.e. taking into account the contract’s specificities)
  2. One must understand the legal system, the various concepts dealing with change of circumstances and its impact on the contract. In particular, the tribunal and counsel must ‘disambiguate’ the situation of hardship and distinguish it from force majeure and other apparently identical but, in reality, very different concepts.
  3. A careful look at the contract and its requirements in light of the applicable law – in particular whether a legal provision is mandatory and the impact of the pandemic on the contract’s performance.

Prof. Dr. Abdel Wahab finally noted that the current trend in the drafting of contractual hardship or force majeure clauses is to (i) state the event to be taken into account by nature without additional requirements, (ii) establish less stringent notification requirements, and (iii) refer expressly to the renegotiation of certain contract terms.

Alexander Fessas underscored the complexity of the disputes arising out of the pandemic, noting that hardship is most often invoked, and provided some examples of recent practice of ICC tribunals. Mr Fessas mentioned that Parties and counsel need to pay attention to various notions and different concepts. From a civil lawyer perspective, conditions and hypotheses must be distinguished from remedies and consequences provided by applicable rules. He also noted that case law shows that both counsel and tribunals confuse the notions of hardship and force majeure. Mr Fessas insisted that it is crucial to understand what the claims and requests for relief are. The question that should be kept in mind is: ‘Under what conditions should parties rely on force majeure and distinguish it from hardship?’. He questioned the added value of the force majeure certificate issued by some states (such as China or France) qualifying the pandemic as a force majeure event, and the distinction between party autonomy and mandatory rules with regard to hardship.

2. Legal foundations invoked in international commercial arbitration to remedy hardship situations

Members of the panel: Caline Mouawad (moderator) (Partner, Chaffetz Lindsey LLP, New York; Vice-Chair of the Steering Committee of the ICC Commission on Arbitration and ADR), Daniel Behn (common law) (Associate Professor, International Dispute Resolution, QMUL, Centre for Commercial Law Studies); Nayla Comair-Obeid (MENA Region) (Founding Partner, Obeid Law Firm, Beirut/Paris; Professor of Law; Chartered Arbitrator; Council Member, ICC Institute); Klaus Berger (civil law) (Independent Arbitrator, Germany; Professor, University of Cologne, Faculty of Law; Council Member, ICC Institute).

The panel analysed the fact pattern under two contractual clauses, force majeure2 and hardship.3 On force majeure, the panel noted the following key elements to consider: (i) the time of the conclusion of the contract, (ii) if the event was or not foreseeable, and (iii) which event would trigger the clause (the pandemic itself, the date of its recognition as such, or governmental measures) (iv) whether the event itself (i.e. the pandemic or governmental measures) was within the scope the contractual definition of force majeure, (v) whether the clause contains an exhaustive list of events or is a catch-all provision, and (vi) the meaning of ‘any other event of similar nature’ stated by the clause; (vii) and the role of the applicable law in the interpretation of the clause. Ms Comair-Obeid provided examples of recent case law dealing with disputes arising as a result of the pandemic.4

From a civil law perspective, a legal provision on force majeure will play a role with regard to the interpretation and implementation of the clause. By contrast, Mr Behn explained that the English law approach will focus on the clause in the absence of a legal provision, having in mind that the concept of 'frustration’ in English law is different form force majeure and is interpreted strictly by the judge. As to the interplay between a force majeure contractual provision and a force majeure legal regime in the applicable law, Mr Berger recalled a case where arbitrators gave full effect to the contractual clause,5 reflecting the will of the parties, since force majeure is not mandatory.

In its analysis of the hardship clause, the panel agreed that, in the absence of a general rule, the assessment of exceptional circumstances and excessive onerousness will be interpreted restrictively by the arbitral tribunal, for whom the threshold is extremely high. Indeed, arbitral tribunals have seldom found that the requirements for hardship are met.

As to legal provisions on hardship, the speakers recalled the difference in civil law and common law. In particular, frustration is based on the idea of a foundation of the contract on which the parties agree. The panel also recalled the importance of addressing the nuances within each legal system, for instance (i) the mandatory nature of most hardship provisions in the MENA region, which render any contrary contractual clause null and void, (ii) the power of the judge vis-à-vis the contract (termination and/or adaptation of the contract), in light of the three options given by 2020 ICC Model Clause on Hardship.6

3. Hardship situations and investment arbitration

Members of the panel: Audley Sheppard QC (moderator) (Partner, Clifford Chance, London), Patricia Shaughnessy (Associate Professor, Founder and former Director of ICAL Master Program, Stockholm University), Yves Derains (Founding Partner, Derains & Gharavi, Paris; Honorary Chair, ICC Institute), Caroline Richard (Freshfields Bruckhaus Deringer US LLP, Washington D.C.; Adjunct Professor, American University’s Washington College of Law).

On the topic of state measures causing hardship, Patricia Shaugnessy recalled that the State may exercise its right to protect the public interest but should also comply with international law and with the applicable law to the contract. She addressed the type of measures that may trigger an investment claim in these pandemic times, and emphasized the importance of (i) seeing if the measure falls within the protected area of the treaty (standards on protection, umbrella clause), (ii) assessing whether any exceptions exist under the treaty for measures taken for the protection of public health, and (iii) if there is a contract, analyzing any specific contractual provisions that may exist, such as stabilization clauses and those for exceptional circumstances (force majeure or hardship), and looking at the applicable domestic law.

Addressing state of necessity in international investment law, Yves Derains first presented the historical origins of such concept codified in Article 25 of the International Law Commission (ILC)’s Articles on Responsibility of States for Internationally Wrongful Acts 2001.7 He noted that COVID-related state measures may potentially breach an investment treaty but may, under certain circumstances, be excused under the concept of state of necessity, if its conditions are cumulatively met. Mr Derains stressed that invoking a state of necessity is a defense of last resort for the State, because the requirements are extremely strict, and because under the terms of Article 27,8 compensation may still be due. He then cited the string of cases in which Argentina had invoked a state of necessity as a result of its 2001 economic crisis, but noted that the analysis of this concept by arbitral tribunals had been inconsistent. Mr Derains concluded by stating that the defense of state of necessity is theoretically applicable in investment law, but the chances of success are slim.

Caroline Richard spoke about the exercise of police powers in international investment law. The overarching question is whether States can be held liable for bona fide measures taken to protect public health (e.g. export restrictions on medication, lockdown, hotel and quarantine centers). Ms Richard noted that States will use their right to regulate vis-à-vis their obligations under the treaties, and in this context are likely to invoke the police powers doctrine, which allows a State to exclude liability if the measure can be characterized as one falling within the police powers of states.9 The speaker recalled the evolution of the police power doctrine in arbitral awards,10 and assessed whether it could be successfully accepted with respect to measures arising from the pandemic. She referred to the only known epidemic case – the Bischoff case (1903) –11 where the police powers doctrine had been successfully invoked to exclude liability. Ms Richard then noted that today, for the police powers doctrine to be successful, the following requirements must be met: (i) there must be a reasonable nexus between the measures and the policy goal; (ii) the measure must not be arbitrary or discriminatory; and (iii) the proportionality of the measure, in particular, whether the scope and duration of the measure adopted is proportional to the public purpose sought.

4. Hardship impact on the management of arbitral proceedings and solutions

Members of the panel: Diego Fernandez Arroyo (moderator) (Independent Arbitrator; Professor of Law, Director, LLM in Transnational Arbitration & Dispute Settlement, Sciences Po Law School, Paris), Teresa Giovannini (Senior Counsel, LALIVE, Switzerland; Council Member, ICC Institute; Member, ICC Court), and Chiann Bao (Independent Arbitrator, Arbitration Chambers, Hong Kong/United Kingdom; Vice-President, ICC Court).

Teresa Giovannini addressed the general impact of the pandemic on arbitration proceedings and identified tools to mitigate the impact in a cost effective manner. She submitted that procedures need to be adapted in order to protect fundamental rights (due process and the right to be heard), while allowing arbitrators to conduct the arbitration in efficient manner. She noted that case management experience during the pandemic has triggered creativity within institutions, which resorted to remote or virtual proceedings as an alternative solution, or found new ways of managing remote/virtual proceedings.12

Chiann Bao shared her experience in the use of technology in arbitration. She emphasized how technology can assist proceedings, and noted that conducting procedural meetings and certain hearings (e.g. for purely legal issues or bifurcation) remotely, is as efficient as in-person hearings. However, when it comes to evidentiary hearings, where witnesses and experts are heard, her approach was more nuanced, as it depends on the case and the relevance of the issue.

5. Conclusion

The webinar left the audience with three key takeaway points.

First, the pandemic has had an impact on contract performance, as many parties have had difficulties meeting their contractual obligations. When addressing the impact of a change of circumstances on the performance of the contract, the parties and the tribunal must first consider the legal system in which the contract is inserted, which will then make it possible to identify the applicable legal concept (hardship, frustration, force majeure). They must then assess the content of the contractual clause and apply it to the facts.

Second, the pandemic may cause States to breach their international obligations under investment protection treaties. When assessing whether a measure taken by a State to protect public health breaches the treaty, tribunals will need to determine whether the measure can be characterized as a treaty violation, and if so, whether liability can be excluded as a result of exceptions, the police powers doctrine, or a state of necessity defense.

Third, the pandemic has had an impact on the management of arbitral proceedings, and has triggered the development of creative ways of using technology to conduct proceedings remotely. While they are welcome development, virtual proceedings must be conducted in such a way that they comply with the parties’ basic procedural rights.


1
Two questions asked at the conference reveal the possibility of invoking hardship today and the limited success in the past of doing so. The first question was: ‘Are we witnessing a surge in invoking hardship situations because of COVID-19?’. The responses from the audience were: 75% ‘yes’, 4% ‘no’, 21% ‘not sure’. The second question was: ‘Based on practical experience, how successful were you in invoking hardship before arbitral tribunals?’. The response from the audience was less than a 15% success rate.

2
The force majeure fact pattern was the following: ‘The supply agreement contains a force majeure clause which excuses non-performance or delayed performance if the event is unforeseeable and defines a force majeure event as “natural catastrophes or any other event of similar nature, embargoes, acts of war, riots, strikes, acts of God, or governmental orders or acts of authority”. In April 2020, a party suspended performance and invoked the force majeure clause due to an interruption in the supply chain of goods resulting from the Covid-19 pandemic.’

3
The hardship fact pattern was the following: ‘The supply agreement contains a hardship clause which provides that, when continued performance of a party’s contractual duties has become excessively onerous due to an event beyond its reasonable control and that it could not reasonably have foreseen at the time of the contract, the parties are bound to negotiate alternative terms to overcome the consequences of the event. If the parties are unable to agree on new terms, the party invoking the hardship clause can terminate the contract. In April 2020, a party suspended performance and invoked the hardship clause on the basis that performance had become more costly due to the Covid-19 pandemic. The parties’ negotiations were unsuccessful, and the party terminated the supply agreement.’

4
E.g. in the MENA region: Dubai International Financial Centre Small-Claims Tribunal - DIFC 136/2020, Leighton v. Laneyl House Hospitality, Luden Restaurant, 1 July 2020; DIFC 177/2020, Landin v. (1) Lakhan (2) Lakshmi, 29 July 2020; Qatar Financial Centre : QFCRT 001/2020, (2020) QIC (RT) 2, David Russel v. Qatar Financial Centre Regulatory Authority, 10 Aug. 2020.

5
ICC Award n° 8873 (1997), Original in French, Journal de droit international, 1998, 1017-1024, with note by D. Hascher, ibid. 1024; ICC International Court of Arbitration Bulletin, Vol. 10, No. 2, Fall 1999, 78-81. Abstract published in English and French, Uniform Law Review / Revue de droit uniforme, 1999, 1010 – 1011.

6
https://iccwbo.org/publication/icc-force-majeure-and-hardship-clauses/

7
Art. 25 ‘Necessity’ ‘1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole. 2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) the international obligation in question excludes the possibility of invoking necessity; or (b) the State has contributed to the situation of necessity.’ (https://legal.un.org/ilc/texts/instruments/english/draft_articles/9_6_2001.pdf).

8
Art. 27: ‘The invocation of a circumstance precluding wrongfulness in accordance with this chapter is without prejudice to: (a) compliance with the obligation in question, if and to the extent that the circumstance precluding wrongfulness no longer exists; (b) the question of compensation for any material loss caused by the act in question’.

9
Certain treaties now include police power provisions explicitly, e.g. the Canada-United States-Mexico Agreement (CUSMA).

10
NAFTA Chapter Eleven, Arbitral award Methanex Corporation v. United States of America, Award on Jurisdiction and Merits, 3 Aug. 2005; Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case n° 2012-12; Philip Morris Brands SARL, Philip Morris Products S.A & Abal Hermanos S.A v. Oriental Republic of Uruguay, ICSID Case n° ARB/10/7, 8 July 2016; PCA, Saluka Investments BV (The Netherlands) v. The Czech Republic, Partial Award, 17 March 2006.

11
See Bischoff Case, Reports of International Arbitral Awards, 1903, vol. x, pp. 420-421.

12
See e.g. https://iccwbo.org/publication/icc-guidance-note-on-possible-measures-aimed-at-mitigating-the-effects-of-the-covid-19-pandemic/ (April 2020).