In brief
The events of recent weeks in Iran have once again plunged the world economy into a period of heightened and prolonged uncertainty. Despite the current ceasefire, the situation in the Strait of Hormuz has already emerged as a critical chokepoint, resulting in significant price volatility and the risk of severe supply‑chain disruption. In this volatile geopolitical and regulatory environment, now is an opportune time to review and future‑proof commercial agreements, while at the same time drawing on lessons learned from recent trade wars, sanctions developments and the COVID‑19 pandemic.
In this context, many companies rely on force majeure provisions in their commercial contracts. While force majeure remains an important contractual mechanism, it is a double‑edged sword that must be handled with care and strategic foresight. Therefore, there are good reasons for companies to consider supplementary or alternative contractual solutions, particularly where contracts are exposed to extensive or rapidly evolving regulatory change.
In depth
General considerations regarding force majeure
Force majeure has traditionally been the primary contractual tool for managing unforeseen events that fall outside the parties’ normal business risk, especially in cross‑border and global supply chains. Wars, pandemics, government measures and disruptions in critical infrastructure are typical examples. At the same time, the global crises of recent years have shown that many standard force majeure clauses are ill‑suited to long‑lasting, systemic or rolling disruptions.
The application of force majeure has proven to be highly uncertain across many jurisdictions. In order for a party to be excused from performing under an agreement, it is normally required that the relevant event is beyond the party’s control, that it could not reasonably have been foreseen at the time of contracting, and that it could not reasonably have been avoided or overcome. In addition, a clear causal link must be established between the force majeure event and the party’s actual inability to perform the contract. In practice, it is often this causation requirement that gives rise to the greatest uncertainty and dispute, particularly where performance is not strictly impossible but merely significantly more burdensome or costly.
The drafting of the force majeure clause is therefore of central importance. More detailed clauses can increase predictability, but may inadvertently exclude disruptive events that are not expressly listed. Conversely, overly broad and general formulations can be difficult to interpret and, in some cases, practically ineffective. The fundamental challenge lies in attempting to regulate unknown future events in advance, particularly in light of emerging risks such as cyber‑attacks, expanding export and import restrictions, and disruptions affecting logistics and transport chains.
In this context, other legal doctrines may also be considered, such as hardship or frustration. Hardship clauses typically seek to facilitate renegotiation where unforeseen events fundamentally upset the commercial equilibrium of the contract, rather than excusing non‑performance altogether. Frustration and similar doctrines generally have a very narrow scope of application and often presuppose that the agreement has effectively lost its commercial purpose. These mechanisms are, like force majeure, characterized by restrictive interpretation and a degree of legal uncertainty.
Against this background, force majeure should be viewed as a limited legal safety net rather than a comprehensive tool for allocating commercial risk. By combining a carefully calibrated force majeure clause with more targeted contractual mechanisms addressing identified risk areas, such as sanctions, export controls, tariffs, price‑adjustment mechanisms and regulatory changes, companies can significantly enhance contractual resilience and predictability in an increasingly uncertain environment.
Alternative contractual solutions
Depending on the industry, transaction structure and geographical scope, it may be more appropriate for companies to include, in addition to force majeure, more tailored contractual provisions to address specific risks and uncertainties. In the case of regulatory change, it is particularly important to understand the regulatory environment in which the business operates, as well as where and how supply‑chain disruptions are most likely to materialize.
Experience from the customs field and the recent increase in tariffs and trade defense measures demonstrates that these risks can often be addressed more effectively by, for example, carefully analyzing delivery terms and their allocation of customs‑related costs and responsibilities. The use of well‑designed price‑adjustment mechanisms can also mitigate the impact of sudden tariff increases, particularly where pricing is based on variable formulas, or where the agreement includes discounts, rebates or other adjustment mechanisms that may either absorb or pass through increased costs.
In the area of sanctions, the inclusion of bespoke sanctions clauses has become recommended market practice and is also endorsed by guidance from the European Commission. A key consideration in sanctions drafting is ensuring that the clause effectively captures newly imposed sanctions or restrictive measures that either prohibit or materially impede contract performance. In addition, forum‑selection and governing‑law clauses have become increasingly important in sanctions‑related disputes. Where disputes are adjudicated before EU courts, procedural rules may provide EU‑based companies with a degree of protection against being compelled to perform contractual obligations in breach of EU sanctions law.
Another area that has become increasingly complex and fragmented in recent years is export controls, particularly as a growing number of jurisdictions have introduced national control lists, end‑use controls and new licensing requirements. At the same time, companies remain under pressure to secure predictable delivery schedules and resilient supply chains. Agreements with customers should therefore expressly address delays resulting from extended licensing processes, as well as scenarios where an export license is ultimately denied. This approach enables contractual obligations to be aligned, back‑to‑back, throughout the supply chain, ensuring that customer requirements realistically reflect suppliers’ legal ability to export where national export‑control restrictions apply.
Concluding remarks
Force majeure clauses offer both advantages and limitations, including the potential for broad protection against truly unforeseeable events, but also significant uncertainty in application. In our view, a combined approach, integrating force majeure with targeted and risk‑specific contractual mechanisms, will in most cases provide a more robust and commercially effective solution.
A company’s regulatory exposure and supply‑chain vulnerability should be central to any assessment of how best to future‑proof its contracts in this context. Contractual design must be closely aligned with the company’s actual risk profile, enabling parties to identify and implement solutions that most accurately reflect their operational realities, commercial vulnerabilities and forward‑looking uncertainties.