Force majeure and hardship: how should businesses provide for them in contracts?

While a commercial contract is being performed, sudden macroeconomic events such as natural disasters, epidemics, geopolitical conflict, trade embargoes, inflation or a break in global supply chains can completely upset the parties’ original economic calculations. When a business cannot perform the contract as promised, or performing it would cause heavy financial losses, it tends to reach for two legal “lifebuoys”: a force majeure event (sự kiện bất khả kháng) and performance of the contract when circumstances change fundamentally (hardship, hoàn cảnh thay đổi cơ bản).

However, in practice before courts and arbitral tribunals, the parties often seriously confuse the two. Many businesses wrongly believe that market price changes are force majeure, or stop performing on their own initiative when they face economic difficulty, without realising that this is an unlawful breach of contract.

This article analyses the essential differences between force majeure and hardship under Vietnamese law and international practice, reviews notable judgments and awards, and explains how to draft contract clauses that help businesses allocate risk safely.

1. The legal nature of force majeure and hardship

Both arise from objective events that occur after the contract is concluded and are beyond the parties’ control. Even so, force majeure and hardship are two completely separate legal concepts. They differ in the conditions for applying them, their effect on obligations and the outcome before a court or tribunal.

2. Practice and lessons from courts and arbitral tribunals

2.1. Market price changes are not force majeure (CIETAC awards)

One of the biggest mistakes traders make is treating changes in raw material prices, a sharp rise in sea freight or exchange rate movements as force majeure, and using this to refuse delivery or rescind the contract.

• Palm oil sale dispute (China and Singapore) at CIETAC: the parties signed a contract for the sale of 3,000 tonnes of refined palm oil. After signing, the international market price of palm oil rose sharply. The seller delayed and then refused to deliver, citing market difficulties. The CIETAC tribunal held that price changes are a normal commercial risk that traders must foresee when they enter the market, and are not force majeure. The seller’s failure to deliver was a fundamental breach under Article 25 of the CISG, and the seller had to pay the buyer the full price difference for buying substitute goods under Article 74 of the CISG.
• Cotton sale dispute (Pakistan and China) at CIETAC: the seller did not deliver, citing “objective difficulties” because the market price of cotton had risen sharply. CIETAC firmly rejected this argument. It held that refusing to deliver “to avoid losses” is a serious breach of contract, not a case of exemption from liability.

2.2. The elements of force majeure at VIAC (Awards No. 058 and 059)

Practice at the Vietnam International Arbitration Centre (VIAC) shows that arbitral tribunals apply the 3 statutory criteria in Article 156 of the Civil Code 2015 very strictly (objective, unforeseeable, impossible to overcome):

• VIAC Award No. 058: in a contract for the sale of goods between a Korean company (seller) and a Vietnamese company (buyer), the seller delivered all the goods but the buyer did not pay. When sued, the buyer argued that objective financial difficulty, because the market had frozen, was force majeure. The tribunal rejected this argument entirely. It held that the obligation to pay money is an absolute obligation, and a business’s cash-flow difficulties are not force majeure that would exempt it from paying the debt and interest.
• VIAC Award No. 059: the dispute arose when a construction project was suspended by an unexpected decision of a competent state authority. The tribunal found that this was a risk caused by a third party (a public authority), beyond the parties’ control. In this case, the parties should share the risk instead of placing all liability for the breach on one party.

2.3. How Vietnamese courts apply Article 420 of the Civil Code 2015 on hardship

Article 420 of the Civil Code 2015 was an important legislative step. It comes close to the French doctrine of imprévision and to international commercial principles (UNIDROIT). Judgments in recent years show that courts are using Article 420 to resolve contractual deadlocks caused by epidemics or policy changes:

• Judgment No. 32/2023/KDTM-PT of the People’s Court of Binh Duong Province: the court found that the Covid-19 lockdown and social distancing were an objective, natural cause arising after the contract was concluded, which changed the circumstances fundamentally under Point a, Clause 1, Article 420 of the Civil Code 2015. On that basis, it accepted the factory tenant’s notice to hand back the premises because it could no longer pursue its business purpose.
• Judgment No. 121/2023/DS-PT of the People’s Court of Da Nang City: in a dispute over a contract for the sale of an apartment/land plot, the court found that a state authority (the People’s Committee) changing its planning decision and the timeline for issuing the land use rights certificate was an objective cause involving human action that the parties could not foresee when they signed. This was a ground to find a fundamental change of circumstances that prevented the original purpose of the transaction from being achieved.
• Judgment No. 66/2023/DS-PT: the appeal court applied Article 420 of the Civil Code 2015 to a dispute over a deposit contract for the transfer of land use rights, where the land was recovered by the State. The court found that the land recovery made the planned subdivision and transfer impossible. Applying force majeure (Article 156 of the Civil Code) would only have resolved the exemption from damages, not the claim to return the deposit. The court therefore used Article 420 to declare the contract terminated and order the deposit to be returned, to ensure a fair balance of interests.

2.4. The trap of “stopping performance on your own initiative” under Article 420 of the Civil Code 2015

The biggest risk Vietnamese businesses face when relying on a fundamental change of circumstances lies in Clauses 2 and 3 of Article 420 of the Civil Code 2015:

• Mandatory rule: when circumstances change fundamentally, the affected party only has the right to ask for renegotiation within a reasonable time. Clause 2, Article 420 states clearly that the parties must continue to perform their obligations during the negotiations.
• Consequences of stopping on your own initiative: if negotiations reach a deadlock and the business stops supplying goods, stops paying or unilaterally rescinds the contract without waiting for a court decision, the court will find that the business is in breach of contract under Articles 351 and 360 of the Civil Code 2015. It will bear the full contractual penalty and damages.
• In a dispute over a hotel lease recorded in cassation practice, the court confirmed that even where circumstances had changed fundamentally, the tenant still had to pay rent while the dispute was being resolved. The tenant’s occupation of the property for a long time without paying was a serious breach, and the contract was terminated due to the tenant’s fault.

3. How should businesses draft a force majeure clause?

So that the force majeure clause is not an empty formality when an event occurs, businesses should build a tight protective structure with 4 technical pillars, based on the International Chamber of Commerce standard (ICC Force Majeure Clause).

Pillar 1: Combine a legal definition with a specific list of events

Do not simply refer in general terms to “as provided by law”. The clause should combine:

• A framework definition: an event beyond reasonable control, unforeseeable when the contract was concluded, whose consequences could not be avoided or overcome.
• A list of included events (inclusions): natural disasters (earthquakes, storms and floods of a specified level), war, acts of aggression, armed riots, public health epidemics leading to administrative lockdown by decision of a state authority, economic embargoes, lawful industry-wide strikes.
• An express list of exclusions: to prevent abuse by the partner, the contract should specifically exclude:
  • Market price changes, rising raw material costs or exchange rate movements.
  • Delays or breaches of contract by a party’s subcontractor or secondary supplier (unless that subcontractor is itself affected by force majeure).
  • Internal financial difficulty, loss of liquidity or bankruptcy of the obligor.
  • Ordinary technical machine failures due to the business’s poor maintenance.

Pillar 2: A strict notice procedure and a confirming certificate

The exemption from liability only arises when the affected party fully follows the notice procedure:

• Notice period: written notice must be sent within 48 to 72 hours of the event occurring, or of the affected party becoming aware of it.
• Content of the notice: a detailed description of the nature of the event, how far it prevents performance, and the expected time to overcome it.
• Supporting documents: the party relying on force majeure must produce a written confirmation from a competent state authority, or a force majeure certificate issued within 15 days by the Vietnam Chamber of Commerce and Industry (VCCI) or an equivalent independent organisation in the country concerned.

Pillar 3: Duty to mitigate

A party affected by force majeure may not simply give up. The clause should clearly set out the affected party’s duties:

• It must take all reasonable measures that are technically and economically feasible to limit the losses to the other party.
• The cost of these mitigation measures will be shared between the parties in a reasonable proportion, or borne by the party that carries the risk.

Pillar 4: Legal consequences and a “cut-off period” for ending the contract

• Suspension of obligations: while the force majeure event continues, the contractual obligations are suspended and the time for performance is extended by the duration of the event.
• Cut-off period: under Article 296 of the Commercial Law 2005, if force majeure lasts more than 5 months (for goods to be delivered within 12 months) or 8 months (for goods to be delivered over more than 12 months), the parties have the right to refuse to continue the contract. In modern business, however, this period is too long. The parties should agree a shorter cut-off period:

4. How should businesses draft a hardship clause?

The hardship mechanism in Article 420 of the Civil Code 2015 has many procedural barriers: the 5 conditions are very hard to prove, and court proceedings can take years while the party must keep performing at the old price. So businesses should not rely passively on the statutory rule. They should design their own hardship mechanism in the contract.

4.1. Quantify the events that trigger hardship (triggering events)

Instead of a vague qualitative test such as “causes serious damage”, the clause should set specific numbers:

• The reference price of the raw material on an international exchange (for example LME for metals, CBOT for agricultural products, Platts indices for oil and gas) rises or falls by ≥ 20% compared with the price on the signing date.
• The interbank exchange rate moves by more than ≥ 10% for at least 45 consecutive days.
• A sudden change in import duties, anti-dumping duties or international sea freight increases a party’s total cost of performing the contract by more than ≥ 25%.

4.2. A good-faith renegotiation procedure with time limits (structured renegotiation procedure)

• Trigger: the affected party has the right to send a notice requesting renegotiation, with a cost audit report or documents proving the economic imbalance.
• Negotiation period: negotiations are limited to 30 days from receipt of the notice.
• Interim rule of conduct: during the 30-day negotiation period, the affected party may temporarily adjust volumes or delivery schedules to a minimum level, to avoid building up further sudden financial losses (this agreement helps to exclude the rigid duty to continue performing under Clause 2, Article 420 of the Civil Code).

4.3. An automatic loss-sharing mechanism (risk-sharing formula)

To avoid a deadlock in negotiations, the parties can build in a formula for allocating risk in advance:

• 50/50 mechanism: the cost increase above the initial tolerance threshold (for example, the part of the increase above 10%) is split equally. The buyer bears 50% through a higher purchase price, and the seller absorbs 50% through a lower profit margin.

4.4. A safe exit mechanism

This is the most important clause to overcome the weakness of Article 420 of the Civil Code:

• State clearly: if, after 30 days of good-faith negotiation, the two parties cannot agree on a price adjustment or contract amendment, each party has the right to unilaterally terminate the contract by giving 15 days’ prior written notice.
• Confirm clearly: termination under this clause is a lawful termination by agreement. It is not a breach of contract, no contractual penalty applies, and neither party has to compensate the other for expected lost profit.

5. A model clause combining force majeure and hardship

Businesses can use the following two-tier model clause in long-term contracts for the sale of goods, the supply of services or processing:

6. Summary table: common mistakes and solutions for businesses

Documents and sources cited in this article

I. Legal instruments

1. Civil Code 2015 (Law No. 91/2015/QH13):

• Articles 3 and 401: basic principles of civil law, freedom of agreement and the effect of contracts.
• Articles 156 and 351: definition of a force majeure event and exemption from civil liability due to force majeure.
• Articles 360 and 419: liability to pay damages for breach of contractual obligations.
• Article 420: performance of a contract when circumstances change fundamentally (the 5 conditions, the duty to continue performing during negotiations, the powers of the court).
• Articles 422, 427 and 428: grounds for terminating a contract, and the legal consequences of rescission and unilateral termination.

2. Commercial Law 2005 (Law No. 36/2005/QH11):

• Article 11: the principle of freedom of agreement in commercial activities.
• Article 294: cases of exemption from liability for breach of contract (including force majeure).
• Article 296: extension of the time to perform the contract and the right to refuse to continue performing when force majeure lasts a long time.
• Articles 300, 301 and 302: contractual penalties (8%) and liability to pay damages.
• Articles 310 and 312: suspension and rescission of commercial contracts.

3. Law on Commercial Arbitration 2010 (Law No. 54/2010/QH12):

• Article 6: the court refuses to accept a case where there is an arbitration agreement.
• Article 13: loss of the right to object (waiver of right to object).
• Articles 18 and 19: invalid arbitration agreements and the independence of the arbitration agreement.
• Article 68: grounds on which a court may set aside a commercial arbitral award.

4. Resolutions of the Council of Judges of the Supreme People’s Court:

• Resolution No. 01/2014/NQ-HĐTP dated 20 March 2014: guidance on certain provisions of the Law on Commercial Arbitration.
• Resolution No. 01/2019/NQ-HĐTP dated 11 January 2019: guidance on certain provisions on interest, interest rates and contractual penalties.

II. International treaties and trade practice

1. United Nations Convention on Contracts for the International Sale of Goods, Vienna 1980 (CISG):

• Article 1(1)(a): scope of application of the Convention to international sale of goods contracts.
• Article 25: definition of a fundamental breach of contract.
• Articles 49 and 64: the buyer’s and the seller’s right to declare the contract avoided.
• Articles 74 and 78: full compensation for direct loss and lost profit, and the duty to pay interest.
• Article 79: exemption from liability due to an impediment beyond a party’s control (force majeure).

2. UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles 2016):

• Articles 6.2.1, 6.2.2 and 6.2.3: definition of hardship and how it is dealt with in international trade.
• Article 7.1.7: force majeure.

3. Rules and model clauses of the International Chamber of Commerce (ICC):

• ICC Force Majeure Clause 2020.
• ICC Hardship Clause 2020.
• Uniform Customs and Practice for Documentary Credits (UCP 600) and Uniform Rules for Demand Guarantees (URDG 758).

III. Precedents of the Supreme People’s Court of Vietnam

• Precedent No. 09/2016/AL: adopted by the Council of Judges of the Supreme People’s Court on 17 October 2016; establishes the rule that late-payment interest may not be charged on contractual penalties and damages.
• Precedent No. 13/2017/AL: adopted on 14 December 2017; confirms the absolute independence of the letter of credit (L/C) under UCP 600, which does not lose effect when the underlying international sale contract is rescinded.
• Precedent No. 21/2018/AL: adopted on 17 October 2018; determines fault and liability to compensate losses when a contract is unilaterally terminated with an unreasonable notice period.
• Precedent No. 42/2021/AL: adopted on 24 February 2021; protects a consumer’s right to choose a court when a standard-form contract contains a foreign arbitration clause (SIAC).
• Precedent No. 69/2023/AL: adopted on 18 August 2023; confirms that a confidentiality and non-compete agreement (NDCA) is a separate transaction within the jurisdiction of arbitration, and the principle of loss of the right to object to jurisdiction (waiver of right to object).

IV. Notable court judgments and arbitral awards

• Judgment No. 32/2023/KDTM-PT dated 14 July 2023 of the People’s Court of Binh Duong Province: a dispute over a factory lease; held that the Covid-19 lockdown was an objective cause amounting to a fundamental change of circumstances under Article 420 of the Civil Code 2015.
• Judgment No. 121/2023/DS-PT dated 7 September 2023 of the People’s Court of Da Nang City: a dispute over an apartment sale contract; held that an administrative decision of the People’s Committee changing land use planning was a fundamental change of circumstances under Article 420 of the Civil Code 2015.
• Judgment No. 66/2023/DS-PT of a provincial-level People’s Court: applied Article 420 of the Civil Code 2015 to declare a deposit contract for the transfer of land use rights terminated and order the deposit to be returned, because the land was recovered and the purpose of the contract was lost.
• Judgment No. 71/2024/DS-PT of a provincial-level People’s Court: applied Article 420 of the Civil Code 2015 to a dispute over an education services contract during the epidemic, and ordered tuition fees to be refunded because the purpose of the contract was not achieved.
• Judgment No. 02/2022/KDTM-ST dated 16 March 2022 of the People’s Court of Binh Duong Province: a dispute over an international contract for the sale of plant protection products between Company W (China) and Company S (Vietnam); dealt with an arbitration agreement that was incapable of being performed and applied the CISG directly.
• A 2022 commercial appeal judgment of the People’s Court of Ho Chi Minh City: recognised as lawful a clause on pre-estimated damages (liquidated damages, LD) in a construction contract and the mechanism releasing the claimant from proving actual loss.
• Award No. 058 of the Vietnam International Arbitration Centre (VIAC): rejected the buyer’s argument that objective financial difficulty was force majeure justifying refusal to pay.
• Award No. 059 of VIAC: an award on a construction project terminated early because of a decision of a competent state authority.
• Award No. 063 of VIAC: held that rescission of an international sale contract must be based on a fundamental breach.
• Awards of the China International Economic and Trade Arbitration Commission (CIETAC): applied Articles 25, 49 and 74 of the CISG in international disputes over the sale of palm oil and cotton; confirmed that market price changes are not force majeure.
• Toepfer v. Sao Mai: a judicial precedent in which a Vietnamese court refused to recognise and enforce an award of GAFTA international arbitration (London) on the ground that it breached public order and the principle of compensation for actual damage under Vietnamese law.