Properly prepared — contract law in the new security landscape part 2

The first article in the series addressed some preparedness laws that may give the government or other public authorities the right to intervene in ways that affect the conditions for performing a contract. This could, for example, involve rationing of fuel, building materials, or input goods, or the requisitioning of real estate, vehicles, or machinery. Furthermore, it may become relevant for key individuals in a project to be required to serve in the total defence organisation, or otherwise be unable to participate in the project, for example as a result of the Protective Security Act (säkerhetsskyddslagen).

Amendment clauses

Under Swedish law, it is generally the case that changed circumstances can affect the content of a contract. As a starting point, a contract that is objectively impossible to perform, in whole or in part, should not need to be performed to that extent if this is due to something unexpected and outside the parties' control. Even where there is no objective impossibility, extraordinary circumstances may also alter the parties' mutual rights and obligations. In certain cases, changed circumstances that are not quite as extraordinary may nevertheless result in the relevant obligation falling away or being adjusted, if it would be unreasonable for the obligation to remain in force (see Section 36 of the Contracts Act, lagen om avtal och andra rättshandlingar på förmögenhetsrättens område).

These general principles apply even where the parties' contract does not address the issue. However, the principles can be difficult to apply. What could the parties expect when the contract was entered into, and what lies within their control? What constitutes an objective impossibility? What is the precise consequence of this particular unexpected event?

Many commercial contracts therefore contain provisions intended to regulate unexpected events. Sometimes this is deliberate; sometimes it is simply something carried over from earlier contracts and templates. This is often regulated through a so-called force majeure clause. Such clauses typically list a number of events – war, natural disaster, fire, flood, epidemic, strike, blockade, and government action – that exempt a party from liability. The list is often supplemented with a general wording referring to "similar circumstances" or other "circumstances beyond the party's control." The consequence of the unexpected event occurring is not always clearly stated, however – it may simply state that the party is "exempt from liability" or merely not liable for damages.

Within construction law, there is a more tailored regime. The contractor may be entitled to an extension of time in the event of, for example, a government decision resulting in a general shortage of equipment, materials, or goods, or a restriction on labour, as well as in the event of war and defence preparedness (AB 04, Chapter 4, Section 3). Furthermore, under certain conditions, the agreed price may be changed with regard to a government measure or war or other crisis situation with a similar effect (AB 04, Chapter 6, Section 3). Each party may also be entitled to terminate the remaining works if, among other things, war causes damage that materially disrupts the conditions for performing the contract, or if the works need to be suspended for such a long period that the conditions are disrupted (AB 04, Chapter 8, Sections 1 and 2).

Five gaps in classic amendment clauses

War and government action are very often cited as qualifying circumstances in force majeure clauses and sometimes also in more specific amendment clauses. From a preparedness perspective, however, such clauses still have room for improvement.

1. Specific types of events, such as rationing, requisitioning under the Requisitioning Act (förfogandelagen), and total defence duty, are not expressly regulated. Many classic clauses refer to "government action," but it is not certain that all preparedness measures would be covered. The wording in AB 04 is clearer in this respect, albeit not explicit, in that rationing may be covered. It is more doubtful, however, whether the wording covers requisitioning by the state.

2. Heightened alert (höjd beredskap) as a formal legal status is rarely mentioned. The fact that war is ongoing somewhere in the world is not the same as Sweden formally being in a state of heightened alert. The latter triggers a specific legal framework with specific legal consequences, and few commercial clauses are drafted with that distinction in mind.

3. Chain effects are not always covered. Many clauses are drafted so that the unforeseen event must affect the contracting party directly, not indirect effects further down the chain. A government measure affecting a subcontractor therefore risks falling outside the scope of the clause, even though the measure in practice makes it impossible for the contracting party to perform its obligations.

4. A proportionality valve. In certain situations, it may be physically and legally possible to perform, while at the same time requiring sacrifices that are disproportionately large in relation to the value of the contract. In a state of heightened alert, such an addition may be relevant.

5. The consequences of the triggering circumstance occurring are not sufficiently clear. Is the supplier/contractor no longer obliged to perform? Does one party's liability for damages fall away? When does the right to terminate arise?

Force majeure clauses are often drafted in a party-neutral manner, i.e. so that they can be invoked by either party. In practice, however, it is almost always the supplier that is affected (the client's often sole obligation is to pay on time). It is therefore primarily the supplier's task to identify possible risks to performance, even though both parties benefit from clarity and predictability.

Preventive tools

Amendment clauses allow the parties to create the conditions for overviewing and managing an unexpected situation if it occurs. At that point, however, the damage has already been done. The parties also have no control over the state of national preparedness and cannot contract out of mandatory preparedness legislation. Nevertheless, there are certain preventive tools that can be developed through the contract.

• Preparedness undertakings. The client can require its supplier to maintain a certain safety stock of critical input goods, to identify backup suppliers, and to have a continuity plan in place. This reduces the risk of supply disruption in the event of disturbances in the supply chain.

• Step-in rights. With a step-in clause, the client has the right, in the event of a delivery obstacle, to step in and procure directly from subcontractors or alternative suppliers, at the supplier's expense. This makes it possible to act immediately without waiting for a legal ruling.

• Priority undertakings. In the event of a capacity shortage, the client's orders should be prioritised over the supplier's other customers. This can be of great value to the client for as long as, for example, rationing or requisitioning does not completely eliminate capacity.

• Supplier diversification. The client can require that the supplier is not unilaterally dependent on a single subcontractor or raw material source for critical input goods. This comes with a right to require ongoing information about the composition of the supply chain.

• Insurance requirements. The client can require the supplier to maintain business interruption insurance covering delivery disruptions and protecting the client as a result of government decisions and interventions under the preparedness laws.

A note on protective security

In addition to obstacles linked to the preparedness laws, there are also obstacles linked to protective security (säkerhetsskydd), i.e. that a planned subcontractor fails a security vetting or cannot enter into a security protection agreement. Such an event would typically not, in the classic sense, constitute an unforeseeable external hindrance either – the event is a consequence of a regulatory system. The circumstance can, however, clearly make it impossible to perform a contract.

The situation can be specifically regulated in the contract. A security clause can regulate what happens if a party is forced to change subcontractor as a result of the regulatory requirements, specify who bears the additional cost, who is responsible for time losses, and what happens if no approved alternative is available. The issue is equally relevant for the supplier as for the client.

Three things you can do now

1. Read through your force majeure and amendment clauses from both parties' perspectives and with preparedness issues in mind. Is the clause drafted solely for one party, or does it balance the interests of both parties? Does it cover rationing, requisitioning, and heightened alert as a formal legal status?

2. Map your critical supply chains. Identify which suppliers and subcontractors are critical to the business. Assess how the chains would be affected by rationing, requisitioning, or personnel departures to the total defence organisation. A risk matrix – likelihood against consequence – provides an initial picture of where the vulnerability is greatest and what may need to be prioritised.

3. Test your contracts against a concrete scenario. Choose a realistic event – for example, that a supplier has its capacity requisitioned under the Requisitioning Act – and read through the contract step by step: Is the force majeure clause triggered? Who must notify whom, and within what time frame? What consequences arise? Is there a gap? What are the options for action?