The legal context of hardship clauses addressing changed circumstances.
An area of the law that divides the legal traditions is visible in the concept of force majeure. During the late 19th century, the French Cour de cassation (‘supreme court’) established the overriding principle that contractual provisions are recognised as a strong force of law. Unless the parties provided for exceptions in the case of hardship or force majeure, the principle ‘contract is contract’ (pacta sunt servanda) prevails. This principle of “you have to deliver what you promised” is also essential in common law.
Nevertheless, some circumstances that go beyond the reasonable expectations of the parties may call the binding nature of a contract into question. The occurrences of life are infinite and, accordingly, upon the occurrence of unforeseen circumstances, a contract or a rule of law might provide an unjust result. It makes a hardship or force majeure provision of great importance[1].
Examples of hardship cases (where changed circumstances were acknowledged).
A change of circumstances triggering a renegotiation or change of an agreement should be highly exceptional. Cases in which such renegotiation or change would be appropriate could be:
- inflation of over 100 percent per day or per week (e.g. as happened in Zimbabwe (2008), Germany (1923), Greece (1944), Yugoslavia (1994)) whilst the contract was entered into during relatively stable economic circumstances (of low inflation);
- a collapse of the real estate market (price drops by over 95 percent in a few days), whilst the affected contractual obligations were non-speculative nature, unrelated to real estate market developments;
- a pricing formula linked to an electricity price index, which price index increases significantly (e.g. effectively turning the index from a ratio of less than 1 (one) into a factor in excess of 1 (one); in other words, changing a mathematical divider into a multiplier);
- a purchase price expressed in a currency that has become subject to extreme fluctuations whilst the contract was entered into during a period of relatively stable exchange rates;
- delivery requirements for countries that have become inaccessible due to political reasons or because of international trade embargo;
- minimum purchase requirements or exclusivity arrangements in long-term agreements, where the product (or a key component of it) has been abandoned due to technological developments.
The examples that might justify an amendment of the contract are highly exceptional. Courts are very reluctant to step into such revision. Obviously, whilst a hardship clause as such can be desirable, providing for changes of circumstances also lowers the threshold for a party to call upon it.
ITC Model contracts on hardship in contracts #
The ITC Model Contracts provide for a contractual device applicable in exceptional cases of a change of circumstances. Those exceptional cases would typically include changes of circumstances or cases of hardship that (a) the parties did not already (implicitly) incorporate in the contract by way of risk allocation, (b) should not remain for the risk and account of the affected party (e.g. because the occurred change of circumstance is part of its business), or (c) could not be influenced by the affected party. For example the international long-term supply contract:
9. Change of circumstances (hardship)
9.1 Where the performance of this contract becomes more onerous for one of the Parties, that party is nevertheless bound to perform its obligations subject to the following provisions on change of circumstances (hardship).
9.2 If, however, after the time of conclusion of this contract, events occur which have not been contemplated by the Parties and which fundamentally alter the equilibrium of the present contract, thereby placing an excessive burden on one of the Parties in the performance of its contractual obligations (hardship), that party shall be entitled to request revision of this contract provided that:
9.2.1 the events could not reasonably have been taken into account by the affected party at the time of conclusion of this contract;
9.2.2 the events are beyond the control of the affected party; and
9.2.3 the risk of the events is not one that, according to this contract, the Party affected should be required to bear.
9.3 Each party shall in good faith consider any proposed revision seriously put forward by the other party in the interests of the relationship between the Parties.
Interference by a third person. The idea behind the clause is that the parties should be free to consult each other in the event of a major change in circumstances − particularly one creating hardship for a particular party. However, a company should only include the option at the end of Article 9.4 (right to refer to the courts/arbitral tribunal to make a revision or to terminate the contract) if (a) the company considers that it is not likely to be used against that party’s interests by a party in a stronger tactical position or (b) the right to refer to a court/tribunal is already an existing right under the applicable governing law in the event of hardship.
9.4 If the Parties fail to reach agreement on the requested revision within [specify time limit if appropriate], a party may resort to the dispute resolution procedure provided in Article 18. The [court/arbitral tribunal] shall have the power to make any revision to this contract that it finds just and equitable in the circumstances, or to terminate this contract at a date and on Terms to be fixed.
DCFR on hardship in contracts
#
The Draft Common Frame of Reference (DCFR) provides for a mechanism that is inspired by the approach of the Dutch Civil Code (art. 6:258) and the Italian Civil Code (art. 1467 (eccessiva onerosità)):
III. – 1:110: Variation or termination by court on a change of circumstances
(1) An obligation must be performed even if performance has become more onerous, whether because the cost of performance has increased or because the value of what is to be received in return has diminished.
(2) If, however, performance of a contractual obligation or of an obligation arising from a unilateral juridical act becomes so onerous because of an exceptional change of circumstances that it would be manifestly unjust to hold the debtor to the obligation a court may:
(a) vary the obligation in order to make it reasonable and equitable in the new circumstances; or
(b) terminate the obligation at a date and on terms to be determined by the court.
(3) Paragraph (2) applies only if:
(a) the change of circumstances occurred after the time when the obligation was incurred;
(b) the debtor did not at that time take into account, and could not reasonably be expected to have taken into account, the possibility or scale of that change of circumstances;
(c) the debtor did not assume, and cannot reasonably be regarded as having assumed, the risk of that change of circumstances; and
(d) the debtor has attempted, reasonably and in good faith, to achieve by negotiation a reasonable and equitable adjustment of the terms regulating the obligation.
Unidroit Principles on hardship in contracts
#
The Unidroit Principles address the issues related to hardship and probably provide for a more sophisticated framework, consistent with the ITC Model Contracts’ solution, permitting the parties to find a solution:
SECTION 2: HARDSHIP
Article 6.2.1 (Contract to be observed)
Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.Article 6.2.2 (Definition of hardship)
There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and
(a) the events occur or become known to the disadvantaged party after the conclusion of the contract;
(b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;
(c) the events are beyond the control of the disadvantaged party; and
(d) the risk of the events was not assumed by the disadvantaged party.Article 6.2.3 (Effects of hardship)
(1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based.
(2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.
(3) Upon failure to reach agreement within a reasonable time either party may resort to the court.
(4) If the court finds hardship it may, if reasonable,
(a) terminate the contract at a date and on terms to be fixed, or
(b) adapt the contract with a view to restoring its equilibrium.
Because courts would be very reluctant to step into the position of a contracting party, the solution of a case of hardship would apply only in highly exceptional, special circumstances. Especially in common law and in French law, this principle is taken rather strictly. In the Germanic legal tradition, such force majeure or hardship provision is not a must-have. This is because the court will take an objective (more reasonable) approach as regards the question of whether a party is excused from performance given the occurrence of exceptional circumstances.
[1] A comprehensive study of the scope and effect of unforeseen circumstances (and hardship, mistake and force majeure) in the European Union countries is: Ewoud Hondius & Hans Christoph Grigoleit (Eds.), Unexpected circumstances in European contract law, The common core of European private law, Cambridge University Press 2011, 692 p. (In the book, Willem Wiggers reported on the laws of The Netherlands.)
