4.3 Change of circumstances (hardship)
Considerations regarding the legal context. An area of the law that divides the legal traditions is evident 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 provide for exceptions in the case of hardship or force majeure, the principle ‘contract is contract’ (pacta sunt servanda) prevails. This principle – “you have to deliver what you promised” – is also essential in common law. Nevertheless, under both systems 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. This makes a hardship or force majeure provision very important.[1]
Examples. A change of circumstances sufficient to trigger a renegotiation or justify an amendment of the contract should be highly exceptional. Courts are very reluctant to step into such revisions. Obviously, while a hardship clause as such can be desirable, contractually providing for changes of circumstances also lowers the threshold for a party to call upon it.
Cases in which renegotiation or change would be appropriate might be, for instance:
- a pricing formula linked to an electricity price index that starts to increase 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, whereas a period of relatively stable exchange rates prevailed when the contract was entered into;
- delivery requirements for a country that has become inaccessible due to political reasons or because of an 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.
ITC Model Contracts. A contractual device applicable in exceptional cases involving a change of circumstances can be found in the ITC Model Contracts. Such cases would typically include changes of circumstances or 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 inherent to its type of business), or (c) could not be influenced by the affected party. For example, in the international long-term supply contract:
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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 this kind of 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 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 if the right to refer to a court/tribunal is already an existing right under the applicable governing law in the event of hardship. In that case:
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.
Legal framework. The Unidroit Principles address the issues related to hardship and provide for a sophisticated framework consistent with the solution proposed in the ITC Model Contracts.
Because courts are 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, a force majeure or hardship provision is not a must-have, because courts will take an objective (more reasonable) approach to the question of whether a party is excused from performance given the occurrence of exceptional circumstances.
[1] An excellent comprehensive study of the scope and effect of unforeseen circumstances (and hardship, mistake and force majeure) in the European Union countries is: Hondius, Ewoud and Grigoleit, Hans Christoph, eds. (2011), Unexpected circumstances in European contract law, The common core of European private law, Cambridge University Press, 692 p.