Title

VIII.1 - Hardship: Requirements

Content

No. VIII.1 - Hardship: Requirements

Any event of legal, economic, technical, political, financial or similar nature

i)

which is beyond the typical sphere of control of the disadvantaged party, and

ii)

which occurs after the conclusion of the contract and whose effects could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contractor, or

iii)

which existed at that time but was not known by the disadvantaged party and could not have been recognized by a reasonable person of the same kind as the disadvantaged party in the same circumstances, and

iv)

which causes a fundamental alteration of the equilibrium of the contractual obligations, thereby rendering the performance of the contract excessively onerous for that party, and

v)

for which the disadvantaged party did not assume, explicitly or implicitly, in the contract or otherwise, the risk of its existence or occurrence.

constitutes hardship.

Commentary

1 The Principle constitutes an exception to the fundamental Principle of sanctity of contracts ("pacta sunt servanda"). In spite its pivotal importance, that principle of sanctity of contracts is not without exceptions. The principle of hardship ("clausula rebus sic stantibus, "Wegfall der Geschäftsgrundlage","frustration of purpose") provides that the continued enforceability of a contract is always subject to the continued existence of those circumstances which prevailed at the time of contracting and which formed the basis for the parties‘ bargain. The pacta principle, properly understood, means the inviolability, but not the unchangeability of contracts. This understanding of the pacta principle is derived from equity and good faith ("pacta sunt servanda in bona fide"). However, since the principle of sanctity of contracts is the rule, the hardship defense is available only in exceptional circumstances. It is for this reason that subsection iii) requires a "fundamental" alteration of the economic equilibrium of the parties' contractual obligations. Such a fundamental, i.e. truly exorbitant alteration may result from an increase of the costs of performance of the party invoking the hardship defense or from a decrease in value of the performance to be rendered by the other party.

2 This hierarchy also follows from the Principle of the presumption of professional competence. In international contracts, which are usually comprehensive, detailed and all-embracing contractual frameworks, there is a presumption that absent an adaption clause in the contract, the Principle of sanctity of contracts prevails since it cannot be assumed that the parties were unaware of possible risks related to a change in the value of the parties' performance.

3 The question whether a "fundamental" alteration of the economic equilibrium of the contractual obligations of the parties has occurred cannot be determined with respect to abstract figures like an increase of costs of 100 or 200% as compared to the initial contractual cost/profit calculations. That question can only be answered against the circumstances of each individual case, including the nature of the contract, its subject matter and the conditions of the market in which that contract was concluded. In a highly volatile market with sharp and constant price fluctuations, a substantial increase in the cost of performance will be more acceptable than in markets with relatively stable price structures. It is essential for the hardship principle to apply that performance of the contract has not just become "more costly". Such increases of costs are part of commercial reality and must usually be borne by the performing party. Instead, performance must have become excessively more onerous, so that it would appear to be against good faith to force the aggrieved party to perform as initially agreed in the contract. 

4 The hardship defense is not available if the party invoking the defense has, unilaterally or by agreement with the other side, assumed the risk for the events on which the hardship defense is based.

References

Doctrine

Fouchard, Philippe, L'Arbitrage Commercial International, Paris 1965

Abas, Piet, Rebus sic stantibus, Cologne, Berlin, Bonn, Munich 1993Berger, Klaus Peter/Behn, Daniel, Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study (April 20, 2020), 6 McGill Journal of Dispute Resolution (2019/2020) Number 4, pages 79-130Bernardini, Piero, Adaption of Contracts, in: Sanders (ed.), ICCA Congress ser. no. 1, Deventer 1983, at 211 et seq.Bishop, R. Doak, International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, YCA 1998, at 1131 et seq.Blessing, Marc, Das neue internationale Schiedsgerichtsrecht der Schweiz - Ein Fortschritt oder ein Rückschritt?, in: Böckstiegel (ed.), Die internationale Schiedsgerichtsbarkeit in der Schweiz (II), Cologne, Berlin, Bonn, Munich 1989, at 13 et seq.Brownlie, Ian, Principles of Public International Law, 4th ed., Oxford 1990.Brunner, Christoph, Force Majeure and Hardship under General Contract Principles - Exemption for Non-Performance in International Arbitration, 2009Delaume, Georges, Law And Practice of Transnational Contracts, New York, London, Rome 1988Derains, Yves, note to ICC Award No. 2404, Clunet 1976, at 996 et seq.Dickstein, Michael E., Revitalizing the International Law Governing Concession Agreements, 5/6 Int’l Tax & Bus.Lawy. 1987/88, at 54 et seq.Domingo, Ortega, Rodriguez-Antolin, Zambrana, Principios de Derecho Global, Navarra, 2006Ehricke, Ulrich, Zur Einführung: Grundstrukturen und Probleme der lex mercatoria, 30 JuS 1990, at 967 et seq.Firoozmand, Mahmoud Reza/Zamani, Javad, Force majeure in international contracts: current trends and how international arbitration practice is responding, Arb. Int'l, Vol. 33 (2017), at 395 et seq.Fontaine, Marcel, Les Clauses de Hardship - Aménagement Conventionnel de l'Imprévision dans les Contrats à Long Terme, DPCI 1976, at 7 et seq.Glossner, Ottoarndt, The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards - Some Thoughts After 30 Years - 1958-1988, in: Sanders (ed.), ICCA Congress ser. no. 4, Deventer 1989, at 275 et seq.Goldman, Berthold, The Applicable Law: General Principles of Law - the Lex Mercatoria, in: Lew (ed.), Contemporary Problems in International Arbitration, London 1986, at 113 et seq.Hartkamp, Arthur, The UNIDROIT Principles for International Commercial Contracts and the New Dutch Civil Code, in: CJHB Brunner-Bundel, Deventer 1994, at 127 et seq.Hascher, Dominique, note to ICC Award No. 5961, Clunet 1997, at 1054 et seq.Hay, Peter, Zum Wegfall der Geschäftsgrundlage im anglo-amerikanischen Recht, 164 AcP 1964, at 231 et seq.Horn, Norbert, Changes in Circumstances and the Revision of Contracts in Some European Laws and in International Law, in: Horn (ed.), Adaptation and Renegotiation of Contracts in International Trade and Finance, Antwerp, Boston, London, Frankfurt a.M. 1985, at 15 et seq.Horn, Norbert, Vertragsdauer. Die Vertragsdauer als schuldrechtliches Regelungsproblem, in: BMJ (ed.), Gutachten und Vorschläge zur Überarbeitung des Schuldrechts, Bd.I, Cologne 1981, at 551 et seq.Hutchison, Dale (Ed.) / Pretorius, Chris (Ed.),  The Law of Contract in South Africa, Oxford University Press Southern Africa, 2018Kahn, Philippe, « Lex mercatoria » et Pratique des Contrats Internationaux, in: Le Contrat Economique International, Bruxelles, Paris 1975, page 200 et suiv.Köbler, Ralf, Die 'clausula rebus sic stantibus' als allgemeiner Rechtsgrundsatz, Tübingen 1991Lando, Ole, CISG and Its Followers: A Proposal to Adopt Some International Principles of Contract Law, in: American Journal of Comparative Law 53, Berkley 2005.Lorfing, Pascale Accaoui, La renégociation des contrats internationaux, 2011MacQueen, Hector L./Thomson, Joe, Contract Law in Scotland, Fourth Edition 2016Markert, Thomas, Rohstoffkonzessionen in der internationalen Schiedsgerichtsbarkeit, Baden-Baden 1989Marrella, Fabrizio, La nuova lex mercatoria, Principi Unidroit ed usi di contratti des comercio internazionale, CEDAM, Tratto di dritto commerciale e di dritto publico dell‘economia, Volume 30, Padova 2003Maskow, Dietrich, Hardship and Force Majeure, 40 Am.J.Comp.L. 1992, at 657 et seq.Melis, Werner, Force Majeure and Hardship Clauses in International Commercial Contracts in View of the Practices of the ICC Court of Arbitration, 1 J.Int'l Arb. 1984, at 213 et seq.Michaelis de Vasconcellos, Harald, Garantieklauseln und Risikoverteilung im internationalen Anlagenvertrag, 1st ed., Heidelberg 1988Molineaux, Charles, Moving Toward a Lex Mercatoria - A Lex Constructionis, 14 J. Int‘l Arb. 1997, No. 1, at 55 et seq.Mustill, Michael, The New Lex Mercatoria: The First Twenty-five Years, Arb.Int'l 1988, at 86 et seq.Nassar, Nagla, Sanctity of Contracts Revisited, Dordrecht, Boston, London 1995Oppetit, Bruno, L'Adaptation des Contrats Internationaux aux Changement de Circonstances: La Clause de Hardship, 101 Clunet 1974, at 794 et seq.Pédamon, Catherine/Chuah, Jason, Hardship in Transnational Commercial Contract - A Critique of Legal, Judicial and Contractual Remedies (2013), Chapter 4, p. 63Ripert, Georges, Les Règles du Droit Civil Applicables aux Rapports Internationaux (Contribution à l'Etude des Principes Généraux du Droit Visés au Statut de la Cour Permanente de Justice Internationale), 44 Rec.Cours 1933-II, at 569 et seq.Roland, Henri/ Starck, Boris/ Boyer, Laurent, Droit Civil: Obligations, 2. Contrat, 4th ed., Paris 1993Samuel, Adam, Jurisdictional Problems in International Commercial Arbitration. A Study of Belgian, Dutch, English, French, Swedish, USA and West German Law, Zürich 1989Schmitz, Stephan, Allgemeine Rechtsgrundsätze in der Rechtsprechung des Iran-United States Claims Tribunal, Frankfurt a.M., Berlin, Bern 1992Sornarajah, M., International Commercial Arbitration, Singapore 1990Tallon, Denis, Hardship, in: Hartkamp et al., Towards a European Civil Code, Nijmegen 2004, at p. 499 et seq.van Houtte, Hans, Changed Circumstances and Pacta Sunt Servanda, in: Gaillard (ed.), Transnational Rules in International Commercial Arbitration (ICC Publ. Nr. 480,4), Paris 1993, at 105 et seq.Wühler, Norbert, Application of General Principles of Law, in van den Berg (ed.), Planning efficient Arbitration Proceedings - The Law Applicable in International Arbitration, p. 553 et seq.Zakariya, Hasan, Changed Circumstances and the Continued Validity of Mineral Development Contracts, in: Hossain (ed.), Legal Aspects of the New International Economic Order, London, New York 1980, at 263 et seq.Zimmermann, Reinhard, Konturen eines Europäischen Vertragsrechts, JZ 1995, at 477 et seq.Zimmermann, Reinhard, The Law of Obligations. Roman Foundations of the Civilian Tradition, Munich Cape Town 1990

Arbitral Awards

Ad-Hoc-Award, Kuwait v. The American Independent Oil Company (AMINOIL), 21 ILM 976ICC Award 2508, Coll. ICC Arb. Awards 1974-1985ICC Award No. 1512, YCA 1976, at 128 et seq. (also published in: Clunet 1974, at 905 et seq.).ICC Award No. 16369, YCA 2014, at page 169 et seq.ICC Award No. 2291, Clunet 1976, at 989 et seq.ICC Award No. 2404, Clunet 1976, at 995 etICC Award No. 2478 IN 1974, YCA 1978, at 222 et seq. (also published in: Clunet 1975, at 925 et seq.).ICC Award No. 4761, Clunet 1987, at 1012 et seq.ICC Award No. 5961, Clunet 1997, at 1051 et seq.ICC Award No. 8486, YCA 1999, at 162 et seq. (also published in: 10 ICC Bull. No.2, 1999, at 69 et seq.; Clunet 1998, at 1047 et seq.)ICC Award No. 9029, 10 ICC Bull. No. 2, 1999, at 88 et seq.ICC Award No. 9479, ICC Bull. 12/No. 2 (2001), at 67 et seq.Iran-U.S. Claims Tribunal, Gould Marketing, Inc. v. Ministry of National Defence, 3 IRAN-U.S. C.T.R., at 147 et seq.Iran-US Claims Tribunal, Mobil Oil Iran, Inc. et al. v. Iran , 16 IRAN-U.S. C.T.R., at 3 et seq.

Court Decisions

Alfred Marks Realty Co. v. Hotel Hermitage Co., 170 A.D. 484.BGE 101 II, 17BVerfGE 34, 216 et seq.Davis Contractos Ltd. v. Fareham Urban District Council, [1956] A.C. 696French Cour de Cassation, Arrêt du Canal de Craponne of March 6, 1876, Dalloz 1876, at 193Krell v. Henry, [1903] 2 K.B. 740.Transatlantic Financing Corporation v. United States of America, 363 F.2d 312Tsakiroglou & Co Ltd v Noblee Thorl GmbH, The Law Report 1962 at Page 7 et seq.

Miscellaneous

CISG Advisory Council Opinion No. 7: Exemption of Liability for Damages Under Article 79 of the CISG

National Legislation

Danish Contracts ActEgyptian Civil CodeGIW DDRGIW GDRItalian Codice CivileNieuw Burgerlijk Wetboek - New Netherlands Civil Code ( Dutch Civil Code )Philippines Republic Act 386 (Civil Code)Russian Civil CodeSaudi Arabia Civil Transactions Law - Royal Decree No. M/191, June 18, 2023, official translationTurkmenistan Civil CodeUzbekistan Civil Code

International Legislation

Fontaine, Marcel, OHADA Uniform Act On Contract Law Preliminary DraftVienna Convention on the Law of Treaties of 1969

Model Terms

ICC (ed.), Force Majeure and Hardship, Paris 1985 (ICC Publ No. 421).ICC Force Majeure Clause 2003, ICC Hardship Clause 2003, ICC Publication No. 650

Principles / Restatements

Principles of European Contract Law - PECLUNCITRAL Legal Guide on Drawing up International Contracts for the Construction of Industrial Works, 1988UNIDROIT Principles of International Commercial Contracts 2016

Model Laws

Principles of Latin American Contract Law (PLACL)The Draft Civil Code for Israel in: Siehr, Kurt/Zimmermann, Reinhard (ed.) The Draft Civil Code for Israel in comparative perspective, 2008Uniform Commercial Code (USA)

Arbitration Rules

UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works, Exemption Clauses No. 1, 12

Contract Clauses

1. Hardship Defined as Event Increasing Costs of One PartyEmployment Contract