What is A”hardship clause”

April 21, 2019 Critical Thinking

What is A”hardship clause”?
Given rapidly changing global economic and political undercurrents, there is a real risk of supervening events rendering it commercially non-viable (albeit not impossible) for a party to comply with its contractual obligations, particularly in long-term international commercial contracts.

As part of risk allocation, hardship clauses are incorporated in international commercial contracts for parties to renegotiate the contract to restore the equilibrium, if and when it becomes onerous for a party to perform its contractual obligations arising from an event of hardship.

On an international level, an event of hardship is generally defined in Article 6.2.2 of the UNIDROIT Principles as an unforeseeable event arising beyond the disadvantaged party’s control after conclusion of the contract for which the risk of the same has not been assumed. The International Chamber of Commerce Hardship Clause 2013 mirrors the same elements.

Generally, a hardship clause consists of two parts: the circumstances of hardship and its consequences.

Circumstances of hardship may be broadly worded to cover serious ‘economic, political or technical’ change as a catch-all, or narrowly construed with a list of specific events: “if the production of steel deriving from haematite sources should reach 20% of the total production of steelworks x” or “if ordinary crude oil delivered to its destination should increase by more than 6 francs per ton with respect to the original price.”
In contracts involving oil, gas or energy, stabilisation and adaption mechanisms such as indexation and sliding scales are also commonly in the hardship clause to ‘maintain the value’ and to ‘rehabilitate’ the investment.
As such, narrowly construed hardship clauses with a list of specific events are ‘not real hardship clauses’ insofar as they challenge foreseeability of the event being a crucial element of hardship and provide for an automatic readjustment without a need for parties to re-negotiate the contract.

Hardship clauses usually provide for parties to renegotiate the contract, with some stipulating a more subjective approach for it to be done “with fairness” or “equitable adjustment”; failing which, parties may be entitled to terminate, suspend the contract, or refer the dispute to the courts or arbitral tribunals that may, if hardship is found, terminate the contract or restore the original balance of the contract.

Although all jurisdictions recognize a change in circumstances, the approaches towards hardship clauses vary.
The courts in Belgium have generally found that where a specific event of hardship is not expressly provided for, the disadvantaged party has implicitly assumed the risk involved and agreed to bear any loss occasioned by the same.
In principle, the only exceptions to the pacta sunt servanda principle for non-performance of contracts in Belgium and France is in the event of a force majeure and the doctrine of imprévision (unforeseability). This is also consistent with the common law systems.

In international commercial arbitration, increase in prices as high as 25-50% are considered foreseeable and do not exempt a party from non-performance of the contract on the grounds of hardship.BIBLIOGRAPHY
Cases
Commercial Court Tongeren (Scafom International BV ; Orion Metal BVBA v. Exma CPI SA), 25 January 2005
Court of Cassation Supreme Court (Scafom International BV v. LorraineTubes S.A.S), 19 June 2009
District Court Hasselt (Vital Berry Marketing v. Dira-Frost), 2 May 1995
Legislation
Principles of International Commercial Contracts.International Institute for the Unification of Private Law (UNDROIT) (Rome, 2016)
Books
Brunner C, Force Majeure and Hardship under General Contract Principles. Exemption for Non-Performance in International Arbitration (Kluwer Law International 2009)
Den Haerynck, W, Drafting Hardship Clauses in International Contracts’ in Dennis Campbell (ed), Structuring International Contracts (Kluwer Law International Ltd 1996)
Journals
Bernardini, P, ‘Stabilization and adaption in oil and gas investments’ (2008) The Journal of World Energy Law & Business Volume 1, Issue 1
Fontaine, M, ‘Les Clauses de Hardship’ Droit et Pratique du Commerce International (1976) 261
Konarski, H, ‘Force Majeure and Hardship Clauses in International Contractual Practice’ International Business Law Journal (2003) 405
Melis, W, ‘Force Majeure and Hardship Clauses in International Commercial Contracts in View of the Practice of the ICC Court of Arbitration’ 1 J Intl Arb (1984) 213
Oppetit, B, L’adaptation des contrats internationaux aux changements de circonstances: la clause de ‘hardship’ Journal de droit international (1974) 794
Zaccaria, E, ‘The Effects of Changed Circumstances in International Commercial Trade’ International Trade and Business Law Review (2004) 135
Other
ICC Commission on Commercial Law and Practice, ICC Force Majeure Clause 2003 ICC Hardship Clause 2003 (Publication No. 650, Paris: International Chamber of Commerce, 2003) ;https://cdn.iccwbo.org/content/uploads/sites/3/2017/02/ICC-Force-Majeure-Hardship-Clause.pdf; accessed 7 September 2018