HARDSHIP UNDER THE UNIDROIT PRINCIPLES – Part 2

In our second part of the Hardship under the UNIDROIT principles we will have a closer at the CISG, ICC hardship clause and how the German, Dutch, French and Belgian law govern hardship.

II. CISG

The UN Convention on Contracts for the International Sale of Goods does not contain any provisions on the impossibility of performance, with the exception of Art. 79 CISG, which according to the prevailing view is narrowly understood. The literature is divided on the treatment of the basis of the transaction. The application of Art. 6.2.2 PICC pursuant to Art. 9 para. 2 CISG or Art. 7 para. 2 CISG or the application of national law determined via IPR pursuant to Art. 7 para. 2 CISG are discussed as possible solutions in the Vienna Sales Convention. The supplementary interpretation by the Unidroit Principles is also frequently advocated. This makes it all the more important to take this loophole into account when drafting contracts, for example via the ICC Hardship Clause.

III. ICC HARDSHIP CLAUSE

In order to increase certainty, parties may wish to regulate this situation in their agreement, independently from the law governing the contract. The ICC Hardship Clause intends to satisfy this need through a standard clause which can be included in an individual contract.

Since one of the most disputed issues is whether it is appropriate to have the contract adapted by a third party (judge, arbitrator) in case the parties are unable to agree on a negotiated solutions, the clause provides two options between which the parties must choose: adaptation or termination.

1. A party to a contract is bound to perform its contractual duties even if events have rendered performance more onerous than could reasonably have been anticipated at the time of the conclusion of the contract.

2. Notwithstanding paragraph 1 of this Clause, where a party to a contract proves that:

a) the continued performance of its contractual duties has become excessively onerous due to an event beyond its reasonable control which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract; and that

b) it could not reasonably have avoided or overcome the event or its consequences, the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms which reasonably allow to overcome the consequences of the event.

 

Paragraph 3 deals with the situation where the parties are unable to agree alternative contract terms. In this case, there are mainly two options: contract termination by one of the parties, or adaptation or termination by the judge or arbitrator having jurisdiction under the contract. Under option A, the party invoking hardship will be entitled to terminate the contract on its initiative.

Under option B, (which is admitted under a number of national laws as well as under the Unidroit Principles), the parties are entitled to request a judge or arbitrator to adapt or terminate the contract. In this case the judge or arbitrator may decide which of the two alternatives is more appropriate, in particular where no adaptation is reasonably possible.

If option B is considered inappropriate by the contractual parties, who fear the adaptation of the contractual balance by a third party (judge or arbitrator), parties can choose option A or C, which do not involve adaptation of the contract by the judge or arbitrator. Under option A, the party invoking hardship will be entitled to terminate the contract on its initiative—and the other party may thereafter claim the unlawfulness of such decision—, whereas under option C, either party may request the judge or arbitrator to declare the termination.

In case the parties opt for adaptation, it may be suggested that the judge or arbitrator invites the parties to submit proposals of the required adjustments, which might be taken as starting point for adapting the contract.

IV. German Law

The parties to a contract often assume the existence or occurrence of certain circumstances without making this the subject of an express or at least tacit agreement or condition. Such misconceptions about existing material contractual circumstances or future developments can seriously jeopardize the performance of the contract. Section 313, which was introduced by the modernization of the law of obligations in 2002 and codifies judge-made law since the decisions of the Reichsgericht in 1920 and 1920, takes this into account by allowing the contract to be amended or rescinded in the event of a “disturbance of the basis of the contract”:

Bürgerliches Gesetzbuch (BGB): § 313 Störung der Geschäftsgrundlage

(1) Haben sich Umstände, die zur Grundlage des Vertrags geworden sind, nach Vertragsschluss schwerwiegend verändert und hätten die Parteien den Vertrag nicht oder mit anderem Inhalt geschlossen, wenn sie diese Veränderung vorausgesehen hätten, so kann Anpassung des Vertrags verlangt werden, soweit einem Teil unter Berücksichtigung aller Umstände des Einzelfalls, insbesondere der vertraglichen oder gesetzlichen Risikoverteilung, das Festhalten am unveränderten Vertrag nicht zugemutet werden kann.
(2) Einer Veränderung der Umstände steht es gleich, wenn wesentliche Vorstellungen, die zur Grundlage des Vertrags geworden sind, sich als falsch herausstellen.
(3) Ist eine Anpassung des Vertrags nicht möglich oder einem Teil nicht zumutbar, so kann der benachteiligte Teil vom Vertrag zurücktreten. An die Stelle des Rücktrittsrechts tritt für Dauerschuldverhältnisse das Recht zur Kündigung.

Translation:

§ Section 313 BGB: Disruption of the basis of the contract

(1) If circumstances which have become the basis of the contract have seriously changed after the conclusion of the contract and the parties would not have concluded the contract or would have concluded it with different content if they had foreseen this change, an adjustment of the contract may be demanded insofar as one party cannot reasonably be expected to adhere to the unchanged contract, taking into account all the circumstances of the individual case, in particular the contractual or statutory distribution of risk.

(2) A change in circumstances shall be deemed to have occurred if essential ideas that have become the basis of the contract turn out to be incorrect.

(3) If an adjustment of the contract is not possible or not reasonable for one party, the disadvantaged party may withdraw from the contract. The right of withdrawal shall be replaced by the right of termination for continuing obligations.

A disruption according to section 313 BGB is to be assumed if the basis of the transaction has either ceased to exist at a later date (“cessation” of the basis of the transaction pursuant to para. 1) or if it is absent from the outset (“absence” of the basis of the transaction pursuant to para. 2). Its legal consequence is – according to the wording of the law – primarily a claim for contract adjustment by the disadvantaged party or a right of withdrawal, in the case of continuing obligations a right of termination instead (para. 3). In this way, an appropriate balance is to be achieved between the beneficiary party’s interest in continuation and fulfillment and the disadvantaged party’s interest in amendment or termination.

In German law, it is possible to include a hardship clause in the contract, but subject to close control. Furthermore, the parties to a contract for the performance of a continuing obligation can under Section 313 BGB demand alteration or termination of the contract if facts that were relevant for the basic concept of a contract have changed significantly since the contract was entered into. This also includes force majeure events such as a change in economic, political or social conditions and circumstances. Section 313 BGB allows hardship to be assumed not only if the objective circumstances have changed, but also if the common subjective ideas of the parties, which they have made the basis of the transaction, do not exist or have changed.

The application of the principles of the basis of the transaction essentially means distributing the risk of a discrepancy between perception and reality among the parties involved according to valuation criteria. The decisive factor is always a value decision. It must explain why, for reasons of contractual fairness, the risk of the occurrence or emergence of an inappropriateness of performance and consideration should exceptionally not remain with the party who is affected by it, but should (also) be borne by the other party. The contractual correction is to be imposed on the reluctant party if and because the parties are not in a position to find an adequate compromise of interests themselves, which would typically require one party to forego an unexpected and ultimately unearned, but therefore no less welcome, benefit.

The circumstances (para. 1) or ideas (para. 2) relevant under Section 313 must have become “the basis of the contract”; merely unilateral, unrecognizable motives or ideas are irrelevant. The prevailing case law thus makes a distinction between the basis and the (“actual”) content of a contract: certain circumstances or ideas have “not yet” become the “actual” content of the contract, but have “already” become the basis of the contract. This is ultimately justified by the fact that the problem of the basis can no longer be solved with the legal interpretation (and therefore: determination of content), but is only located beyond the (supplementary) interpretation of the contract.

According to traditional terminology, Section 313 regulates in subsection 1 the subsequent loss of the basis of the transaction and in subsection 2 its original absence. This order corresponds to the frequency of the cases. Both cases are summarized in the title of the provision as “disturbance of the basis of the transaction”. The allocation of a case to para. 1 or para. 2 is irrelevant.

In practice, the problem of distinguishing between Section 313 BGB and section 275 (2) BGB often arises. The latter provision concerns the so-called practical impossibility:

(2) The debtor may refuse performance to the extent that it requires an effort which, taking into account the content of the obligation and the requirements of good faith, is grossly disproportionate to the creditor’s interest in performance. When determining the efforts to be expected of the debtor, it must also be taken into account whether the debtor is responsible for the impediment to performance.

In this case, unlike in the case of impossibility of performance pursuant to section 275 (1) BGB, performance is still physically possible but not reasonable for the debtor. In these cases, the debtor can claim a right to refuse performance. However, the express assertion of the right to refuse performance in the form of an objection is required. The obligation to perform does not lapse ipso iure. The practical impossibility pursuant to section 275 (2) BGB covers obstacles to performance that can only be removed with considerable, unreasonable effort. For a right to refuse performance to exist, it is necessary that the removal of the obstacle to performance requires an effort that is grossly disproportionate to the creditor’s interest in performance, taking into account the content of the obligation. In this respect, the standard of assessment is exclusively the amount of the creditor’s interest in performance, i.e. the benefit that the creditor derives from the matter in relation to and in comparison with the debtor’s costs of performance.

In practice, it is not always easy to differentiate between practical impossibility and impediment to equivalence in the sense of hardship. This is because both provisions initially cover cases in which performance and consideration are not (or no longer) in a reasonable relationship. The distinction between section 275 (2) BGB and section 313 BGB is usually made on the basis that section 275 (2) BGB focuses on the creditor’s interest in performance and is the starting point for reasonableness; section 313, on the other hand, is based on the debtor’s interests.

V. Dutch Law

In the Netherlands, the judge can amend or dissolve the contract in the event of unforeseen circumstances if this is required in good faith and the circumstances are not the responsibility of the burdened party in accordance with the nature of the contract and the general view of the market (Art. 6:258, 260 BW). The law deliberately mentions amendment and termination side by side and does not rank them in order of priority.

Article 6.258 BW:

1. De rechter kan op verlangen van een der partijen de gevolgen van een overeenkomst wijzigen of deze geheel of gedeeltelijk ontbinden op grond van onvoorziene omstandigheden welke van dien aard zijn dat de wederpartij naar maatstaven van redelijkheid en billijkheid ongewijzigde instandhouding van de overeenkomst niet mag verwachten. Aan de wijziging of ontbinding kan terugwerkende kracht worden verleend.
2. Een wijziging of ontbinding wordt niet uitgesproken, voor zover de omstandigheden krachtens de aard van de overeenkomst of de in het verkeer geldende opvattingen voor rekening komen van degene die zich erop beroept.
3. Voor de toepassing van dit artikel staat degene op wie een recht of een verplichting uit een overeenkomst is overgegaan, met een partij bij die overeenkomst gelijk.

Translation:
1. At the request of one of the parties, the court may alter the consequences of a contract or dissolve it in whole or in part on the grounds of unforeseen circumstances of such a nature that the other party may not, according to standards of reasonableness and fairness, expect the contract to be maintained unchanged. The amendment or dissolution may be given retroactive effect.
2. An amendment or dissolution shall not be pronounced insofar as the circumstances by virtue of the nature of the contract or generally accepted practice are for the account of the party invoking it.
3. For the application of this article the person to whom a right or obligation under a contract is transferred shall be deemed to be a party to that contract.

Apart from Force Majeure, Dutch law thus includes the doctrine of ‘unforeseen circumstances. Under Dutch law, there must at least be unforeseen circumstances to successfully invoke Article 6:258 of the Civil Code. Whether the circumstances were foreseeable at the time the contract was concluded is not decisive. The relevant question is: what assumptions did the parties make (i.e. have they anticipated the possibility of the occurrence of unforeseen circumstances or at least tacitly included that possibility).

Therefore, it is not decisive whether the sanctions were foreseeable at the time the contract was concluded. What matters are the assumptions the parties made when entering into the agreement. If the contract does not provide for war and/or sanctions and those circumstances were not foreseeable at the time of conclusion, unforeseen circumstances are involved

If it is then established that there are unforeseen circumstances, these circumstances must also be of such a nature that the other party, according to standards of reasonableness and fairness, cannot expect the contractual relationship to remain unchanged. This is a high burden since the principles of reasonableness and fairness first require that one keeps to the given word and only allows deviation in very exceptional cases. The Supreme Court has – in line with this – ruled that the court must exercise restraint in the acceptance of unforeseen circumstances.

VI. French Law

In France, the theory of imprévision (lack of foresight) has not been recognized in jurisprudence since the ruling of the Cour de cassation in 1876 (Canal de Craponne); only force majeure could lead to relief. While the Cour de Cassation thus rejected the théorie de l’imprévision, the legislator included it in the law as part of the reform of Article 1195 of the Civil Code February 2016. Under French law, this provision is not of public order, but it is a default provision, which means that it will apply if the parties don’t decide to exclude it.

Article 1195 Code Civil :

Si un changement de circonstances imprévisible lors de la conclusion du contrat rend l’exécution excessivement onéreuse pour une partie qui n’avait pas accepté d’en assumer le risque, celle-ci peut demander une renégociation du contrat à son cocontractant. Elle continue à exécuter ses obligations durant la renégociation.
En cas de refus ou d’échec de la renégociation, les parties peuvent convenir de la résolution du contrat, à la date et aux conditions qu’elles déterminent, ou demander d’un commun accord au juge de procéder à son adaptation. A défaut d’accord dans un délai raisonnable, le juge peut, à la demande d’une partie, réviser le contrat ou y mettre fin, à la date et aux conditions qu’il fixe.

Translation:

If, due to a change of circumstances which couldn’t have been foreseen upon conclusion of the contract, performance becomes excessively costly for a party which didn’t accept to bear the related risk, then this party may request its contracting party to re-negotiate the contract. The requesting party shall keep performing its obligations throughout this new round of negotiations.

If the requested party refuses to renegotiate the contract or if the parties fail to reach a new agreement, then they may either jointly decide to terminate the contract on mutually acceptable effective date and conditions, or request the judge, by mutual agreement, to adapt the contract. If no agreement is reached within a reasonable period, the judge may, if so requested by either party, revise the contract or declare contract termination and set the effective date and conditions for such termination.

Art. 1195 para. 1 of the Civil Code has provided for renegotiations if circumstances have changed in an unforeseeable manner and this places an excessive burden on one party without that party having assumed the risk. If the renegotiations fail, the parties can terminate the contract by mutual agreement or have it amended by the court in accordance with Art. 1195 Para. 2 of the Civil Code. If such an agreement also fails, the judge can terminate or amend the contract at the request of one of the parties.

VII. Belgian Law

The same applies to Belgium. While the Cour de Cassation rejected the théorie de l’imprévision, the legislator included it in the law as part of the reform of Article 5.74 of the Civil Code which came into force on January 1, 2023. Under Belgian law, this provision is not of public order, but it is a default provision, which means that it will apply if the parties don’t decide to exclude it.

Art. 5.74. Code Civil Changement de circonstances

Chaque partie doit exécuter ses obligations quand bien même l’exécution en serait devenue plus onéreuse, soit que le coût de l’exécution ait augmenté, soit que la valeur de la contre-prestation ait diminué.

Toutefois, le débiteur peut demander au créancier de renégocier le contrat en vue de l’adapter ou d’y mettre fin lorsque les conditions suivantes sont réunies: 1° un changement de circonstances rend excessivement onéreuse l’exécution du contrat de sorte qu’on ne puisse raisonnablement l’exiger; 2° ce changement était imprévisible lors de la conclusion du contrat; 3° ce changement n’est pas imputable au sens de l’article 5.225 au débiteur; 4° le débiteur n’a pas assumé ce risque; et 5° la loi ou le contrat n’exclut pas cette possibilité. Les parties continuent à exécuter leurs obligations pendant la durée des renégociations.

En cas de refus ou d’échec des renégociations dans un délai raisonnable, le juge peut, à la demande de l’une ou l’autre des parties, adapter le contrat afin de le mettre en conformité avec ce que les parties auraient raisonnablement convenu au moment de la conclusion du contrat si elles avaient tenu compte du changement de circonstances, ou mettre fin au contrat en tout ou en partie à une date qui ne peut être antérieure au changement de circonstances et selon des modalités fixées par le juge. L’action est formée et instruite selon les formes du référé.

Translation:

Each party must perform its obligations even if performance has become more onerous, either because the cost of performance has increased, or because the value of the consideration has decreased.
However, the debtor may ask the creditor to renegotiate the contract with a view to adapting it or terminating it if the following conditions are met: 1° a change in circumstances makes performance of the contract excessively onerous, so that it cannot reasonably be required; 2° this change was unforeseeable when the contract was concluded; 3° this change is not imputable to the debtor within the meaning of article 5.225 to the debtor; 4° the debtor has not assumed this risk; and 5° the law or the contract does not exclude this possibility. The parties continue to perform their obligations for the duration of the renegotiations.
If renegotiations are refused or fail within a reasonable time, the judge may, at the request of either party, adapt the contract in order to bring it into line with what the parties would have reasonably agreed at the time the contract was concluded if they had taken account of the change in circumstances, or terminate the contract in whole or in part on a date which cannot be prior to the change in circumstances and in accordance with the terms set by the judge. The action is brought and heard as a summary proceeding.

This article will allow the parties to revise the contract in the event of unforeseeable circumstances, not attributable to the parties and subsequent to the conclusion of the contract, upsetting the contractual economic balance. The legislator has laid down several conditions for application:

• Posteriority: clearly, the circumstances must have arisen subsequent to the conclusion of the contract.
• Non-attributability: the parties must not be at the origin of the circumstances, which must be beyond their control.
• Unforeseeability: The circumstances must be unforeseeable.

This condition must be assessed in a reasonable manner, as it is not a condition of absolute unpredictability. For example, a worldwide pandemic or a war are both unforeseeable events.
The theory of unforeseeability can be applied not only to the unforeseeability itself, but also to the effects of that unforeseeability. This means that the theory of unforeseeability can be applied to the effects of the “initial” unforeseeable event, which are also unforeseeable for the parties. For example, the compulsory closure of “public” places such as businesses, restaurants, cinemas, etc. due to the Covid-19 pandemic can be considered an unforeseeable effect of the pandemic.

• No voluntary risk-taking: when analyzing unpredictability, the notion of risk must be taken into account. Indeed, if one of the parties voluntarily takes a risk, the future circumstances arising from this risk cannot be considered unforeseeable.
• The circumstances must upset the economy of the contract. This implies a real imbalance of benefits and excessive onerousness. The consequence of this disruption is that the services can no longer reasonably be demanded of the injured parties.

If these conditions are met, the parties will have to renegotiate the original contract. Renegotiation means adapting the contract, in a reasonable manner, so that it resembles what the parties could have agreed had they been informed of the changed circumstances from the outset. Renegotiation obviously leaves room for discretion on the part of the parties.

The last paragraph of article 5.74 of the new Civil Code stipulates that, should renegotiation fail or be refused, the judge may be called upon to adapt the contract, at the request of either party. It should be noted that the legislator has opted for summary proceedings, taking into account the urgency of finding a solution in practice.

Finally, it should be stressed that this article is suppletive. This means that the parties will be able to derogate from the application of the article or model it via a contractual clause.

It appears that the Unidroit Principles 2016 were a source of inspiration for the nouveau Code civil:

 

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