Denis Philippe | Lawyer at Brussels’ and Luxembourg’s Bar Professor at the Université Catholique de Louvain and at the ICHEC | Invited Professor at the University of Paris Nanterre

I. Notion of hardship

Hardship (doctrine of imprévision or unforeseen circumstances)  is classically defined by reference to three criteria:

  • Non imputability
  • Unpredictability
  • Disruption of the contractual economy

In addition, the contracting party invoking hardship must not have assumed the risk.

Hardship is more widely recognized in international law than in domestic law. Indeed, the actual Belgian civil code doesn’t contain a provision regarding the hardship but the new civil Code which will enter into force on the 1st of January 2023 will recognize the doctrine of unforeseen circumstances in its article 6.74 and in France only the new Civil code contains a provision on hardship since 2016 in article 1195 [1].

International instruments such as the UNIDROIT Principles (article 6.2.2.) and the European principles on contract law take into account the eventuality of a change of circumstances and set a frame for the consequent renegotiation. Beside these texts, international contracts usually contain an hardship clause; this situation so often occurs that according to some, a hardship clause is implied in an international agreement [2].

1. Hardship and domestic law

In arbitral proceedings, the presence of hardship is often determined by reference to domestic law provisions [3]. Indeed, when arbitral tribunals had to apply French law before 2016, the hardship theory was frequently rejected [4].

Though that may seem the case, hardship doesn’t need to be explicitly provided for in domestic law [5]: indeed in an ICC sentence n° 20757, the arbitral tribunal relied on the general principle of good faith as defined in article 1375 of the Italian Civil Code to state that the parties had a duty to renegotiate the contract when a significant difference existed between the terms of the original contract and those generally practiced on the market for similar objects after the contract was concluded.

2. Hardship and UNIDROIT Principles

The Unidroit Principles are a model law for international contracts and are often applied by arbitrators and we have seen that they contain a provision for hardship [6]. Among the cases where arbitral tribunals have retained hardship based on the UNIDROIT principles we can mention an arbitral award of November 30, 2006, issued by the Mexico City Arbitration Center [7] and an award issued by the Chamber of Conciliation and Arbitration of São Paulo, February 9, 2009 [8]. In the latter, the court rejected the application of the doctrine of unforeseen circumstances, considering that fluctuations in electricity prices on the short-term market were a circumstance falling within the seller’s sphere of risk and referred to ICC case law as well as to article 6.2.1 of the UNIDROIT Principles, which expressly provides that the fact that performance is more expensive is not sufficient to constitute a form of hardship.

However, in this award, the UNIDROIT Principles are invoked to support the decision and not as the primary legal basis. Furthermore, it is also difficult to successfully invoke the doctrine of unforeseen circumstances, since meeting all the conditions for its application is anything but obvious.

3. Hardship in International Law

Several awards affirm, independently of the applicable law, that hardship is an integral part of the rules of international trade.

One can quote the decision of the judges in an Iran-USA case [9]:

The concept of changed circumstances, also known as rebus sic stantibus, has been incorporated in its basic form in so many legal systems that it can be considered a general principle of law. Other awards even consider that financial equilibrium is a rule of the lex mercatoria [10].

Any commercial transaction is based on the balance of reciprocal benefits and to deny this principle would be to make the commercial contract a random contract, based on speculation or chance. It is a rule of the lex mercatoria that the benefits remain in financial equilibrium and that is why, in almost all international contracts, the price is therefore fixed according to the conditions existing at the time of the conclusion of the contract and will vary according to parameters which reflect the variations in the values of the various elements which make up the product or service [11].

On the other hand, numerous judgments also strongly reaffirm the principle of “Pacta sunt servanda” [12]. The contract freely entered into takes the place of law for the parties; this is undoubtedly all the more true in international trade law, where the risks are higher and, consequently, factors of security such as the principle of the convention loi prevail.

Several of the judgments analysed consider that the clausula should be strictly applied, even excluding it. Others, while advocating strict application, do not reject the application of the clausula in international arbitration.

However, we would like to point out that many of these solutions were adopted under the old French contract law; now, in view of the reform of February 10, 2016, it is highly unlikely that such an argument can still be supported. In the same spirit, two arbitral awards have rejected the application of the doctrine of unforeseen circumstances where the contract does not expressly provide for this possibility.

Finally, we would like to point out an approach based on the notion of abuse of rights. In Award n° [4972-1989][13] the arbitrator established that the powers of amiable compositeur conferred on it do not authorize it to revise the contract; that nevertheless the principle of respect for the binding force of the contract (and in this case the right to automatic termination which was used by the defendant) must be modulated in the event of abuse of rights. It should be noted that the question of abuse of rights seems to be central to the balance sought by arbitrators.

II. Elements to note in international agreements

Even when it is admitted, the clausula is subject to a strict interpretation, which in international contracts is justified by the following considerations.

  1. The international operation is complex and generally involves more risks than domestic ones

The presence of these various risks must be foreseen by the parties when they conclude the contract. They must therefore, in the contractual negotiation, take these elements into consideration and accompany them with appropriate contractual stipulations (price increase, insurance, etc.). This needs to take risks into account is all the greater when the commitment assumed is for a long period [14].

  1. The negotiator in international contracts is usually a skilled and knowledgeable individual

He must therefore take the initiative to ensure a protection against changes in circumstances [15]. This assertion is supported by the presence in most international contracts of clauses organizing the change of circumstances. Thus, in a decision 2216-1974 , the ICC noted the absence of hardship clauses and concluded that hardship should not apply [16].

  1. This does not mean, in our opinion, that the clausula can never be applied in international law

The preceding reflections find their limits in the ability of the contracting parties to forecast. Current events show that the international economic reality is extremely complex and changing, and the upheavals it is experiencing surprise us every day. The Covid crisis is the best proof of this[17]. The clauses, however perfectly drafted they may be, do not always manage to grasp this reality. The solution is all the more obvious when it comes to inexperienced contractors [18] entering the international market [19].

Consequently, if the problem of change of circumstances is more strictly assessed in international commercial law, it is undoubtedly because of the generally greater ability of commercial practitioners to protect themselves, by appropriate clauses, against change of circumstances. Moreover, the absence of a clause may result from an oversight, a lack of competence, etc., and cannot be analyzed as a deliberate desire to set aside the principle of maintaining the contractual balance. Finally, one must take into account, in favor of a revision of the contract, the complexity of the life of international trade, whose paths are often impenetrable, as the Covid, the war in Ukraine illustrate.

  1. The doctrine has written that the maintenance of contractual balance is a principle of the lex mercatoria[20]

If these principles were to be firmly accepted, it would have to be accepted that the international contract can be adjusted to changing circumstances, even in the absence of a hardship clause. Some arbitral awards have recognized this[21].

  1. Complexity of the contract

The complexity and imponderables of international trade make it necessary to complete the contract in the event of a change in circumstances. Refusing to apply the contract in a flexible manner would lead to a rigid result, harmful to contractual efficiency.

It will be recalled that such a distinction was made by McNeil in the United States who distinguishes between “discrete contracts” and “relational contracts” [22]. Different rules should apply between simple contracts, such as buying a newspaper, and complex contracts. Thus, renegotiation of the contract would be more appropriate in the latter type of contracts. The international contract will generally fall into the latter category.

III. Practice

Some decisions insist that the clausula applies only in the case of events of a catastrophic nature, such as war, devaluation, flood or earthquake[23]. However, whether or not the circumstances are catastrophic is not, in itself, a decisive factor in the application of the hardship. Moreover, the conditions of application are very strict in arbitration case law. Thus, most decisions consider that the circumstances are foreseeable and therefore do not give rise to adaptation of the contract [24]. Others consider that the change of circumstances is included in the contractual risk [25].

The existence of a hardship clause does not always ensure the application of this doctrine, since its interpretation may be restrictive, either from the point of view of its implementation or of its content. The crossing of a certain threshold (e.g., a 20% increase in costs) may sometimes be the lever for the application of unforeseeability [26]. Recognizing the principle of clausula does not therefore call into question the security of contractual relations.

A 5-year transport contract including a hardship clause requires the parties to meet to renegotiate in the event that one of them suffers a prejudice not foreseen at the time of signing the contracts. The arbitrators did not have the power to revise the contractual terms. They ruled that any increase in market freight rates, no matter how significant, could not justify the application of this clause, as the contractual rates were freely negotiated. Similarly, significant increases in the shipowner’s expenses (port charges and overheads) are not elements of the hardship situation; these elements were foreseeable at the conclusion of the contract and the shipowner was able to cover himself in the future for fluctuations in bunker prices [27]. At this point, it is interesting to note an arbitration award on force majeure that may have echoes in the area of hardship.

In this award, the Société Générale BENIN SA, had granted an investment credit to the CECO company, which was guaranteed by a mortgage on various buildings of the company. After some unpaid debts, Société Générale initiated a real estate seizure procedure. CECO contested the implementation of the mortgage recovery procedure, on the grounds that its failure to pay was justified by a case of force majeure, in this case, financial difficulties related to Covid-19.

According to the arbitral tribunal, the Covid-19 epidemic did not constitute force majeure in this case. Indeed, the tribunal stated that while the circumstances of unforeseeability and exteriority were proven in this case, the irresistibility was not. It had to be assessed, in terms of an obligation to pay sums of money, according to the real difficulties of the CECO company’s cash flow, which must have been caused exclusively by the pandemic, making it impossible for the debtor to fulfil its obligation to pay its debts. [28]

It is interesting to ask how such an interpretation could be made in the case of unforeseen circumstances: must the change in economic circumstances be exclusively due to an external circumstance (such as a pandemic, a war, a natural disaster, …) or can it be the result of both an exceptional event and poor management of the debtor’s finances? Is the obligation to renegotiate the same in both cases? These are legitimate questions to ask and, once again, it is advisable to take them into account when drafting clauses.

One may wonder if consequences of the climate change may also be considered as a case of hardship: indeed some changes may be unpredictable, but climate change is a reality so much talked about that one shall reflect about it and take it into account when drafting an hardship clause.

IV. Duty to renegotiate [29]

In the presence of a hardship clause, when a change of circumstances as defined in the clause occurs, the parties must renegotiate the contract, at least when the clause so provides or when good faith requires it. Again, the obligation to renegotiate may be based on the principle of good faith. This obligation of renegotiation has been inserted in the French and Belgian legislation.

Due to the health crisis caused by the coronavirus, many contractors were faced with a significant economic disruption of their contractual situation. As an example we refer to the award of the Court of Arbitration for Sport, n° 1545/20 of August 28, 2020 where the arbitral tribunal stated that:

“In short, the pandemic is not and cannot be considered to be a valid or just cause for the unilateral termination of the Employment Agreement, should not be used by one Party or the other for tactical advantage, and its consequences should be shared between the Parties in a manner deemed equitable under the circumstances[30].

Because of the sanitary crisis due to the coronavirus, a Hungarian basketball team had communicated to its team that it would have suspended or at least postponed, the events of the season. One of the players had taken a plane, the day before the confinement, to visit her family abroad. This was contrary to her contract with the club, which initiated a procedure to terminate the contract based on the player’s behavior as well as on Covid-19 and its consequences.

The employee claimed that the company had verbally authorized the team members to leave the city or country. In addition, an employee of the company had helped her make the travel arrangements. Therefore, her behavior could not be characterized as “serious misconduct”. In addition, the company pointed out that the plaintiff was the only team member who left the country without prior authorization. Therefore, her behavior could be qualified as “serious misconduct” and that the pandemic had caused an exceptional situation during which the parties should have cooperated in any modification of the contractual terms in accordance with the adage rebus sic stantibus.

The arbitral tribunal considered that according to the company’s guidelines, the parties should have renegotiated their respective commitments in good faith because of the coronavirus. However, this crisis could not be a sufficient reason for a unilateral contractual termination. Thus:

“In short, the pandemic is not and cannot be considered to be a valid or just cause for the unilateral termination of the Employment Agreement, should not be used by one Party or the other for tactical advantage, and its consequences should be shared between the Parties in a manner deemed equitable under the circumstances.”

Consider the following arbitration award. The parties had agreed to negotiate the price of the goods to be delivered each year. The price could be fixed for the first three years but not for the fourth; the arbitrator insists on the need to respect good faith in negotiation, especially in the annual renegotiation of a contract. This hypothesis does not directly concern the clausula but shows the importance of honest and serious negotiation in international trade [31].

V. Effects

  1. Termination of the contract

This solution remains exceptional and should only be applied when renegotiation is impossible or if one of the parties does not negotiate in good faith.

  1. Renegotiation

This will be the most common solution and should be considered under the prism of the duty of good faith.

  1. Adaptation of the contract by the arbitrator

The question will then be whether an arbitrator who is charged with deciding a dispute can substitute himself for the parties in the drafting of the contract [32]. We believe that this is not the task of the arbitrator and that it is preferable that the arbitrator control the negotiation with regard to the principle of good faith.

This being the case, the arbitrator is sometimes invested, even in the absence of a hardship clause, with a mission of renegotiation by the parties [33]: it is on the basis of the interpretation of the contract that the arbitrator concludes to revise it [34]. Arbitrators consider that it is their task to give full effect to the contract by adapting it to the changed circumstances.

In our view, it is not appropriate for the arbitrator to assume an extensive power of interpretation and revision of the contract under the guise of seeking the will of the parties, otherwise legal certainty will be jeopardized. However, this adaptation is sometimes allowed not only in the case of a hardship clause, but also in the case of the application of certain national laws and on the basis of the lex mercatoria.

  1. Compensation to the injured party [35]

Sometimes, it is in the form of compensation that the contractual disruption is resolved. We can mention the decision of the Belgian Court of Cassation of June 19, 2009 [36] where the judge, applying the doctrine of hardship in the international contract, condemned the party who refused to negotiate to pay 450.000€ to the party who demanded the renegotiation following a change of circumstance making the execution excessively expensive.

  1. Obligation to mitigate one’s own damage

Each party must limit its damages in the event of hardship and must take care to diligently and prudently manage the effects of the change in circumstances [37].

Conclusion

We note that most legal systems, including recently French and Belgian law, recognize the doctrine of unforeseen circumstances. International principles such as UNIDROIT also recognize it; it seems unlikely to us that an arbitrator would currently reject its application and I believe that the revision of the contract in the event of a disruption of the contractual economy must be considered as a principle of the lex mercatoria.

In international trade, which is the cornerstone of international arbitration, the problem of changed circumstances is of significant importance. We can therefore only recommend that the parties, masters of their contractual destiny, insert a clause specifically dealing with the disruption of the contractual economy, taking into account the law applicable to their contract.

What if there is no clause?

Practice also shows that nothing is more unhealthy than an unbalanced contract that one party is forced to perform. This party, feeling victimized by fate, will look for all sorts of ways out or excuses not to perform. Rather than fanning the flames of dishonesty and confrontation, it is undoubtedly preferable to favor dialogue, transparency and continuity, which should enable the interests of the parties to the contracts to be maximized. This is particularly true in the case of international contracts, where it is more difficult and more expensive to assert one’s rights by means of judicial sanction, and this is also the path followed by the new French and Belgian contract law.

More specifically, with respect to international contracts, they require stability, flexibility and collaboration. We therefore advocate, following the example of the UNIDROIT Principles and the European Principles of Contract Law, admitting the renegotiation of the contract with a view to its adaptation when good faith no longer allows the debtor to require the continuation of the contract as it stands and the change in circumstances has profoundly upset the economy of the contract [38].

Finally, it should be noted that it is difficult to establish that all the conditions for the application of unforeseeability have been met.

An adaptation of the contract by the arbitrator can only take place as an ultima ratio; thus, one must not lose sight of the fact that the adaptation of the contract may have repercussions on other contracts in the contractual chain [39] and if the contracting parties desire that the arbitrator could as an ultima ratio, adapt the contract, it is advisable to foresee this power of revision in the hardship clause itself [40].

Bibliography

[1] New Civil Code, art. 1195. See. Y. PICOD, Jurisclasseur civil, Contrats, Effets, Imprévision, article 1195.

[2] ICC, Award No. 2291, 1975, J.D.I., 1976, 989. P. KAHN, « Lex mercatoria et contrats internationaux », in Le contrat économique international, Bruxelles, 1975, 195 ; See F. DASSER, Internationale Schiedsgerichte und Lex Mercatoria, Schulthess, Zurich, 1989, 111

[3] On applicable law in hardship in arbitral case law see L. BOINAT, Contrats Internationaux et Imprévision en Arbitrage Commercial International.

[4] Icc, Award No. 2708, Clunet 1977, at 943 and foll. And ICC, final Award n° 15814 in 2010

[5] ICC Award 20757/EMT/GR of May 12, 2017

[6] See. Ch. Brunner, «Force Majeure and Hardship under General Contract Principles : Exemption for Nonperformance in International Arbitration», International Arbitration Law Library, Volume 18, Kluwer Law International 2008, pp. 116-67

[7] Arbitration Center of Mexico (C.A.M.), Award of November 30, 2006, available on http://www.unilex.info/principles/case/1149.

[8] Câmara FGV de Conciliação e Arbitragem (São Paulo, Brazil), Award Nº 1/2008 of February 9, 2009 available on http://www.unilex.info/principles/case/1530

[9] Iran-US Claims Tribunal, Questech Inc. v. Iran, 9 IRAN-U.S. C.T.R. 9, 122-123.

[10] ICC, Award No 2291, 1975, J.D.I., 1976, 989 ; ICC, Award No 1512, 1971, J.D.I., 1974, 905 ; PH. KAHN, « Lex mercatoria et contrats internationaux », in Le contrat économique international, Bruxelles, 1975, 195.

[11] ICC, Award No 2291, ibid.

[12] ICC, Award in case n° 1512 of 1971, J.D.I., 1974, p. 905 ; interim award in case n° 2321, of 1974, J.D.I., p. 938 ; award in case n° 2404, of 1975, J.D.I., 1976, p. 995 ; award in ad hoc arbitration Texaco/Calasiatic c/Gouvernement libyen, J.D.I., 1977, p. 350 and foll., particularly p. 363 ; W.L. CRAIG, W.W. PARK & J. PAULSON, « International Chamber of Commerce Arbitration », Oceana Publications & IIC Publishing, 1990, p. 623 ; see M. de BOISSESON,  Award n° 5953 of 1989, Clunet 1990. 1056 ; F. OSMAN, Les principes généraux de la lex mercatoria, contribution à l’étude d’un ordre juridique anational, L.G.D.J, p.154. See. B. ARFAOUI, L’interprétation arbitrale du contrat de commerce international, PhD thesis, 2008. p.173. The author argues for a recognition of the disruption of the contractual economy as a principle of the lex mercatoria..

[13] ICC Award No. 4972, Clunet 1989, at 1105 et seq.

[14] See in national case law, Swiss Federal Tribunal, September 26, 1974, A.T.F., vol. 100, pp. 345 and foll., particularly cons. 2, pp. 348 et 349.

[15] ICC Award No. 2508 of 1976, Clunet 1977.

[16] ICC Award No.2216, Clunet 1975, at 917 et seq.

[17] D. PHILIPPE, « Coronavirus: Force majeure? Hardship? Deferral of obligations? », in Coronavirus and the law in Europe, Intersentia Online, Available in print 2021 ISBN 978-1-83970-082-8.

[18] See the same argument, note under Award n° 1512, above, J.D.I., 1974, p. 910.

[19] If elements personal to the contractor (experience, etc.) cannot be taken into consideration to assess the disruption of the contractual economy, they can, in our opinion, play a role in assessing the imputability or foreseeability of new circumstances..

[20] See Award by M. RIPERT and M. PLANCHAUD, Published on Journal de droit international, 1959, p. 1078 ; see reference under Award n° 2404 of 1975, Journal de droit international, 1976, p. 996.

[21] ICC Award N° 1761, Clunet, 1987, 1012

[22] I.R. MACNEIL, «Whither Contracts?» (1969) 21 Journal of Legal Education 403.

[23] See Award of November 6, 1983, YB Comm. Arb., vol. IX, 1984, p. 69 ; See M. de BOISSESON, Le droit français de l’arbitrage interne et international, 1990, p. 641.

[24] Award N° 5617, 1989, ICC Collection of Arbitral Awards, 1991-1995, pp. 537 et s.

[25] Award of February 12 1998, CISG-online no 436, UNILEX

[26] O. CACHARD, « Les clauses de hardship dans les contrats maritimes previsions et imprevision ! » Droit maritime français, 2011, L. BOINAT, Contrats Internationaux et Imprévision en Arbitrage Commercial International.

[27] Maritime Arbitration Chamber of Paris, Award 1172.

[28] OHADA CCJA, Société Générale Bénin SA vs. Société CECO SA, award N° 219/2021, December 23, 2021

[29] See on adaptation clauses D. MATRAY & F. VIDTS, « Les clauses d’adaptation des contrats », in Les grandes clauses des contrats internationaux, Bruxelles, 11 and 12 March 2005, 55e Séminaire de la Commission Droit et Vie des Affaires ; our study « Les clauses relatives au changement de circonstances dans les contrats à long terme », in La vie du contrat à prestations successives, Bruylant, 1991, pp. 157 and foll. ; M. FONTAINE & F. DE LY, Droit des contrats internationaux, 2004, pp. 387 and foll.

[30] Court of Arbitration for Sport, Award N° 1545/20 of August 28, 2020

[31] Award 5953, above, and reference Y.D. p. 443.

[32] See on this topic, PHILIPPE & PARTNERS, La rédaction des contrats internationaux, « Les clauses de changement de circonstances dans les contrats à long terme », 2012, pp.143 to 191. ; on the possibility of the amiable composer to modify the contract, ICC Award n° 3327 which refuses to allow the arbitrator to modify the contract, J.D.I., 1988, p. 971 ; See. Les aspects juridiques de l’outsourcing, under the direction of M. FONTAINE, D. PHILIPPE & C. DELFORGE, Bruylant, 2003, p. 199.

[33] P. ACCAOUI-LORFING, La renégociation des contrats internationaux, 2011, p.263 and the unpublished decision cited by her, ICC n°5754 of November 3, 1988.

[34] P. ACCAOUI-LORFING, op.cit., pp. 263 & 264. These were the 18-year energy price adjusment clauses with a take or pay clause.

[35] ICC Award N° 4761 (1987), J.D.I., 1987, 1012. The same solution applies in French administrative law, see D. PHILIPPE, Changement de circonstances et bouleversement de l’économie contractuelle, Bruylant, 1986, pp. 71 and foll.

[36] See also Belgian Supreme Court June 19, 2009,  D.A.O.R. 2010, 156-162 and note D.PHILIPPE.

[37] I. SCHWENZER & E. MUNOZ, Duty to renegotiate and contract adaptation in case of hardship in Revue de droit uniforme, 2019/1, n. 24, pp. 149 to 174. These authors are of the opinion that the obligation to limit one’s own damage is sufficient to meet the problem of hardship without having to go through the recognition of the obligation to renegotiate.

[38] These will be exceptional cases; ICC Award n° 8501, 2001, p. 1164.

[39] E. S. DARANKOUM, L’application des Principes d’UNIDROIT par les arbitres internationaux et par les juges étatiques, Thémis, Univ. Montréal, volume 36, 2002, p. 459.

[40] See P. ACCAOUI-LORFING, op.cit.