As the term impediment is not defined in Art. 79 CISG, an interesting question is bound to arise whether the hardship provisions in UPICC Arts. 6.2.1 through 6.2.3 and PECL Art. 6:111 can be invoked to expand the meaning of impediment found in the CISG to include cases of economic or commercial hardship. This is to be furthered below. In this respect, it seems fairly obvious that a tribunal would first have to examine the UNCITRAL debates to see what range of impediments the drafters had in mind before accepting the relevance of the UNIDROIT (or the PECL) hardship provisions as an interpretational aid. 1223 Above all, the hardship provisions in the two Principles will be examined in general below, followed by the analysis of their gap-filling application.
In contrast to the CISG, the UNIDROIT Principles dedicate an entire section (Section 6.2)-- comprised of three Articles, namely Arts. 6.2.1 through 6.2.3 -- to hardship. At the outset, it is to be noted that the UNIDROIT Principles deal with force majeure in the chapter on Non-Performance. Hardship is dealt with in the chapter on Performance. The logic of this divided treatment is clear. If performance is impossible it will not be performed; whether the non-performance is excused or will be the basis for a money judgment for damages or restitution is a question dealt with under Non-Performance. If performance is burdensome, the consequences of the burden is dealt with as an aspect of performance. 1224 Nonetheless, the provisions on "hardship" contained in the chapter on Performance should be compared with the provision on "force majeure", contained in the chapter on Non-Performance.
To some extent, the concepts of excuse and hardship overlap. However, they are implemented in different ways. Essentially, if a non-performing party is "excused" it is relieved of its obligation to perform without incurring liability for damages; whereas, a party facing "hardship" is entitled to request renegotiation of the contract (or even have a court impose modifications), but is not entitled to withhold performance. In addition, a primary distinction between excuse and hardship is that excuse is invoked after non-performance, while hardship is invoked in advance of non-performance. 1225 Most importantly, there seems to be difference upon the trigger point between the two concepts. The rule of force majeure is draconian and unforgiving. Nothing short of total impossibility will excuse non-performance or partial non-performance. Impracticability will not suffice as an excuse. Rather, impracticability as well as hardship far short of impracticability must be tested under the Hardship articles. 1226
Under the UNIDROIT Principles, hardship alone never forgives non-performance. It instead compels renegotiation and authorizes courts to "adapt" (revise) the contract to take the hardship into account. Nonetheless, the Section on Hardship starts with the caption: "Contracts to be observed". Art. 6.2.1 provides: "Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship." This Article stresses the exceptional character of hardship by emphasising the serious nature of the principle pacta sunt servanda. The purpose of this Article is to make it clear that even if a party experiences heavy losses instead of the expected profits or the performance has become meaningless for that party the terms of the contract must nevertheless be respected. 1227 This seems to be more or less self evident, and is similarly mentioned in Art. 1.3. It is only repeated here in order to make clear that the UNIDROIT Principles also take the principle pacta servanda sunt as a basis, and that the possibility of adaptation is of an extraordinary character. 1228 Thus, the UNIDROIT Principles encompass the concept of pacta sunt servanda -- the maxim that contractual promises must be kept. 1229 The principle of the binding character of the contract is not however an absolute one. When supervening circumstances are such that they lead to a fundamental alteration of the equilibrium of the contract, they create an exceptional situation referred to in these Principles as "hardship" and dealt with in the following articles of this section. 1230 As an exception, the UNIDROIT Principles address the concept of hardship in the case of a change of circumstances in Arts. 6.2.2 and 6.2.3, something similar to the public law theory of rebus sic stantibus. 1231
It should be emphasised that the notion of hardship does not mean that performance is prevented or rendered impossible - it makes it more onerous. Art. 6.2.2. sets out the characteristics of an event that makes the excuse of hardship available. According to this provision, a change in the market after the conclusion of the contract only amounts to hardship if the equilibrium of the contract has been fundamentally altered. The requirement of a fundamental alteration of the contract entails that normal economic risks is not to be regarded as hardship but only developments in the market that lie far beyond the normal economic development. 1232 The application of hardship is, according to Art. 6.2.2, further conditioned that the event occurs after the conclusion of the contract, that the event could not reasonable be taken into account, that the event is outside the disadvantaged party's control, and that the risk of the event is not assumed by the disadvantaged party. After that, the effects of hardship is specified in Art. 6.2.3. According to this provision, it is important to recall that the existence of hardship does not permit a termination of the obligations, but gives the disadvantaged party a right to request that the parties renegotiate the contract so as to re-establish the equilibrium of the contract and to facilitate its survival. Upon failure to reach an agreement, the disadvantaged party can request the court or arbitral tribunal to either terminate or adapt the contract.
There is a trend beyond the UNIDROIT Principles to the effect that excessive hardship is a ground for relief. The Commission on European Contract Law has formulated a rule that is basically the same as UNIDROIT's, and considered a hardship rule to be necessary and inserted it in one article, i.e. Art. 6:111 PECL, under the heading "Change of Circumstances". As discussed previously, PECL Art. 8:108 contains a rule similar to CISG Art. 79 and UPICC Art. 7.1.7. In addition, PECL Art. 6:111 contains a provision on hardship, which is not dealt with under the CISG nevertheless dedicated with an entire section (Section 6.2) under the UNIDROIT Principles. In contrast to the single paragraph found in Art. 79(1) CISG, which in only includes impediments which must be equated with actual impossibility, the European Principles deal with the issue of change of circumstances in a quite thorough way, providing not only a basic statement of principle (Art 6:111(1)) 1233 and the operational parameters of the concept (Art. 6:111 (2)), but also the mechanism for the adaptation or termination of the contract by the court (Art. 6:111(3)). 1234
It is found that the majority of countries in the European Community have introduced into their law some mechanism intended to correct any injustice which results from an imbalance in the contract caused by supervening events which the parties could not reasonably have foreseen when they made the contract. In practice contracting parties adopt the same idea, supplementing the general rules of law with a variety of clauses, such as "hardship" clauses. The European Principles adopt such a mechanism, taking a broad and flexible approach, as befits the pursuit of contractual justice which runs through them: they prevent the cost caused by some unforeseen event from falling wholly on one of the parties. The same idea may be expressed in different terms: the risk of a change of circumstances which was unforeseen may not have been allocated by the original contract and the parties or, if they cannot agree, the court must now decide how the cost should be borne. The mechanism reflects the modern trend towards giving the court some power to moderate the rigours of freedom and sanctity of contract. 1235
But it should always be borne in mind that the rules adopted by the two Principles are not mandatory. The parties can adopt whatever they want in the way of adjustment or renegotiation, and they are perfectly free to agree that a particular change in circumstances shall not affect the terms of the contract - for instance, they may exclude any change on the grounds of a fall in the value of money. In any case, it will only be in exceptional circumstances that the rules permitting renegotiation will operate. They must not provide a means for a party which has entered a contract which has simply turned out badly to revise it. 1236
As discussed above, the two Principles both include an excuse provision (respectively in UPICC Art. 7.1.7; PECL Art. 8:108) that parallels Art. 79 of the CISG. In addition, however, the two Principles also contain provisions dealing with the concept of hardship (respectively in UPICC Arts. 6.2.1 through 6.2.3; PECL Art. 6:111).
Generally speaking, the two sets of Principles serve a gap-filling role for the interpretation of CISG contracts. The two Principles can be used to: (1) interpret the CISG; (2) answer unresolved questions that fall within the scope of the CISG; or (3) resolve issues that are not addressed in the CISG. The purpose of the two Principles' gap-filling role is to preclude an easy resort to the domestic law indicated by the conflict of law rule of the forum. Thus, when the CISG does not adequately resolve a given issue, a court may look to the two Principles (which are international in character) rather than resort to domestic law. Courts have not yet decided whether the hardship provisions of the UNIDROIT Principles serve a gap-filling role for Art. 79 of the CISG. Seemingly, for judges and arbitrators, the provisions on hardship of the two Principles may serve as a means of interpretation of, or supplementation to, Art. 79 CISG. This requires that Art. 79 contain a gap with respect to situations of hardship. However, it is clear that the CISG does not contain a specific provision dealing with hardship. It has also been shown that it cannot be determined with sufficient clarity how the issue of radically changed circumstances can be decided upon, on the basis of Art. 79 and the CISG in general. Furthermore, the adaptation of the contract by the judge is not expressly allowed by the CISG, and must therefore be regarded as impossible.
With regard to the interplay between CISG Art. 79 and hardship provisions (Arts. 6.2.1 through 6.2.3) of the UNIDROIT Principles, it is generally believed, (as is proven in the history of Art. 79) that Art. 79 does not contain a gap as to situations of imprévision or hardship. Proposals brought forward during the drafting process of the CISG to make provision for those situations were expressly rejected. The rejection of a hardship provision indicates the CISG never intended that hardship should exist side by side with Art. 79. Moreover, the purpose of Art. 79 is to set definite limits on the promisor's liability for breach of contract. Judges and arbitrators, therefore, cannot use the provisions on hardship of the UNIDROIT Principles to interpret or supplement the CISG. 1237 The Secretariat Commentary makes it clear: "Neither article 65 [draft counterpart of CISG article 79] nor any other provision of this Convention would release the seller from the obligation to deliver the goods on the grounds that there had been such a major change in the circumstances that the contract was no longer that originally agreed upon. The parties could, of course, include such a provision in their contract." 1238
Nonetheless, according to the doctrine of party autonomy as stated in CISG Art. 6 and following the Secretariat Commentary, parties to a contract which is governed by the CISG are free to agree on the applicability of the UNIDROIT Principles to their contract. In this case, the UNIDROIT Principles' provisions on hardship become a part of their agreement and thus supplement Art. 79 CISG. It is also possible for the parties to include only the UNIDROIT Principles' hardship provisions into their contract. In view of the narrow scope of Art. 79 and the uncertainties surrounding it, the contractual supplementation of Art. 79 with the respective provisions of the UNIDROIT Principles may be strongly advisable. Depending on the needs and features of their transaction, the parties can adapt the provisions of the UNIDROIT Principles so as to take into account these needs and features. 1239
Regarding the possibility of application of the provisions of PECL Art. 6:111 as a means of specifying the meaning of the CISG's general principles (Art. 7(2)) it is suggested that this solution should not be adopted for the following reasons. First, it is highly unlikely that a non-European Union judge or arbitrator will refer to the PECL in order to interpret the meaning of the CISG's general principles when applying CISG Art. 7(2). 1240 Second, even if CISG Art. 7(2) is applied by a European Union judge or arbitrator, it is hard to imagine that the latter would refer to PECL Art. 6:111 to justify renegotiation or adaptation of the contract, since CISG Art. 7(2) only requires settlement with reference to the general principles on which the CISG is based. Neither the legislative history nor the language of the CISG indicates the existence of any general principle allowing renegotiation or judicial adaptation in the case of changed circumstances or economic impossibility. 1241 Only if a general principle exists within the CISG's system (e.g., full compensation), may the PECL provisions be used in order to specify one of the possible meanings of that principle (e.g. the mode of calculation of the rate of interest).
Nonetheless, the principle of party autonomy as established not only in the CISG or the UNIDROIT Principles but also under the PECL requires such general inapplicability of the PECL Art. 6:111 not to disrespect the intentions of the contracting parties, which could have provided in their contracts for renegotiation or adaptation in the cases of hardship, economic impossibility, etc. One should note, however, although it is not expressly excluded the possibility of hardship being invoked in respect of other kinds of contracts, hardship will normally be of relevance to long-term contracts, i.e. those where the performance of at least one party extends over a certain period of time. 1242
Based on the foregoing analysis it is thus clear that PECL Art. 6:111 or UNIDROIT Principles Arts. 6.2.1 through 6.2.3 may only apply if the contracting parties agree on its incorporation into the contract of sale. In this situation, in accordance with CISG Art. 6, PECL Art. 6:111 or UPICC Arts. 6.2.1 through 6.2.3 will apply as a special provision of a contractually incorporated a set of terms. Taking into consideration the problems relating to the renegotiation or adaptation in the cases of radical change of circumstances where the CISG applies, it is therefore suggested that the contracting parties should make clear their intentions, that is, whether they will provide for the possibility of renegotiation where the price of goods has been altered by inserting a hardship clause or for the possibility of mutual discharge from liability in the cases of economic impossibility or hardship by inserting a force majeure clause. Such provision will be desirable especially in situations where (a) there is a long term contract (e.g., distribution agreement consisting of a number of successive sale agreements between the same parties), (b) the price of goods sold tends to fluctuate in the international market, or (c) where, especially in contracts subjected to arbitration, the parties subject their contract to legal sources or principles of supranational character. 1243
1223. See Jacob Ziegel in "Editorial remarks on the manner in which the UNIDROIT Principles may be used to interpret or supplement CISG Article 79". Available online at ‹http://www.cisg.law.pace.edu/cisg/principles/uni79.html›
1224. See Joseph M. Perillo in "Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts": Contratación internacional. Comentarios a los Principios sobre los Contratos Comerciales Internacionales del Unidroit, Universidad Nacional Autónoma de México - Universidad Panamericana (1998); p. 120. Available online at ‹http://www.cisg.law.pace.edu/cisg/biblio/perillo3.html›
1225. Supra. note 7, p. 390.
1226. Supra. note 12, p. 126.
1227. See Comment 1 on Art. 6.2.1 UPICC.
1228. See Maskow, Dietrich in "Hardship and Force Majeure": 40 Am.J.Comp.L. (1992); p. 661. TLDB Document ID: 126400.
1229. Supra. note 11.
1230. Supra. note 1.
1231. See Sylvette Guillemard in "A comparative study of the UNIDROIT Principles and the Principles of European Contracts and some dispositions of the CISG applicable to the formation of international contracts from the perspective of harmonisation of law": Pace Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International (2000-2001); pp. 83-113. Available online at ‹http://cisgw3.law.pace.edu/cisg/biblio/guillemard1.html›
1232. Supra. note 16, p. 662.
1233. Unlike the UNIDROIT Principles, the European Principles do not expressly provide for the binding force of contracts in its general provisions. Art. 6:111 PECL which deals with changes in circumstances begins with the rule that "[a] party is bound to fulfil its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished." In this one relatively long article, the European Principles set out almost the same conditions for hardship as the UNIDROIT Principles.
1234. As stated above, Arts. 6.2.2 and 6.2.3 of the UNIDROIT Principles deal with the definition of hardship and the effects of hardship respectively. This splitting up is intended to achieve greater clarity.
1235. See Comment and Notes to the PECL: Art. 6:111. Comment A. Available online at ‹http://www.cisg.law.pace.edu/cisg/text/peclcomp79.html› Admittedly, it can be argued that if sanctity of contract were applied strictly, and the idea that relief might be given when circumstances change unforeseeably were rejected, parties would be given a stronger incentive to introduce appropriate clauses into their contracts. But experience suggests that frequently the parties are not sufficiently sophisticated, or are too careless of their own interests, to do this; or they insert clauses which do not cover every eventuality. It can also happen that the operation of the clause itself runs into some unforeseen difficulty. For instance, a price fluctuation clause which operates by reference to the price of oil may have been drafted with only moderate rises in that price in mind and may give distorted results during an oil crisis. It is therefore impractical to leave such questions to be expressly agreed.
1237. Supra. note 4, p. 240.
1238. See Secretariat Commentary on Art. 65 of the 1978 Draft [draft counterpart of CISG Art. 79]. Comment 5. Available online at ‹http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-79.html›
1239. Supra. note 4, pp. 240-241.
1240. The drafters of the PECL aimed to make a major contribution to the formation of a European ius commune, i.e., lex mercatoria, the scope of which is limited to the States of the European Union. In contrast, the CISG may be applied universally.
1241. The various national laws solve in very different ways the problem of changes of circumstances which make the obligations of one party much more onerous but which do not amount to force majeure. Some accept it as a basis for modifying the contract, others do not. (See notes to Art. 6:111 PECL, supra. note 23.)
1242. See Comment 5 on Art. 6.2.2 UPICC.
1243. See Dionysios P. Flambouras in "The Doctrines of Impossibility of Performance and clausula rebus sic stantibus in the 1980 Vienna Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law: A Comparative Analysis": 13 Pace International Law Review(Fall 2001); pp. 292-293. Available online at ‹http://www.cisg.law.pace.edu/cisg/biblio/flambouras1.html›
Eric von Hippel
Erik S. Raymond