21.2 INTERPLAY BETWEEN CISG EXCUSE AND UNIDROIT PRINCIPLES / PECL HARDSHIP

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.

21.2.1 Hardship: UNIDROIT Principles Arts. 6.2.1 through 6.2.3

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.

21.2.2 Change of Circumstances: PECL Art. 6:111

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 

21.2.3 Gap-filling Application of Hardship Provisions?

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