21.4 EFFECTS OF HARDSHIP

21.4.1 In General

Once such events or change of circumstance discussed infra. 21.3 is established, the renegotiation mechanism will be triggered. Generally speaking, the effectsof hardship have both a procedural and a substantive law aspect. The procedural aspect starts with renegotiation, either "the disadvantaged party is entitled to request" (Art. 6.2.3(1) UPICC) or "the parties are bound to enter into" ( Art. 6:111(2)) such renegotiation, and may lead to a court decision in case of the failure "to reach agreement" within a reasonable time or period. In such cases of the parties' failure to reach agreement during renegotiation, either party is authorized to resort to the court (Art. 6.2.3(3) UPICC). "Here, the parties, in the first instance, are allocated the responsibility to resolve the disequilibrium or to fill the gap in their agreement. Only after an unsuccessful attempt for a reasonable time may either party request the intervention of a court or arbitral tribunal."  ¹²⁶⁶ 

Once the matter is brought before a court (including an arbitral tribunal: Art. 1.10 UPICC; Art. 1:301 PECL), the court may either terminate or adapt the contract. The solution seems to be a problem in some jurisdictions since it includes to a certain degree the imposition of conditions by the judiciary. This is true even if the court only terminates the contract, since it has to fix the respective terms at the same time. A tendency in this direction, problematical enough if practiced in national law, causes even more concern in international trade, where the party autonomy is of particular importance. The judge usually has to decide what the law is and not to make decisions for the parties or anybody else.  ¹²⁶⁷  Nevertheless the two sets of Principles have proposed to put this burden on the shoulders of the judge in these exceptional cases and by adding certain substantive rules (Art. 6.2.3(4) UPICC; Art. 6:111(3) PECL) which give a certain legal basis for this constructive legal decision-making. It is said, however, the contract may only be terminated if this is reasonable. Otherwise the court must adapt the contract. Insofar the original equilibrium of the contract is given as a yardstick for adaptation.  ¹²⁶⁸  But the procedure adopted does not impinge on rules allowing the contract to be brought to an end in other circumstances, forexample the right to terminate a contract of indefinite duration by giving notice.  ¹²⁶⁹ 

One should note, however, as for the consequences of a change in circumstances, the two sets of Principles result in notably different results. While the UNIDROIT Principles permit ("the disadvantaged party is entitled to request" (Art. 6.2.3(1) UPICC)) the parties to engage in renegotiations, the European Principles require ("the parties are bound to enter into" (Art. 6:111(2))) it. This obligation has its repercussions if the parties are unable to agree and the matter is resolved by a court. The present author thinks this divergency appears to be of merely technical nature instead of those of a "policy" nature. Furthermore, under the European Principles, the court has the power to sanction if the attitude of the parties during renegotiations merits sanction (Art. 6:111(3) PECL, the second sentence).  ¹²⁷⁰ 

21.4.2 Triggering of Renegotiation

21.4.2.1 Request for renegotiation

Since hardship consists in a fundamental alteration of the equilibrium of the contract, the first sentence of Art. 6.2.3(1) UPICC, which reads: "In case of hardship the disadvantaged party is entitled to request renegotiations", in the first instance entitles the disadvantaged party to request the other party to enter into renegotiation of the original terms of the contract with a view to adapting them to the changed circumstances.  ¹²⁷¹  This is confirmed by the PECL Art. 6:111(2), although differing from the UNIDROIT Principles in its plain language in require the parties to enter into renegotiation, under which if performance has become excessively onerous, "the parties are bound to enter into negotiations with a view to adapting the contract or ending it". Like many expressly agreed clauses, Art. 6:111 envisages at the outset a process of negotiation to reach an amicable agreement varying the contract.

Thus, once hardship is established, the disadvantaged party may request renegotiation of the contract. Furthermore, the other party, if it is concerned about maintaining the contractual relationship, may also seek to open negotiations.  ¹²⁷²  However, it is to be noted that, a request for renegotiations is not admissible where the contract itself already incorporates a clause providing for the automatic adaptation of the contract (e.g. a clause providing for automatic indexation of the price if certain events occur). However, even in such a case renegotiation on account of hardship would not be precluded if the adaptation clause incorporated in the contract did not contemplate the events giving rise to hardship.  ¹²⁷³ 

21.4.2.2 Renegotiation in good faith

The second sentence of Art. 6.2.3(1) UPICC clearly states: "The request shall be made without undue delay and shall indicate the grounds on which it is based". Accordingly, on the one hand, the request for renegotiations must be made as quickly as possible after the time at which hardship is alleged to have occurred. The precise time for requesting renegotiations will depend upon the circumstances of the case: it may, for instance, be longer when the change in circumstances takes place gradually.  ¹²⁷⁴  On the other hand, Art. 6.2.3(1) UPICC also imposes on the disadvantaged party a duty to indicate the grounds on which the request for renegotiations is based so as to permit the other party better to assess whether or not the request for renegotiations is justified.  ¹²⁷⁵  The UNIDORIT Principles stress communication. Therefore, it is important that the request state the grounds for the request, unless those grounds are obvious.  ¹²⁷⁶  An incomplete request is to be considered as not being raised in time, unless the grounds of the alleged hardship are so obvious that they need not be spelt out in the request.  ¹²⁷⁷ 

Although no similar rule is found under Art. 6:111 PECL, its Official Comment makes it clear: "Under the general duty of good faith, the party which will suffer the hardship must initiate the negotiation within a reasonable time, specifying the effect the changed circumstanceshave had upon the contract."  ¹²⁷⁸  Nevertheless, a delayed or incomplete request is not automatically excluded. The disadvantaged party does not lose its right to request renegotiations simply because it fails to act without undue delay or to set forth the grounds on which the request for renegotiations is based in making the request. The delay or insufficiency in making the request may however affect the finding as to whether hardship actually existed and, if so, its consequences for the contract.  ¹²⁷⁹  On the other hand, if the hardship claim is justified, the other party is obligated to negotiate in good faith to adapt the contract to alleviate the burden.  ¹²⁸⁰  "The negotiations must be conducted in good faith, that is to say, they must not be either protracted or broken off abusively. There will be bad faith if one party continues to negotiate after it has already entered another, incompatible contract with a third party. Normally the principle of good faith will require that every point of dispute between the parties should be brought up in the negotiations."  ¹²⁸¹ 

Clearly, although nothing is said (in Art. 6.2.3 UPICC or Art. 6:111 PECL) to that effect, both the initiation of renegotiations by either party and the conduct of both parties during the renegotiation process are subject to the general principle of good faith (Art. 1.7 UPICC; Art. 1:201 PECL) and to the duty of cooperation (Art. 5.3 UPICC; Art. 1:202 PECL). Thus the initiating party must honestly believe that a case of hardship actually exists and not request renegotiations as a purely tactical manoeuvre. Similarly, once the request has been made, both parties must conduct the renegotiations in a constructive manner, in particular by refraining from any form of obstruction and by providing all the necessary information.  ¹²⁸²  A party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party (Art. 2.15(2) UPICC; Art. 2:301(2) PECL).

Finally, another application is specified in Art. 6.2.3(2) UPICC in stipulating: "The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance." The reason for this lies in the exceptional character of hardship and in the risk of possible abuses of the remedy. Withholding performance may be justified only in extraordinary circumstances.  ¹²⁸³  Although again no similar rule is found under Art. 6:111 PECL, its Official Comment clearly states: "The victim who withholds its performance on the grounds that it is excessively onerous (for instance during renegotiation) does so at its own risk."  ¹²⁸⁴ 

21.4.3 Court Measures in case of Hardship

If the parties fail to reach agreement on the adaptation of the contract to the changed circumstances within a reasonable time, either party is authorized to resort to the court. Art. 6.2.3(3) UPICC reads: "Upon failure to reach agreement within a reasonable time either party may resort to the court." Although no similar rule is found in Art. 6:111 PECL, as noted above, the obligation of the parties to enter into renegotiation established under Art. 6:111 PECL, which appears to be a divergency of technical nature from Art. 6.2.3 UPICC, has its repercussions if the parties are unable to agree and the matter is resolved by a court. Furthermore, the Official Comment on Art. 6:111 PECL makes it clear: "If the parties' negotiations do not succeed, either of the parties may bring the matter before the court."  ¹²⁸⁵  Such a situation may arise either because the non-disadvantaged party completely ignored the request for renegotiations or because the renegotiations, although conducted by both parties in good faith, did not achieve a positive outcome. How long a party must wait before resorting to the court will depend on the complexity of the issues to be settled and the particular circumstances of the case.  ¹²⁸⁶ 

Upon a showing of hardship, the court may react in a number of different ways. Art. 6.2.3(4) UPICC states: "If the court finds hardship it may, if reasonable,(a) terminate the contract at a date and on terms to be fixed, or (b) adapt the contract with a view to restoring its equilibrium." Similarly, the first sentence of Art. 6:111(3) PECL reads: "If the parties fail to reach agreement within a reasonable period, the court may: (a) end the contract at a date and on terms to be determined by the court; or (b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances." Clearly, the court may, in effect, either terminate the contract or modify its terms. Thus, although the court will intervene only in the last resort, it is given wide powers. The court has great flexibility in its power to terminate or revise. The termination may be on such terms as the court deems just. It should be noted that in many cases, the reliance interest of the party not burdened by hardship ought to be redressed. Revision need not always be a price adjustment. The place of delivery could be changed.  ¹²⁸⁷  Of course, as to be demonstrated below, there is a strong possibility that a court will refuse to revise the contract by a declaration that the contract be performed as originally agreed.

A first possibility is for it to terminate the contract. However, since termination in this case does not depend on a non-performance by one of the parties, its effects on the performances already rendered might be different from those provided for by the rules governing termination in general. Accordingly, Art. 6.2.3(4)(a) UPICC and Art. 6:111(3)(a) PECL both provide that termination shall take place at a date and on terms to be fixed or determined by the court. Another possibility would be for a court to adapt the contract with a view to restoring its equilibrium. In so doing the court will seek to make a fair distribution of the losses between the parties. This may or may not, depending on the nature of the hardship, involve a price adaptation. However, if it does, the adaptation will not necessarily reflect in full the loss entailed by the change in circumstances, since the court will, for instance, have to consider the extent to which one of the parties has taken a risk and the extent to which the party entitled to receive a performance may still benefit from that performance.  ¹²⁸⁸ 

In other words, the modification of the clauses of the contract must be aimed at re-establishing the balance within the contract by ensuring that the extra cost imposed by the unforeseen circumstances are borne equitably by the parties. They may not be placed solely on one of them. Unlike the risks which result from total impossibility, the risks of unforeseen events are to be shared. The court may intervene in a variety of ways. According to the texts, the proposed solutions are only options. First, the court may reject the application. It will do so if, in its opinion, the remedy would be worse than the harm: if, for instance, the remedy were to create a new hardship on the other party's side. Second, it may extend the period for performance, increase or reduce the price or the contract quantity or order a compensatory payment. Much will depend on the procedural rules of the forum, but these will often permit similar results to be reached e.g. by granting a délai de grâce or by reducing the counter-performance to be rendered. It is to be noted that Art. 6:111(3)(b) PECL establishes a limit to the court power to adapt the contract: "in a just and equitable manner". Moreover, the Official Comment on Art. 6:111 PECL clearly states that the court can modify clauses of the contract but it cannot rewrite the entire contract. The modifications made to the contract must not amount to imposing a new contract on the parties. Otherwise, the only option open to the court would be to declare the contract ended. It is obvious that if the parties fail to agree on a change to the contract, the resulting difficulties will usually be such that the court will end up declaring the contract ended. And the court will fix the date for the contract to end in such a way as to ensure that the aggrieved party is not unfairly prejudiced by the other party's failure to agree ending the contract or to negotiate for adaptation of the contract.  ¹²⁸⁹ 

Finally, it is to be recalled that under the European Principles, the court has the power to sanction if the attitude of the parties during renegotiations merits sanction. The second sentence of Art. 6:111(3) PECL clearly states: "In either case [the court's option to adapt or end the contract upon failure of parties' renegotiation], the court may award damages for the loss suffered through a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing." Thus, the obligation to renegotiate is independent and carries its own sanction. The compensation provided here will normally consist of damages for the harm caused by a refusal to negotiate or a breaking off of negotiations in bad faith (for instance, the expenses of bringing the action insofar as these have not been recouped by an award of costs). It may be awarded against either party.  ¹²⁹⁰ 

21.4.4 Concluding Remarks

Based on the foregoing discussion it is clear that the court's decision to terminate or to modify the contract is very much a last resort. The whole procedure is devised to encourage the parties to reach an amicable settlement through renegotiation. Furthermore, both the initiation of renegotiations by either party and the conduct of both parties during the renegotiation process are subject to the general principle of good faith. A disadvantaged party may not during the tendency of renegotiation or resolution withhold its performance. It is only in cases where the negotiations are unsuccessful that the parties are entitled to resort to judicial system, where the court is authorised to make a decision on the merits in accordance with Art. 6.2.3(4) UPICC or Art. 6:111(3) PECL.

Clearly, the first aim should be to preserve the contract. The court could even require the parties to make a last effort at renegotiation if it believes that there is still a chance of saving the contract. It may employ any means that are permitted under its national law, such as appointing a mediator to assist the parties.  ¹²⁹¹  In short, a court is authorized to grant four possible options of relief if it finds a hardship: (1) terminate the contract at a specified date and on terms to be fixed; (2) adapt the contract with a view to restoring its equilibrium; (3) direct the parties to resume negotiations to reach an agreement adapting the contract; (4) confirm the terms of the contract as originally agreed.  ¹²⁹²  However, a judge can only terminate or adapt a contract where it is reasonable under the circumstances. Art. 6.2.3(4) UPICC expressly states that the court may terminate or adapt the contract only when this is reasonable. The circumstances may even be such that neither termination nor adaptation is appropriate and in consequence the only reasonable solution will be for the court either to direct the parties to resume negotiations with a view to reaching agreement on the adaptation of the contract, or to confirm the terms of the contract as they stand.  ¹²⁹³ 

In any event, it is in effect the court which declares the contract ended in case of hardship, in contrast to what happens when the non-performance is imputable to one of the parties or when performance becomes impossible. It may be that, after fruitless negotiations, one of the parties will take the initiative and announce unilaterally the end of the contract. If the other challenges this, the court must decide whether the party was justified in taking this attitude. In addition the court will have to fix the date as from which the contract is ended, taking into account how much of it has been performed. It is this date which will determine the extent of restitution which will become due. The hardship provisions in the two Principles also empower the court to end the contract upon terms, for instance provided that an indemnity is given. It may also order the payment of an addition to the price or of compensation for a limited period and the termination of the contract at the end of the period. So the mechanism adopted by Arts. 6.2.1 through 6.2.3 UPICC and Art. 6:111 PECL gives the court wide powers. These must be used in moderation, to avoid any reduction in the vital stability of contractual relations. This moderation is shown by the experience of countries which have already a similar rule.  ¹²⁹⁴