22.3 HARDSHIP CLAUSE

22.3.1 Introduction

In practice, specific clauses are used to give the possibility of adjusting the contract under certain circumstances. It is fairly common in contracts dealing with international trade, particularly those that have long durations, to make provisions for revision of the contract in case of changed circumstances.  ¹³¹⁵  Among these clauses, hardship clauses organise the revision of the contract whenever a change of circumstances significantly modifies the economy of the contract.  ¹³¹⁶  They apply to situations of changed circumstances in which the parties intend not to dissolve the contract but to continue it.  ¹³¹⁷ 

Perillo even believes that the widespread use of hardship clauses in long-term contracts has created a custom and the hardship clause must be implied in the contract even if it was not expressly included by parties: "Sophisticated international trade agreements of long duration typically contain a renegotiation or other adaptation clause that provides flexibility to the relationship -- so typical as to perhaps rise to the strength of a usage. The absence of such a clause may reflect that such a clause has been rejected by one or both parties, but is more likely to have been overlooked by unsophisticated parties or deliberately omitted by a sophisticated drafter. In the last two cases, the court should consider the contracts as having an omitted term and fill the gap with the help of the UNIDROIT Principles."  ¹³¹⁸  However, another commentator notes that the fact that parties sometimes include a hardship clause in the contract may prove that no general customary principle exists. Moreover, there is such a variety in these hardship clauses with regard to their scope, application and remedy, that it is difficult to base a customary principle on them.  ¹³¹⁹ 

In fact, arbitrators have consistently refused to read customary hardship clauses into long-term contracts. Rather, they have ruled that hardship clauses should be interpreted strictly. Accordingly, a clause mentioning specific changes must be interpreted as meaning that no other changes should be taken into account. Therefore, parties are recommended to specifically instruct the arbitrators or tribunals to take account of the changed circumstances by inserting in advance a hardship clause in their contracts. As noted previously, the CISG has not resolved the existing problems of hardship. Hardship clauses may, therefore, be highly desirable in cases where the CISG applies. On the other hand, the mere presence of a hardship clause should not in itself exclude the application of the general law on changed circumstances. It would be too cumbersome if parties were obliged to negotiate and draft hardship clauses covering all possible events which may affect performance. Consequently, the general law on changed circumstances remains applicable to all changes not covered by a hardship clause.  ¹³²⁰ 

22.3.2 Drafting Considerations

Hardship clauses are usually highly complex and vary significantly from case to case. However, in general terms, it can be stated that the provisions in current use have two basic common features, namely the determination of the events which may trigger the readjustment process and the establishment of an appropriate procedure for the adaptation of the relationship to new circumstances.  ¹³²¹  In other words, hardship clauses always consist of two main parts. The first part of the clause defines the hypothesis when the clause applies. The second part deals with the effects of hardship, i.e., what happens whenever the hypothesis is realised.  ¹³²²  In a hardship clause it is important to stipulate when and how the parties will rearrange the contractual terms in case the contract loses its economic balance due to certain events which may or may not be specified.  ¹³²³ 

On the one hand, hardship clauses usually state that the circumstances at the time of the conclusion of the contract have changed. This change of circumstances must be serious or substantial and beyond the control of either party. Furthermore, the change must be entirely uncontemplated and unforeseeable. Then, a hardship clause often goes on to describe the effect of the change in circumstances, namely that the contract is out of balance, leading to a substantial economic hardship. Here, some clauses set out the requirement that a party is prejudiced. This, however, seems too extensive.  ¹³²⁴  With regard to the wording of hardship clauses, it can be very broad and refer to "events" as the circumstances which are to be considered. Sometimes, the wording is more specific. For example, "monetary events", or specific changes in environmental conditions are taken into account. However, it seems advisable to use broad wording, give a list of specific circumstances as examples, and insert the excluded circumstances. On the other hand, the use of more subjective criteria, such as "unfair" or "inequitable" should also be avoided due to their vagueness.  ¹³²⁵  In short, the hypothesis of a hardship clause has two aspects: the clause sets out the circumstances in which hardship exists; it then describes the consequences or effect of these circumstances on the parties to the contract.  ¹³²⁶ 

On the other hand, hardship clauses usually provide for revision of the contract. Some clauses set out criteria for the revision of the contract. An example of such a clause is, "to restore the equilibrium between the parties as it was at the time of the conclusion of the contract." A more subjective approach would be, for example, "with fairness" or "equitable adjustment".  ¹³²⁷  In a case where no agreement between the parties can be reached, hardship clauses provide for sanctions. The stipulation of revision of a contract is only useful if it is followed by a sanction that deals with the situation in which no agreement can reached. "A hardship clause without a sanction is hardly worth the paper on which it is written." Sanctions are usually the termination of the contract or adaptation of the contract by a third person. In the latter case, provision can be made for the intervention of an arbitrator, an expert, or even a court.  ¹³²⁸