Hardship clause in international contracts

Hardship | Be prepared for change of economic circumstances

Changes in economic background and in overall circumstances nowadays are fast. Such changes can be e.g. change in gasoline and oil prices, exacerbation regarding securing finance or environmental hazard. Therefore, does your contractual terms duly notice changes in economic circumstances by containing i.e. hardship –clause.

In case parties have not prepared by contractual terms to changes on economic circumstances then in general applicable law defines which options are available to the parties. We point out that different legal systems identify different principles e.g.: force majeure, hardship, frustration of purpose etc. However, such principles may not always apply when economic circumstances change affecting the presumptions of parties regarding economic development of the business environment. Therefore, in such case contractual terms become important when economic requirements affecting the contractual partners change substantially.

Changes in circumstances and contractual relationship

In the contract law, a general principle under Finnish law is that contract binds (pacta sunt servanda). The idea behind the requirement of binding is the assumption that the circumstances are the same or constant during the term of the contract. Therefore, unfavorable changes which have not been assumed at the time of drafting and signing the contract, a party must suffer as part of the principle that contract bind party to it.

However, especially in respect of long term contractual relationship parties mutual benefit can be said to emphasize detriment to short term profits. Therefore, it is in a such contractual relationship in both parties’ interest to secure co-operation in changing economic environment. In general, hardship situation is usually in question when fulfilling the obligation of the contract is not impossible but to fulfill agreed obligations requires from the other party unreasonable economical sacrifices.

Further for companies it is possible and advisable to prepare for changes in economic circumstances by contractual terms. In case company has duly prepared for economic changes by way of contractual terms, in such case the terms of the contract define the proceedings what should be followed when assumed economic circumstances during contract period are changed.

Hardship – Taking into consideration economical balance behind the contractual relationship

In case operational environment of the company is changed permanently it is likely that the original economic presumption behind the contracts made by the company can have been destabilized from the estimated. In such case, the whole reasonableness of the contract or the contractual relationship can become to be evaluated again. Such situation is known as hardship –situation.

In case, the contracts of the company suffering hardship situation contain hardship –clause or reference to legal principles such as: Unidroit Principles of International Commercial Contracts, Principles of European Contract Law as well as Draft Common Frame of Reference then applicable hardship clause usually actualize. In such case, the terms of the contract require that the parties begin negotiations regarding the fate of the contract.

Hardship clauses are usually re-negotiation clauses which aim to secure that the economic balance between the parties is recovered. Difference to e.g. force majeure –clause is that this clause exempts the supplier from fulfilling its obligation during and the time of hindrance without obligation to re-negotiate. Therefore, a hardship –clause protects in principle both parties’ interests whereas force majeure –clause protects the interest of the supplying party.

It is recommended to be prepared for economic environment change by way of contractual terms

We point out that, in general a court of law is reluctant to conciliate contractual terms under the general principles of contract law. Therefore, in case the parties contract contains a re-negotiation clause (hardship) in such case the parties are obliged to begin negotiations to adjust contractual terms under the terms of the contract. Consequently, as a part of a risk management companies should be prepared for economic changes behind their contractual frameworks. Hardship –clause in contracts creates protection against changing situations.

About us – LKOS Law Office

LKOS Law office frequently advises corporates regarding international trade and transport law. We provide trade compliance services to our clients to support their international trade. LKOS Law Office is a NewLaw business law boutique office.

Our specialist in this subject matter is Oscari Seppälä. For further information please contact our specialists by email or by phone (+358 40 672 4285).

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*This article is for general information purposes only and does not constitute a legal advice.