Time to renegotiate the renegotiation clauses in contract law?
Change is inevitable. The field of contract law is not far removed
from the application of this principle. Contracts are set to govern
the legal relationship between the parties within the existing
regulatory framework. Parties enter into a bargain on the basis of
the then existing law and the applicable regulation. For instance,
with the advent of regulators like the Competition Commission of
India which regulates the behavioral aspects of a party's
dealings, one necessarily structures a contract to be compliant
with these regulatory requirements. Commercial forecasts, long term expectations and business plans
of parties to a contract are accordingly structured and
understandings arrived at with a counter party. This understanding
forms the very basis and the backbone of a contractual
However, it is not always possible to foresee, contemplate or
predict changes which may take place in the regulatory and legal
landscape after entering into an agreement which may have a
material bearing on the original contract. These changes in the
applicable law may at times alter the equilibrium of a contract in
such a significant manner that it may become inequitable to insist
that the affected party perform its part of the contract in the
changed circumstance. These changes may strike at the root of a
contract and alter the very basis or the substratum of the
Accordingly, in order to offset the effects of an unforeseen
change, parties often provide for a pre agreed contractual
mechanism which takes effect in case of such unforeseen changes
after the date of the agreement. This is particularly true for long
infrastructure contracts relating to roads, power and other sectors
which are capital intensive and performance spans over a period of
20 to 30 years. In such cases, parties generally provide for
"renegotiation" or "hardship" clauses within
the body of the original contract, which may be invoked in case of
any supervening circumstance that renders performance commercially
unviable. These clauses enable a party to renegotiate terms of a
contract and restore the balance of the contract.
In the absence of parties agreeing upon such a mechanism or
giving effect to an agreed mechanism of this nature, a contract
runs the risk of being frustrated. Indian Courts have recognized
the doctrine of frustration of contracts which has been embodied
within the provisions of the Indian Contract Act, 1872. Courts have
interpreted frustration or impossibility to perform in the
practical and commercial sense and not strictly in a literal sense.
Parties may avoid performing a contract which is rendered
impracticable by availing this remedy under contract law. However,
avoiding contracts as being frustrated may not always be a
desirable option in a developing economy where investors look for
stability and predictability in doing business. With a proactive
Government striving hard to provide a business friendly environment
for investors, a change in the traditional outlook may indeed be
warranted. This is where renegotiation clauses in a contract derive
These clauses provide for an agreed mechanism of renegotiation
so as to enable the parties to restore the balance of a contract
which has been disturbed as a result of the unforeseen change in
law post the agreement. Jurisprudence surrounding the
enforceability of renegotiation clauses is still in a nascent
stage. It may be worthwhile exploring international law on this
aspect. For instance, the UNIDROIT Principles adopted by the United
Nations provide that in case parties fail to agree upon suitable
changes to a contract in case of a subsequent event rendering
performance inequitable, the matter may be settled by arbitration.
The arbitrators are empowered in such cases to inter alia direct
suitable modifications to a contract in order to adapt the contract
to the changed circumstance and restore the equilibrium of a
Investors who make substantial investments do necessarily seek
to run a viable business, protect their investments and make a
reasonable profit. Towards that end, they provide for appropriate
contractually agreed remedies in case of an unforeseen supervening
event. Recognition and enforcement of these measures may indeed
bring in the much needed stability, consistency, clarity and
certainty which are the fundamental requirements of carrying on a
profitable business in a developing economy.
Originally PublishedBusiness World Online,
December 24, 2014
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