In the year 2020 as COVID-19 spread all over the world different countries adopted different measures in order to combat the spread of this deadly virus. Imposing city lockdown, banning international travel, demanding quarantine and likewise precautions caused international trade to almost come to a halt. As a legal term, hardship, concept that allows the party faces it to be exempted from its obligations when the conditions are met for hardship to occur. However it is an exceptional phenomena and cannot be claimed if particular conditions are not met. Because of the pandemic, conditions should be met in order hardship to occur and obligor to be relieved from his/her obligations or other remedies have been discussed even more.
For example, six crew members on board the livestock vessel Al Kuwait, were determined to have caught the coronavirus on May 26, 2020. They were sent to a hotel quarantine, while the remaining 42 crew members were required to stay on board and undergo medical examinations. The transport of 56,000 sheep worth $12 million was significantly delayed as a result of this. Al Kuwait was only given permission to leave Western Australia in June 2020. This is just one illustration of the nature of COVID-19's obstructive effect.1
THE MAIN PRINCIPLE IN THE AREA OF CONTRACT LAW: PACTA SUNT SERVANDA AND EXCEPTIONAL PRINCIPLE: CLAUSULA REBUS SIC STANTIBUS
The principle of pacta sund servanda, one of the main principles in the contract law from the ancient times. Pacta sund servanda refers to the sanctity of the contracts. Therefore parties to a contract are bound to fulfill their obligations when it is possible to perform. Pacta sunt servanda principle indicates that the Parties should do what they have promised at the time of the conclusion of the Contract if there is no unexpected reasons for keeping them from doing so.2 Principle reflects the sanctity of contract, as it has religious roots among all societies, simply means that a contract which has legally become enforceable must be checked in order to continue to be in force. "It means the inviolability, not unchangeability of contracts.".3
The binding character of the contracts must be evaluated with the principle of rebus sic stantibus and good faith in order to ensure fairness among the performances of the Parties. Clausula rebus sic stantibus examines what will be the fate of the contract in case of the circumstances at the conclusion of the Contract change afterwards, in a degree that the Parties would not have established the Contract, or would have established it other than they agreed upon earlier if they had anticipated those changes. According to this doctrine, either of the contracting parties has the right to request the revision of the contract in case of a change in circumstances to such an extent.4
However since under some severe conditions obligor would not perform his/her obligation because the contractual obligation has become severely more burdensome for the aggrieved party, exemption from the principle has developed. Clausula rebus sic stantibus constitutes exception to the pacta sund servanda principle since economic equilibrium of the parties' contractual obligations altered in a way to aggrieved party not to perform his/her obligation as determined in the contract. This exemption can only be applied when contractual obligation became severely burdensome or even impossible. Exemption from contractual obligation may be applicable in case of impossibility, force majeure or the like. However, the question if hardship amounts to an exemption from the contractual obligation is still a debated issue in case decisions and doctrine. 5
HARDSHIP UNDER CISG
In this article hardship concept will be analyzed in the context of CISG. To analyze hardship concept firstly it should be determined under which circumstances hardship will be occurred. According to CISG Art. 79/1, "A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences." Therefore according to CISG there are three conditions for an impediment to amount to hardship and those can be listed as;
- The impediment should be beyond the control of the party and make the performance excessively onerous,
- It should not be such an event that the party may take into account at the time of the conclusion of the contract, in other words it should unforeseeable,
- The party may not avoid or overcome the impediment or consequences.
Hardship is essentially change of circumstances that the contract is concluded. When circumstances change in degree to party cannot perform their obligation, exemption from performance of obligation may come into agenda in the context of hardship. Unexpected changes in circumstances may be exemplified as changes in political and economic policies, social unrest and natural phenomena, global or regional pandemic, an earthquake, a flood, a terrorist attack, a sudden increase on import tariffs in one of the production countries or price fluctuations that were not foreseeable at the time of the conclusion of the contract.6 When such a change in circumstances occur after the conclusion of the contract, the party faces hardship, would not be deemed to be liable with his/her responsibilities. Also to mention of exemption from liability, unforeseen and unavoidable change should be in a degree to alter the equilibrium of the contract fundamentally.
According to CISG Advisory Council Opinion No:20, "In international law instruments, hardship may be found only the performance of the contract has become excessively onerous or if the utility of performance has considerably decreased, or if the equilibrium of the contract has been fundamentally altered."7
HARDSHIP AS AN IMPEDIMENT BEYOND CONTROL: As above mentioned only events outside of the control of the party may be accepted as hardship under CISG. Thus there is a distinction between the events which are in the control of the parties' and those which are not. External circumstances such as natural disasters, pandemic, political or economic crises, state's intervention are accepted as events outside of the control of parties'. On the other hand, circumstances have their origin in the party itself are not accepted as beyond control of the party even if they are not foreseeable such as illness, arrest, death, financial strain, labor strikes. Thus to say that an event beyond the control of the party it is mandatory that it should be external.
HARDSHIP AS AN UNFORESEEABLE EVENT: Hardship to exempt the party from his/her liability the event causing the hardship should be unforeseen at the time of the conclusion of the contract. Thus, if the party may have the opportunity to take the event into consideration at the time of the conclusion of the contract the event causing the imbalance between the performances afterwards, cannot be accepted as unforeseen. Eisenberg Formula may be an ideal way for to understand this criterion better. According to this formula, in the case of drastic price increase due to market fluctuations, if a look at historic price movements during a reasonable past period may make it possible to anticipate the future then fluctuation is not unforeseen. Therefore if it is possible to determine the so-called price movement or any change for the specific case by examining the contractual relationship then it cannot be said that the subsequent change is unforeseen.8
HARDSHIP AS AN EVENT THAT CANNOT BE AVOIDED OR OVERCOME: For an event to be accepted as hardship, the disadvantaged party should not be able to avoid or overcome the impediment or its consequences. For example "if the seller may have to turn to another supplier or consider alternative possibilities for the transportation of the goods."
CASE STUDY: SCAFOM INTERNATIONAL BV v LORRAINE TUBES S.A.S.
A buyer from the Netherlands and a seller from France were involved in this case. Contract concerning to selling of steel tubes was the subject of the deal. There were no price adaptation clause in the contract. The price of steel had increased by 70% before the delivery. The seller attempted to renegotiate the terms of the contract but the buyer rejected, insisting instead on contract fulfillment at the agreed-upon amount. It was held by the Belgian court that the unforeseen price increase constitutes hardship under Article 79 of the CISG.9
Trust between the parties to a contract has the critical importance for the continuation of business life. The principle of "pacta sunt servanda" shall serve this function to be actualized. Once this principle started to lose its notability, trust and so business life may be collapsed. Thus, maintaining the principle shall be considered of great importance. Sanctity of the contracts shall only be waived under serious circumstances such as hardship as it is examined above. Exemption from contractual performance of one of the parties is based on the assumption that the parties could not have foreseen the changed circumstances at the time of the conclusion of the contract. According to this assumption parties to a contract would have concluded the contract with different conditions. Thus it should be accepted that the changed circumstances give right to aggrieved party to be relieved from the performance. Aggrieving a party for the sake of protecting the sanctity of the contract would constitute an unfair result which is against the main purpose of law, rightness. Equilibrium between principle of "pacta sunt servanda" and "rebus sic stantibus" shall be guarded carefully. To ensure this equilibrium each contract should be evaluated on their own terms and circumstances. To conclude, it is noteworthy to reiterate that the interpretation of a contract must be made with taking all conditions into consideration in order to not aggrieve any party, to reach the most equitable result and to uphold the general principles of law.
- CISG-AC Opinion No. 20, Hardship under the CISG, Rapporteur: Prof. Dr. Edgardo Muñoz, Universidad Panamericana, Guadalajara, Mexico. Adopted by the CISG Advisory Council following its 27th meeting, in Puerto Vallarta, Mexico on 2 – 5 February 2020.
- Ishida, "CISG Article 79: Exemption of Performance, and Adaptation of Contract through Interpretation of Reasonableness - Full of Sound and Fury, but Signifying Something", at 374, 77.
- Scafom International BV v Lorraine Tubes S.A.S (Hof van Cassatie, 19 June 2009)
- Laschon E, Gubana B, Carmondy J (2020) Coronavirus outbreak on live export ship Al Kuwait docked in Fremantle as six test positive for COVID-19
- HERMAN Shael, Specific Performance: Comparative Analysis (2003)
- The Principle of Rebus Sic Stantibus as an Alternative Solution for Banks in Negotiating Bad Debt Settlement Due to Force Majeure after Earthquake in the Special Region of Yogyakarta, Indonesia /2015
- WEHBERG H., Pacta Sunt Servanda, The American Journal of International Law
- ZAKARIYA Hasan, Changed Circumstances and the Continued Validity of Mineral Development Contracts: Hossain ed., Legal Aspects of the New International Economic Order, London, New York (1980)
- Rimke Joern, Force majeure and hardship: Application in international trade practice with specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts
1. Laschon E, Gubana B, Carmondy J (2020) Coronavirus outbreak on live export ship Al Kuwait docked in Fremantle as six test positive for COVID-19
2. HERMAN Shael, Specific Performance: Comparative Analysis
3. ZAKARIYA Hasan, Changed Circumstances and the Continued Validity of Mineral Development Contracts: Hossain ed., Legal Aspects of the New International Economic Order;
4. WEHBERG H., Pacta Sunt Servanda
5. Rimke Joern, Force majeure and hardship: Application in international trade practice with specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts
6. CISG-AC Opinion No. 20
7. CISG-AC Opinion No. 20
8. Ishida, "CISG Article 79: Exemption of Performance, and Adaptation of Contract through Interpretation of Reasonableness"
9. Scafom International BV v Lorraine Tubes S.A.S
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