Release from Liability in the event of a Significant Change of Circumstances

Release from Liability in the event of a Significant Change of Circumstances

In the Principles of European Contract Law (PECL)

Vis major

In most European countries a party is bound to perform his obligations under the contract even though it has become more onerous for him to do so. An exception to this rule, the pacta sunt servanda, is made in the case of vis major (i.e. force majeure), which is the term used here to denote supervening events that make performance impossible or quasi-impossible. In a case of vis major the obligor will be excused for his non-performance. Although the rules are not the same in all the legal systems, most of them display the following main features:

The obligor is relieved from his obligations only if performance has become impossible in law or in fact. Most legal systems also accept quasi-impossibility, where performance, though possible in fact, has become an economically unreasonable requirement. Furthermore, the legal systems require that the obligor could not reasonably be expected to take the impossibility into account at the time of the conclusion of the contract and that the impossibility of performance was due to factors beyond the control or influence of the obligor.

In most legal systems vis major ends the contract. There is no room for modification of its terms and no scope for the parties to renegotiate the contract with a view to such modification. The vis major rule, however, is not mandatory. It is negotiable and in practice is often waived in standard contract terms. Article 79 of the United Nations Convention on Contracts for the International Sale of Goods (CISG) and Article 8:108 of Principles of European Contract Law define the legal position that has been outlined here.

Hardship

In contracts for the performance of a continuing or recurring obligation, such as cooperation agreements, long-term construction contracts and contracts for a continuous supply of goods or services, unforeseen contingencies may make performance excessively onerous for one party, especially in times of depression or unrest. These contracts need a hardship clause which goes beyond the vis major rule. Many contracts do actually contain such a clause, but often the parties forget to provide them, or they do not find them necessary. It has been argued that a party who is then exposed to hardship must bear the consequences. However, the hardship which a party may suffer in these case is often too hard a penalty for his forgetfulness or improvidence. Many national legal systems already take this factor into account, either by means of explicit rules or by invoking the principle of good faith, as in Germany, and the rules developed from that principle concerning frustration of contract (clausula rebus sic stantibus). Such rules are unknown in common law and, as far as civil contracts are concerned, in French law too. Nor has the United Nations Convention on Contracts for the International Sale of Goods any separate provision on hardship (see Article 79).

Article 6:111 of the PECL

The Commission on European Contract Law considered a hardship rule to be necessary and inserted it in Article 6:111 of the Principles of European Contract Law. The text reads as follows: “(1) A party is bound to fulfil its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished. (2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or terminating it, provided that (a) the change of circumstances occurred after the time of conclusion of the contract, (b) the possibility of a change of circumstances was not one which could reasonably have been taken into account at the time of conclusion of the contract, and (c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear. (3) If the parties fail to reach agreement within a reasonable period, the court may: (a) terminate the contract at a date and on terms determined by the court; or (b) adapt the contract to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances. In either case 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.”
As in the case of the vis major rule, the hardship rule is not mandatory. The two rules differ in a number of respects. A party may seek relief if performance has become excessively onerous; it is not required that it has become impossible. Thus, there was hardship when a company which in 1929 had undertaken to deliver water at a fixed price to a hospital in ‘times ever after,’ had to continue to deliver the water after 1978, when the agreed price had become derisory as a result of inflation. There was also hardship when a gas company which in 1908 had promised to deliver gas for a period of 30 years at a fixed tariff, had to continue delivery at that price when, during the First World War, a severe shortage of the coal that was used to produce gas quadrupled its price. The Principles of European Contract Law, however, do not provide for automatic termination of the contract in all cases. The contract may be adapted to the new conditions by negotiation between the parties (the preferable option) or, if necessary, by the competent court. Details are contained in paragraphs 2 and 3 of Article 6:111 of the Principles of European Contract Law.

Source: Ole Lando

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