Reproduced with permission of the author
Practical Considerations in International
Infrastructure Investment and Finance
Frederick R. Fucci
Thelen Reid & Priest LLP
American Bar Association
Section of International Law
Spring Meeting (April 2006)
I. HARDSHIP DEFINED
"... Just as the Company cannot not argue that it should not be required to bear any increase in the price ... it would be totally excessive if it is admitted that such increases are to be considered a normal business risk; on the contrary, it is necessary to find a solution that puts an end to temporary difficulties, taking into account both the general interest ... and the special conditions that do not allow the contract to operate normally ...; to this end it is necessary to decide, on the one hand, that the Company is required to provide the concession service and, on the other hand, that during this period it must bear only that part of the adverse consequences that a reasonable interpretation of the contract allows ..."
|(a)||Delay in delivery or non-delivery in whole or in part by a seller . . . is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.|
In situations in which neither sense nor justice is served by either answer when the issue is posed in flat terms of 'excuse' or 'no excuse', adjustment under the various provisions of this Article is necessary, especially the sections on good faith, on insecurity and assurance and on the reading of all provisions in the light of their purposes, and the general policy of this Act to use equitable principles in furtherance of commercial standards and good faith.
There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and
|(a)||the events occur or become known to the disadvantaged party after the conclusion of the contract;|
|(b)||the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;|
|(c)||the events are beyond the control of the disadvantaged party; and|
|(d)||the risk of events was not assumed by the disadvantaged party.|
II. QUESTIONS FOR INVESTORS AND LENDERS
The principle of rebus sic stantibus is universally considered as being of strict and narrow interpretation, as a dangerous exception to the principle of sanctity of contracts. Whatever opinion or interpretation lawyers of different countries may have about the 'concept' of changed circumstances as an excuse for non-performance, they will doubtless agree on the necessity to limit the application of the so-called 'doctrine rebus sic stantibus' (sometimes referred to as 'frustration', 'force majeure', imprévision', and the like) to cases where compelling reasons [emphasis in original] justify it, having regard not only to the fundamental character of the changes, but also to the particular type of contract involved, to the requirements of fairness and equity and to all circumstances of the case.
It should be obvious that none of the requirements which might justify the application of the 'doctrine' are fulfilled in this case. As a general rule, one should be particularly reluctant to accept it when there is no gap or lacuna in the contract and when the intent of the parties has been clearly expressed, as in the Bank Guarantee. Caution is especially called for, moreover, in international transactions where it is generally much less likely that the parties have been unaware of the risk of a remote contingency or unable to formulate it precisely.
The Tribunal is convinced that the Argentine crisis was severe, but did not result in total economic and social collapse. When the Argentine crisis is compared to other contemporary crises affecting countries in different regions of the world it may be noted that such other crises have not led to the derogation of international contractual or treaty obligations. Renegotiation, adaptation and postponement have occurred, but the essence of the international obligations has been kept intact.
"If the thesis of Air France were to be accepted, it would become much too easy for companies submitted to the supervision (tutelle) of the State to exonerate themselves from their obligations ... In fact, in relation to third parties, such a company and the State form one and the same legal entity; the intervention of the public authority, which is organically linked to the normal functioning of the company, does not constitute an outside event which can be invoked against third persons and contracting parties."
Even in the absence of a provision by the parties, their intent must reasonably be interpreted as rejecting the external nature of acts of those state organs which play an institutional role in the functioning of the state legal entity. Thus, when a state entity is subject to the supervision of a ministry, the intervention of the latter may be assimilated to an element of its own decision process, even if it is presented as being external. It is not a question of denying the distinction between the personality of the state and that of its agency, but simply to consider that one who contracts with a supervised entity is normally not ready to admit that the supervisory authority may discharge it of its obligations.
State-controlled enterprises, with legal personality, ability to trade and to enter into contracts of private law, though wholly subject to the control of the state, are a well-known feature of the modern commercial scene. The distinction between them, and their governing state, may appear artificial, but it is an accepted distinction in the law of England and other states.
[E]ach contracting party who is temporarily prevented from performing its contractual obligations has the general duty of good faith to make efforts to that end.
The Government has the duty to redress this abnormal situation, first, by putting an end to what by definition should be a temporary situation, a step that might be adequately taken in the context of the continuing negotiations between the parties, and next by paying compensation for the damage caused.
III. DRAFTING CONSIDERATIONS
(i) the circumstances allow the implication that, in default of agreement, a reasonable solution was intended, (ii) a formula is provided by reference to which any absence of agreement can be resolved, or (iii) if, even in the absence of such a formula, the parties have provided adequate machinery to resolve their disagreement.
1. Aluminum Company of America (Alcoa) v EssexGroup, Inc., 499 F.Supp 53 (W.D. Pa. 1980), discussed infra.
2. See e.g. Klaus Peter Berger, Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators, 36 Vanderbilt Journal of Transnational Law 1347 (Oct. 2003); John Gotanda, Renegotiation and Adaptation Clauses in Investment Contracts, Revisited, Id. at 1461; Nagla Nassar, Sanctity of Contracts Revisited: A Study in Theory and Practice of Long-Term International Commercial Transactions (Martinis Nijhoff 1995); Wolfgang Peter, Arbitration and Renegotiation of International Investment Agreements (Kluwer); Robert A. Hillman, Court Adjustment of Long-Term Contracts: An Analysis under Modern Contract Law, 1987 Duke Law Journal 1; Clayton Gillette, Commercial Rationality and the Duty to Adjust Long-Term Contracts, 69 Minnesota Law Review 521 (Feb. 1985)
3. This paper will not attempt to go over some of the older arbitral jurisprudence resulting from investment disputes from the 1960's-1980's, which is familiar to international practitioners and ably described elsewhere. See, for instance, Abba Kolo and Thomas W. Wälde, Renegotiation and Contract Adaptation in International Investment Projects -- Applicable Legal Principles and Industry Practices, 1 Journal of World Investment 5-57 (July 2000).
4. Norbert Horn, Changes in Circumstances and the Revision of Contracts in Some European Laws and in International Law, p. 17 in Adaptation and Renegotiation of Contracts in International Trade and finance, ed. by Norbert Horn (Kluwer 1985)
6. Conseil d'Etat, Compagnie générale d'éclairage de Bordeaux, Rec. 125, concl. Chardenet, 30 March 1916, quoted in M. Long, P. Weil et al., Les Grands Arrêts de la Jurisprudence Administrative (2003) at 188-89. Translation from the award in ICSID Case No. ARB/01/8, CMS Gas Transmission Company v The Argentine Republic (May 12, 2005).
7. CE, 21 juillet 1970, Dpt Hautes Alpes c/ Ste savoyarde d'entreprise: Rec. CE, p. 533; 28 juillet 1989, Ville de Menton c/ Ivaldi et a., req. no. 49650 : RD publ. 1990, p. 291.
8. Article 1147, French Civil Code.
9. Article 1148, French Civil Code
10. Wallack, The Excuse Defense in the Law of Contracts: Judicial Frustration of the U.C.C. Attempt to Liberalize the Law of Commercial Impracticability, 55 Notre Dame Law Review 203, 207 (1979).
11. W.R. Grace and Co. v. Local Union 759, 461 U.S. 757 (1983). Business persons are generally charged with the knowledge that market conditions and prices will change. See Bennett v. Howard, 175 Ky. 797, 195 S.W. 117 (1917) (unless businessman guards against bad markets by contract, he necessarily takes the risk).
12. Maple Farms Inc. v. City School District, 76 Misc. 2d 1080, 352 N.Y.S.2d 784 (Sup. Ct. Chemung Co. 1974).
13. Quoting Transatlantic Financing Corp. v United States, 363 F.2d 312, 315 (D.C. Cir. 1966
14. Louisiana Power & Light Co. v. Allegheny Ludlum Industries, 517 F. Supp. 1319, 1324 (E.D. La. 1981) (interpreting New York law); Eastern Air Lines, Inc. v. Gulf Oil Corp., 415 F. Supp. 429 (1975) (burden of proving each element of claimed commercial impracticability on party claiming excuse).
15. Maple Farms, 352 N.Y.S.2d 7-90.
16. Comment 8 of the official comment to § 2-615 provides:
[T]he exemptions of this section do not apply when the contingency in question is sufficiently foreshadowed at the time of contracting to be included among the business risks which fairly are to be regarded as part of the dickered terms, either consciously or as a matter of reasonable commercial interpretation from the circumstances.
17. Louisiana Power & Light Co., supra (quoting Gulf Oil Corp. v. Federal Power Commission, 363 F.2d 588, 600 (3d Cir. 1977), cert. denied, 434 U.S. 1062 (1978). The standard announced by British courts in Suez Canal closing cases is also strict. The unforeseen cost increase that would excuse performance "must be more than merely onerous or expensive. It must be positively unjust to hold the parties bound." Ocean Tramp Tankers v. V/O Sorfracht (The Eugenia), 2 Q.B. 226, 239 (1964).
18. Publicker Industries v. Union Carbide Corp., 17 U.C.C. Rep. Ser. 989 (E.D. Pa. 1975)
19. Hancock Paper Co. v. Champion International Corp., 424 F. Supp. 285 (E.D. Pa. 1976).
20. 449 F. Supp. 53 (W.D. Pa. 1980).
21. Id. at 59, 66, 79.
22. UNIDROIT Principles, Art. 6.2.1 (Contract to be Observed).
23. UNIDROIT Principles, Art. 6.2.2 (Definition of Hardship).
24. Article 258 of Book 6 of the Dutch Civil Code
25. Art. 1467 Contratto con prestazioni corrispettive -- Nei contratti a esecuzione continuata o
periodica ovvero a esecuzione differita, se la prestazione di una delle parti è divenuta
eccessivamente onerosa per il verificarsi di avvenimenti straordinari e imprevedibili, la parte che
deve tale prestazione può domandare la risoluzione del contratto, con gli effetti stabiliti dall'Art.
1458 (att. 168).
La risoluzione non può essere domandata se la sopravvenuta onerosità rientra nell'alea normale del contratto.
La parte contro la quale è domandata la risoluzione può evitarla offrendo di modificare equamente le condizioni del contratto (962, 1623, 1664, 1923).
26. Article 107(3) of the Civil Code: "When ... as a result of exceptional and unforeseeable events of general character, the performance of the contractual obligation, without becoming impossible, becomes exceptionally onerous in such a way as to threaten the debtor with exorbitant loss, the judge may, according to the circumstances, and after taking into consideration the interests of both parties, reduce to reasonable limits, the obligation that has become excessive. Any agreement to the contrary is void.
27. In the Proceeding between CMS Gas Transmission Company and the Argentine Republic, ICSID Case No. ARB/01/8 (May 12. 2005), referred to as the "CMS Gas Award."
28. Law No. 24.076 of 1992 on the Privatization of the Gas Sector (the "Gas Law") and Decree No. 1738/92 on the Implementation of the Gas Law (the "Gas Decree")
29. ¶¶54-58, CMS Gas Award.
30. Citations to the various emergency measures and a summary of their effect on TGN may be found in ¶¶ 59-67 of the CMS Gas Award.
31. The full text of the code section is as follows:
32. CMS Gas Award, ¶222
33. CMS Gas Award ¶238
34. UNIDROIT Principles, Art. 6.2.2(4).
35. Petrobras Gives El Paso 30 more Days to Revise or Terminate Macae Contract, Platt's Global Power Report, Jan. 13, 2005, Latin America, p.8
36. Petrobras May Seek Arbitration on TwoThermo Plants, Dow Jones Newswires, Dec. 28, 2004
37. Petrobras Gives El Paso 30 more Days to Revise or Terminate Macae Contract, op. cit.
38. Petrobras Seeks Arbitration on Macae, Termoceara Contracts, Feb. 11, 2005, Business News Americas
40. Petrobras Clarifies Disagreements with MPX (Termoceara), Feb. 2, 2005, press release.
41. Petrobras' Position on the Merchant Thermoelectric Power Plants, Feb. 11, 2005, press release
42. MDU Resources Announces Agreement to Sell Termoceara to Petrobras, Mar. 24, 2005, www.mdu.com/news
43. Petrobras Seals Acquisition of Termoceara Thermal Generator, June 17, 2005, Petrobras press release.
44. Macae Merchant Power Plant: Petrobras & El Paso Arbitration Process, July 8, 2005, Petrobras press release
45. In November 2005 El Paso reported that the arbitration panel has "postponed" its final ruling on the dispute and that a final award would not be expected until sometime in the first half of 2006. El Paso Corporation Reports Developments on Macae Arbitration, <http://investor.elpaso.com>, Nov. 30, 2005.
46. El Paso and Petrobras Sign Memorandum of Understanding for Sale of Macae Power Plant, Feb. 2, 2006, <http://investor.elpaso.com>
47. Final Award of 4 May 1999, XXV Y.B. Int'l Comm. Arb. 13 (2000) -- Referred to in this paper as the Himpurna Award.
48. In the ICC Award in Matter No. 2216 (1974), the case arose because a Norwegian company failed to perform a petroleum purchase agreement because the price of petroleum had gone down by more than half between the time of contract and scheduled delivery. The Tribunal did not permit an adjustment in the contract price on the basis of a hardship argument. This was not found to constitute a "bouleversement" of economic circumstances, but a simple fluctuation in market prices. In a commentary to this case by Yves Derains, then Secretary General of the ICC Court of Arbitration, he pointed out that to accept this type of fluctuation as a ground to exonerate the non-performance of a contract "would put in danger the security of transactions." Yves Derain, Chronique des sentences arbitrales, Clunet 1975, p. 921.
49. Himpurna Award, ¶203.
50. ¶207 (emphasis added)
51. CMS Gas Award, ¶225.
52. Decision of the Central Court of Rio de Janeiro, January 28, 2005.
53. Published in 9 Int'l Arbitration Report, A-1 (1994).
54. These conditions are that: "(a) the events occur or become know to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party."
55. In that situation a party generating waste entered into a four-year contract with a waste disposal company in a certain country. The price is fixed per ton over the term of the contract. Two years into the performance, the Government of the country prescribes prices for storing waste that are ten times higher than before.
56. In that case, a dealer in electronic goods in the former East Germany contracted in September 1989 to buy inventory from a supplier in another former socialist bloc country. The goods were to be delivered in December 1990. In November 1990, the buyer in East Germany informed the seller that the goods were no longer of any use to it on the grounds that after unification with West Germany, there was no longer any market for the electronic products from the socialist country supplier.
57. Michael Bonnell, An International Restatement of Contract Law (2d ed. 1997), at 130.
58. Formulation from Bruno Oppetit, author of a classic treatise on French contract law - "a change in the initial assumptions with respect to which [the parties] committed themselves ... comes to modify the equilibrium of this contract to the point of making one of them suffer an unjust hardship." (une rigueur injuste) L'adaption des contrats internationaux aux changements de circonstances : la clause de hardship, Clunet 1974, 794.
59. Henry Lesguillons, Lamy Contrats internationaux, Paris, Lamy, juin 1995, division 4, art. 398.
60. J. L. Devolvé, another French commentator, has defined it as a situation characterized by the occurrence of exceptional, unforeseeable circumstances, external to the parties, that has on the equilibrium of the contract such an effect of bouleversement that the obligor, without being in a state of impossibility of performance, cannot do it without "risking ruin, or in any case considerable harm." L'imprévision dans les contrats internationaux, Comité français du droit international privé, Travaux du Comite francais de droit international privé, Paris, Edition du Centre national de la recherche scientifique, 1989-90.
61. See e.g. the commentary of Yves Derain to the Award in ICC Case No. 2291 (1975) --
62. Cited in ¶188 of the Himpurna Award.
63. Economic statistics cited in ¶¶ 442-448 of the CMS Gas Award.
64. CMS Gas Award, ¶250.
65. CMS Gas Award, ¶355.
66. ICC Award in Case No. 8873 (1997)
67. ICC Award in Case No. 2508 (1976) reported in 104 Journal du Droit International, No. 4 (Octobre-Novembre-Decembre 1977), p. 939-
68. Petrobras Mulls Taking El Paso to Arbitration Court, Dec. 20, 2004, Business News Americas
69. See Form 6-K filed by Petrobras in March 2005 with financial statements for the years ending Dec. 31, 2004 and Dec. 31, 2003.
70. Peter Berger, "Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators", 36 Vanderbilt Journal of Transnational Law 1347, 1352 (Oct. 2003)
71. Until 1975, Algerian law was still based on French law and the contracts were concluded before the transformation.
72. Pierre Mayer, La neutralisation du pouvoir normatif de l'Etat en matière des contrats d'Etat, 1986 Journal du droit international (Clunet ) 5
73. They were the (i) State Minister for Revitalization of State-Owned Enterprises, (ii) the Minister of Mining and Energy, (iii) the Minister of Finance, (iv) the State Minister for National Development Planning, (v) the State Minister for Research and Technology and (vi) the Minister of Trade.
74. Himpurna Award, ¶89
75. Award of July 3, 1958 of the Arbitration Commission for Foreign Commerce of the USSR emphasizing the separate legal personality of the enterprise, 53 A.J.I.L. 800 (1959)
76. Czarnikow Ltd. V. Centrala Handlu Zalgranicznego "Rolimpex" (1978) 2 ALL E.R. 1043.
77. Arbitration and State Enterprises at 46 (1984).
78. Emmanuel S. Darankoum, L'application des Principes d'UNIDROIT par les arbitres internationaux et par les juges étatiques, 36 R.J.T. 421, 469 (2002)
79. R. Chapus, Droit Administratif general : éd Montchrestien 2002, 14e éd., no 1383.
80. See Y. Derains, Chronique des sentences arbitrales, in 107 Journal du Droit International, No. 4, (1980), p. 958.
81. CMS Award, ¶225.
82. CMS Award, ¶238.
83. Articles 478-480, cited above
84. Cass. Com., 3 nov. 1992 : Bull. civ. IV, no 338.
85. CA Paris, 28 sept. 1976 : JCP G 1976 II, 18810, note J. Robert
86. (Cass. Soc. 24 mars 1958 : J.C.P. 58, II, 10868).
87. JurisClasseur, Contrats, Fasc. 20 : POURPARLERS -- 2 -- Obligations conventionnelles de négocier ; d) Régime des obligations de négocier, ¶47.
88. Pierre Lalive, Sur la bonne foi dans l'exécution des contrats d'état, 425, 449 in Mélanges offerts à Raymond Vander Elst (Editions Nemesis 1986) Tôme I
89. Framatome v. AEOI, reported partially in Clunet, 1984, 58.
90. Soixante ans après -- Regard sur l'avenir (ICC Publishing 1984), p. 46
91. ICC Force Majeure Clause 2003; ICC Hardship Clause 2003 -- Developed by the ICC Commission on Commercial Law and Practice -- Draftsman-in-chief: Professor Charles Debattista (ICC Publishing Feb. 2003)
92. CMS Award, ¶245
93. CMS Award, ¶246
94. See also, Emmanuel S. Darankoum, L'application des Principes d'UNIDROIT par les arbitres internationaux et par les juges étatiques, 36 R.J.T. 421, 473 (2002)
95. CMS Gas Award ¶165.
96. CMS Gas Award, ¶244.
97. CMS Gas Award, ¶248.
98. CMS Gas Award, ¶469.
99. CMS Gas Award, ¶412
100. CMS Award, ¶446.
101. CMS Award, ¶456.
102. Paris 1re ch. 28 sept. 1976 : J.C.P. 78, ed. C.I., II, 18810, note J. Robert.
103. "l'équilibre des prestations réciproques" -- B. Goldman, La lex mercatoria dans les contrats et l'arbitrage international, realité et prospectives, p. 495.
104. Paris 6 mai 1988; Rev. arb. 1989, 82, note E. Loquin.
105. See e.g. Ghana/Shell clause, cited in Klaus Peter Berger, "Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators", 36 Vanderbilt Journal of Transnational Law 1347 (Oct. 2003)
106. CMS Award, ¶430-467.
107. Adrian Montague, Hardship Clauses, International Business Lawyer (March 1985), p. 135
108. Id. at 137.
109. ICC Dispute Board Rules
110. David Mildon, Agreements to Agree: Does Expert Determination Provide a Default Solution? (unpublished manuscript -- November 2005)