FORCE MAJEURE AND HARDSHIP UNDER THE UNIDROIT

PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS

Joseph M. PERII~1~

SUMMARY: I. Legal Background in the Civil Law and Con~mon

Law. II. Contractual usages in lnteriuitional Ti ade. III. The Underpinnii~s of the Force Ata"eure and Hardship F~uses. IV. T~ie

UVIDROIT Principles.

I. LEGAL BACKGROUND IN THE CIVIL LAW AND COMMON LAW

A. A Note on the Terms "Frustration" and "Commercial'

George Bernard Shaw is reputed to have said that "England and America are two countries separated by a common' language".²In the United States the term "frustration" is limited to situations where it is p05sible to perform the contract, but performance would be senseless. The usual illustration is a license for the use of apartment to view the coronation procession of King Edward VII. Although the coronation was postponed because of the King's illness, it was still possible for the license to pay for the use of the apartment and for the license to provide the apartment, nevertheless the basic assumption of the parties did not occur and purpose of the 'contract was totally frustrated, and the contract was discharged. In Englan~ "frustration" is used to cover cases of im

112 JOSEPh M. Pi~Ri1.1.0

possibility of performance as well as cases such as the coronation cases. I ~~ill follow the American usage which separates impossibility cases from

frustration cases.

The word "commercial" or some close variation of it is used in many languages. This does not mean that, outside their core meanings, these terms have the same scope, particularly when used in a legal context. The term "commercial contract" has no precise meaning in the English language. It certainly describes more contracts than are covered by the Uniform Commercial Code that is in effect in 49 of the 50 states if the United States. Some jurisdictions have commercial codes of much broader coverage than that of the Uniform Commercial Code.⁴The meanmg of "commercial" in the UNIDROIT Principles cannot be based on its meaning in aiiy one legal system; it is best iiiferred from the illustratiolis utilized in the Principles. These include, for example, construetion contracts,⁵corporate acquisitions,⁶contracts for technical assistance, and contracts for architectural services.⁷So wide-ranging are the illustrations that there is little room for international non-commercial contracts.

B Traditional Doctrine

Traditional doctrine in both the systems of common law and civil law have solidly supported the doctrine of pacta sunt ser\'anda -agreements must be kept though the heavens fall. The major exceptions in civil and common law systems are the doetnues of impossibility of performance, sometimes denominated "for~e majeure", and frustration of the venture. In many legal systems the trad4ional doctrine continues to receive solid support and relief for hardship is limited to these two doctrines. "Either performance is made impossible by force majeure and the contract disappears or the performance is impossible and the contract has to be per-

FORCE MAJEURE AND hARDShIP U~DER l.iJF UNiDROi~ 113

formed, at whatever cost".⁸In others, hardship provides an additional ground for the discharge of a contract or for its adaptation to changed circumstances.

The traditional rule that hardship, short of impossibility, is no excuse for non-performance of a contract, and the modern rule providing relief on grounds of hardship are not the only solutions employed by legal systems. The United States flirts with a vaguely defined doctrine of im9

practicability. France refuses relief for hardship as to contracts in the private sector,'⁰but gives relief under the doctrine of impre'~'ision in administrative tribunals for supervening hardship in the performance of government contracts.

England firmly claims to stand on the traditional rule: "[a] contract will only be frustrated if the substance of it has become impossible or illegal, or the commercial purpose has been completely destroyed".'¹Yet consider the case of Staffordshire Area Health Authority V. South Siaffordshire Waterworks Co. A waterworks company had agreed to provide a hospital "at all times hereafter" with its requirements of water at fixed prices. Decades later, the other ratepayers were paying a rate that was 19 times greater than the agreed prices promised to the hospital. The supplier gave 6 months notice of termination of the contract. The Court of Appeal held that the notice effectively terminated the contract. One of the three judges seemed to state that even if the contract had been perpetual in duration, the contract should be discharged on grounds

114 JOSEPH M. PERi1~LO

of changed circumstances, although this line of reasoning had been disapproved by the House of Lords.¹³The other two judges took the path of interpreting the contract as one for indefinite duration, and therefore terminable on reasonable notice. This approach, however, cannot be taken in England when the contract has a definite period of duration that cannot be interpreted away. Belgium also adheres to the traditional doctrine; force majeure is recognized as an excuse, but unforeseen hardship is neither an excuse nor grounds for revision of the contract. Yet other doctrines have occasionally been employed to redress hardship, and force majeure has been found where performance was possible but extremely costly and strained interpretation has also been employed to redress hardship.¹⁴The Convention on the International Sale of Goods is silent on the question of hardship. Therefore, the UNIDROIT Principles can be used to supplement the Convention.¹⁵

C. _1~odern Approach to Hardship

After World War 1, the German economy was devastated by inflation of an almost incredible scale; the mark ultimately sunk to one-trillionth of its fo~er value. Although the German Civil Code explicitly granted relief for hardship only in cases of impossibility, the courts ultimately held that they could give relief for hardship as an emanation of the principle of good faith a1₃'o found in the Code. Professor Paul Oertmann developed the theory of the Wegfall der Geschaftsgi-undlage 'rIis

FORCE MAJEURE AND HARDSHIP UNDER THE UNIDROIT 115

appearance of the foundations of the contract.¹⁶Germany's high court seized upon this theory and ruled that legal tender no longer had to be accepted in payment of debts, as no debtor could in good faith make such a tender.¹⁷As the case law has evolved, the party who is unduly burdened because of changed circumstances may obtain a discharge of the contract, or the court can adapt the contract to changed circumstances if both parties want the contract to continue. The changed circumstances must be exceptional and the court must balance the interests of both parties.¹⁸Courts of other countries have followed the German lead, Switzerland,'⁹Argentina²⁰and Brazil²¹among them.

Other lands have reached the same result by legislation, Italy in 1942;22 Greece in 1946,23 more recently the Netherlands. The Netherlands Code provides as follows:²⁴

I. Upon the demand of one of the parties, the judge may modif~ the effects of a contract, or he may set it aside in whole or in part on the basis of unforeseen circumstances which are of such a nature that the contracting party, according to criteria of reasonableness and equity, may not expect that the contract be maintained in an unmodified form. The modification or the setting aside of the contract may be given retroactive force.

FORCE NIAJEURE AND HARDShIP UNDER TIlE UNIDROIT 117

that no revision of this Agreement shall prejudice the Company's ability to retain financial credibility abroad and to raise finance by borrowing internationally in a manner and on terms normal to the milling industry.

Sophisticated international trade agreements of long duration typically contain a renegotiation or other adaptation clause that provides flexibility to the relationship -so typical as to perhaps rise to the strength of a

usage. The absence of such a clause may reflect that such a clause has

been rejected by one or both parties, but is more likely to have been overlooked by unsophisticated parties or deliberately omitted by a so-

phisticated drafter. In the last two cases, the court should consider the

contracts as having an omitted term and fill the gap with the help of the UNIDROIT Principles.²⁸As Corbin wrote:²⁹

In order to prevent the disappointment of expectations that the transaction aroused in one party, as the other had reason to know, the courts find and enforce promises that were not put into words, by interpretation when they can and by implication and construction when they must. When unforeseen contingencies occur, not provided for in the contract, the courts require performance as men who deal fairly and in good faith with each other would perform without a law suit. It is thus that unanticipated risks are fairly distributed and a party is prevented from making unreasonable gains at the expense of the other. This is not making a contract for the parties; it is declaring what the legal operation of their own contract shall be, in view of the actual course of events in accordance with those business mores known as good faith and fair dealing.

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III. THE UNDERPINNINGS OF THE FORCE MAJEURE

AND HARDSHIP EXCUSES

What are the bases of the excuses for impossibility, frustration, impracticability or hardship? What are the value judgments that have guided legislators and courts in these areas? In the common-law systems, contract liability is no-fault liability, yet some leeway for an excuse has been allowed. Although in some civil law countries, fault is perceived to have a greater role in contract liability than in the common law, the discussions of these excuses do not seem affected in any important way by ideas related to fault or its absence.³⁰

One trend of thought about the foundations of these excuses stems from one of the principal underpinnings of contractual obligations. Contract liability stems from consent. If an ev&n~t occurs that is totally outside the contemplation of the parties and the event drastically shifts the nature of foreseen contractual risks, is there truly consent? Under this line of thinking, one can infer that the parties did not inten~ that performance would have to be rendered if an unexpected event would create a radical change in the nature of performance. If this inference is sound, one can conclude that the contract did not cover the unexpected event that has occurred. Under this reasoning, the court must then supply a term to cover an omitted case. Thus viewed, relief for impossibility or hardship does not interfere with freedom of contract. If this is so, the next question is how is the court to fill the gap and provide for the omitted case? A useful analogy are cases decided on the basis of mistake of fact. The distinction is that the doctrine~of mistake is applicable only if their is a mistake as to a vital existing fact, while ordinarily impossibility, frus tration and hardship relate to fliture events. In cases of mistake, ideas of unjust enrichment are heavily involved. Before applying any relief based on mistake, one must search the facts for unexpected, unbargained~for gain on the one hand and unexpected, unbargained-for loss on the other. Notions similar to that of the civil law notion of laesio enormis and

common law notions of conscionability are also involved. It is uncon

FORCE MAJEURE AND HARDShIP UNDLR THE UN!DROIT 119

scionably sharp practice to take advantage of the mistakes of fact made by the other contracting party. It may equally be deemed unconscionable to take advantage of a mistake as to the course of future events. International law has long recognized the principle of rebus sic stantib us, an implied term in every treaty that it will cease to be binding when the facts and conditions on which they were based has fundamentally changed.³²This implied term has its origins in the Roman law of contract. The full Latin text is: Contractus qui hahent tractum succesivum et dependentiam de fitturum, rebus sic stantibus intelligentur. Freely translated, the phrase is: "Contracts providing for successive of performance over a future period of time must be understood as subject to the condition that the circumstances will remain the same

Involved are cultural beliefs about unjust enrichment and unjust impoverishment. These terms engage our cultural values. What may have been deemed unjust in the middle ages, when the very morality of making a profit was questioned is viewed differently today. Such values differ not only over time, but also over space. The morality and legitimacy of profit is viewed in one light in Beijing and in another in Havana, although both profess Marxism, and perhaps less dramatically, but still differently, in London than in Rome.

All contracts involve risks. Some contracts are almost purely aleatory. If one sells shares of stock on the stock exchange that one does not have

-the so-called "short sale"- it is a contract of pure risk and I can conceive no circumstance (a~sent fraud or the like) in which a court should relieve the seller or buyer from a total loss even if unexpected

120 JOSEPH M. PERILLO

and uiiforeseeable events disrupted the market. On the other hand, in the more typical contract involving the sale of goods or services, or the rental of real estate, each party expects to gain from the colitract and each party understands that the other party also expects to gain. In such contracts, neither party expects to gain from the other's loss, although both realize that such an imbalance may occur. In the common law, several kinds of events produce an almost automatic excuse for nonperformance: death of a person who is to personally perform, supervening illegality of a performance, and the destruction of the subject matter. When one goes beyond these three categories, relief is most justified if unexpected events inflict a loss on one party and provide a windfall gain for the other or where the excuse would save one party from an unexpected loss while leaving the other party in a position no worse than it would have without the contract.³⁴

IV. THE UNIDROIT PRINCIPLES

A. Force Afajeure (Impossibility of Performance)

This paper will now proceed with a more detailed review of the relevant provisions. First, force majeure will be discussed followed by a discussion of the provisions concerning hardship.

The UNIDROIT Principles deal with force majeure in the chapter on Non-Performance. Hardship is dealt with in the chapter on Performance. The logic of this divided treati~ent is clear. If performance is impossible it will not be performed; whether the lion-performance is excused or will be the basis for a moneyjudgment~ for damages or restitution is a question dealt with under Non-Performance. If performance is burdensome, the consequences of the burden is dealt with as an aspect of performance.

The provisions on force majeure³⁵are rigid. Nothing less than total impossibility will suffice as a predicate for an excuse. There must have

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been an "impediment beyond [the party'sJ control" that "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." Let us analyze the quoted language.

'Jmpedinient beyond [the party 's] control"

Examples derived from American case law can illustrate this phrase. A receiver is appointed to seize the assets of the party, including goods that were the subject of the contract. The party will be excused only if the appointment of the receiver was wrongful and not due to the conduct of

the party who was prevented from performance: A temporary injunction,

preventing the delivery of shares of stock, is issued against the buyer based on alleged violations of the antitrust and securities laws. The buyer will be excused and will not be liable for breach if it is found that there were no

such violations, but not if there was a violation of law. In one case, apparently involving international commerce, a middleman promised delivery to the buyer of one and a half million gallons of blackstrap molasses from a specific sugar refinery. The seller failed to deliver and, in defense of a breach of contract action, argued the defense of impossibility, proving that the specified refinery did not produce a sufficient quantity to fulfill the contract. The defense was unsuccessfiil as the seller failed to show what efforts it had made to attempt to secure a contract for the production

and delivery of sufficient molasses from the operator of the refinery:

What if the impediment i~ caused by the party's financial embarrassnient? Neither Article 7.1.7 nor the commentary' to it refers to this kind of impediment. Under American law, it is quite clear that financial impediments provide no excuse; these are regarded as "subjective" rather than "objective" impossibility and there is unanimity in the case law and in doctrine that subjective impossibility provides no excuse, whether

122 JO5EP1~ M PERILLO

or not it was the result of conditions outside the control of the obligor.³⁹ It Is generally believed that the risk of financial ability to perform is such a basic assumption underlying all contracts that it cannot be excused, except by a decree in a bankruptcy proceeding. It is hard to believe that this general belief is suspended in international trade. Consequently, the phrase "beyond [the party'sJ control" should be given a broad meaning so that it will be deemed that financial health is always within a contracting party's control.

Could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract.

This phrase raises the issue of foreseeability.⁴⁰The question of foreseeability is a difficult one. Anyone who has read a bit of history or who has lived for three or more decades bf the twentieth century can foresee, in a general way, the possibility of war, revolution, embargo, plague, terrorism, hyper-inflation and economic depression, among the other horrors that have afflicted the human race. If one reads science fiction, one learns of the possibility of new terrors that have not yet afflicted us, but involve possibilities that are not pure fantasy. The case law supports the following notion of foreseeability: An event so unlikely to occur that reasonable parties see no need explicitly to allocate the risk of its occurrence, although the impact it might have would be of such magnitude that the parties would have negotiated over it, had the event

been more likely. An Italian text, summarizing some of the Italian cases

states:⁴²

As to a contract made in 1914 to last 60 years, the outbreak of a war (or better, of a certain number of w~~rs) was foreseeable and also foreseeable was the development of aerial arms and the resort to aerial bombardments [...J. As to a contract made during the second world war, the protracted duration of that war was not foreseeable, nor were the proportions of its consequences measurable.

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123

One can reflect on the soundness of such distinctions of fact made by the Italian courts. Similarly, one can reflect on the soundness of decisions of American courts to the effect that American participation in the second World War was foreseeable,⁴³despite the fact that the Japanese attack on Pearl Harbor found their armed forces totally unprepared. Yet, American merchants were supposed to foresee the onset of American participation in the war. Also, the American courts ruled consistently that the closing of the Suez Canal in 1956 was foreseeable to merchants who relied on the canal route.⁴⁴It was again foreseeable in the 1967 when the second canal closing took place.⁴⁵

It is difficult to believe that judges in reviewing the "factual" question of foreseeability can refrain from taking into account the larger consequences of a finding of foreseeability. If, in one case, American entry into the second World War had been declared to be unforeseeable, how many thousands, or tens of thousands of contracts would have to be dissolved because of impossibility or frustration? How many shipping and sales contracts would have heen thwarted by the Suez closings? How broadly would international trade be disrupted and how much uncertainty would be injected into domestic and international trade? I suggest that it is no accident -and I speak of the American and English cases only as I have not made a sufficient study of others- it is no accident that the court is more willing to find an excuse where the supervening event has drastic consequences only for one contract⁴⁶or a small number of contracts than where the supervening event affects an enormous number of transactions, "or to have avoided or overcome it or its consequences

Again, turning to American'case law, to flesh out this phrase, we find that if a party has breached by delay and an impediment arises thereafter, the impediment will not excuse the non-performance.⁴⁷Much of the discussion concerning the phrase "beyond [the party'sJ control" also applies here.

24 JOSEPH M. PERILLO

B. Temporary Force Majeure

Article 7.1.7 of the Princtples provides that '~[w]hen the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract". The doctrine of impossibility, temporary or otherwise, does not inhibit the other party's ability to cancel the contract,

it merely forgives damages. Temporary impossibility gives rise to prospective inability to perform.⁴⁹Although the obligor may be excused by temporary impossibility,⁵⁰the prospective inability will normally give the promisee a power to suspend performance and demand assurance of due performance. However, if the obligor is not able to provide assurance of due performance, the promisee may cancel the contract despite the impossibility that may provide a defet}se in an action for damages.⁵

If the promisee is not justified in cancelling the coutract or chooses not to, what rules govern the conduct of the obligor? Obviously the obligor may suspend performance. When the impossibility ceases, the obligor is usually expected to perform in full and is entitled to an appropriate extension of time for performance,⁵²but this is not a universal rule. When the delay will make performance substantially more burdensome, the rules on hardship must he consulted.⁵³If the impediment relates to the payment of money, as by governmental currency controls, interest accrues on the debt, the payment of which is impeded.⁵⁴

An illustration will serve to clarify these rules. Madame Poussard promised to sing the leading female role in a new opera being produced by B. The first performance was to take place on November 28th. On November 23rd Madame Pot?ssard became ill during a rehearsal. At this time the length of her illness was indefinite and unknown. B hired the only other available substitute performer to take Madame Poussard's place. The substitute insisted on being hired for the entire performance and was so hired. Madame Poussard was ready to perform on December

FORCE MAJEURE AND HARDShIP UNDER TilE UNIDROIT 125

4th at which time she tendered her services, which were refused. The jury found as a fact that the engagement of the substitute was reasonable.⁵⁵

It is clear that Madame Poussard's illness was a defense to any action for breach of contract that B might bring relating to the period of illness. B undoubtedly could suspend performance during the period of illness. However, B did more than suspend performance, B chose to terminate the contract. The question was whether B was justified. In doctrinal language there was a finding that there was serious prospective inability to perform which justified B's cancellation of the contract. The result, probably would be different if Madame Poussard were able on November 23 to give assurances that the illness would have lasted only two or three days.⁵⁶The rules stated here are overridden if one party has assumed the risk in question by agreement or otherwise.⁵⁷

C. Governmental Licenses wid Permits

Four Articles of the Principles and extensive commentary are devoted to the obtaining of governmental permissions; certainly an important topic in domestic trade and a more complex one in international trade. Permits may be needed from more than one State; there may be licensing requirements of which one or both parties may be unaware. The burden of applying for any necessary governmental approval is cast on the party who has its place of business in the State whose approval is required,

but only if the other party has no place of business in the State. In any other case; i.e., when neither party has, or both parties have, a place of business in the State, the party whose performance requires permission must take the necessary me~ures.⁵⁹Where both parties' performances are subject to the same approval~ requirement⁶⁰and neither or both parties have a place of business in the State, the provisions are silent on tile question of who must apply for the necessary permission.

126 JOSEPII M~ PERI1~LO

The party who has the duty to apply for the approval must exercise best efforts by applying without undue delay and, if reasonable, exercise available processes for appeal if the approval is not obtained.⁶¹ As elsewhere in these Principles, there is an emphasis on communication. Unless information regarding the need for approval is generally accessible, the existence of the need for permission must be disclosed by the party whose duty it is to obtain it.⁶²Failure to disclose is a breach of the obligation of good faith inherent in all negotiations.⁶³Similarly, if the approval is granted or denied, this party must, without undue delay, notify the other.⁶⁴Failure to notify constitutes a breach of contract.⁶⁵

What are the consequence of refusal of an approval that has been diligently sought? The text is not totally clear. One reading is that if the contract is subject to governmental approval, it is as though no contract ever came into being.⁶⁶This makes gQvernmental approval similar to the often criticized common law concept of a condition precedent to the existence of a contract.⁶⁷If, however, the lack of approval makes the contract impossible to perform, e.g., denial of a building permit, the rights of the party are governed by the rules governing contractual breaches, including the defense of force majeure.⁶⁸If only a term of the contract fails to receive approval, the contract as a whole survives if it is reasonable to excise the offending term and regard the balance of the contract as a transaction the parties would have agreed to if they knew of the

impediment.

D. Hardship

The provisions on "hardship"' contained in the chapter on Performance⁷⁰should be compared with th~provision on "Force Majeure", con-

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127

tamed in the chapter on Non-Performance.⁷¹The rule of force mateure is draconian and unforgiving. Nothing short of total impossibility will excuse non-performance or partial non-performance. Impracticability will not suffice as an excuse. Rather, impracticability as well as hardship far short of impracticability must be tested under the Hardship articles. Hardship alone never forgives non-performance. It instead compels renegotiation and authorizes courts to "adapt" (revise) the contract to take the hardship into account. Nonetheless, the Section on Hardship starts with the caption: "Contracts to be observed".⁷²Article 6.2.1 provides that "[wjhere the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to he following provisions on hardship."

Hardship. The Factual Predicate

The definition of hardship, which appears in Article 6.2.2, is complex, because it not only defines the nature of the burden, but also other factors that must coexist with the burden to make it legally relevant. As a predicate to legally relevant hardship there must have been "the occurrence of events fundamentally alter[ingj 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 [...J." When is the equilibrium of a contract fundamentally altered? "[AJn alteration amounting to 50% or more of the cost or the value of the performance is likely to involve a 'fundamental' alteration" justif~ing invocation of

the doctrine. Thus, one illustration involves a ten-year contract for the sale of uranium at fixed prices in United States dollars payable in New York. The currency in the b~'er's country declines to 1% of its value against the value that it had at t~e time of contracting. The buyer cannot

invoke force majeure. Similarly, if the price is increased tenfold because some Texans have almost cornered the market, force majeure is not present.⁷⁵Nonetheless, the buyer may have redress under the hardship provisions. As a factual matter, hardship exists if the equilibrium of the

128 JOSEPH M. PERII~LO

contract is "fundamentally altered" by events that occur or become known after contracting. As with tile case of impossibility, hardship as a fact does not automatically trigger the legal concept of hardship. In addition, it must be shown that the events could not reasonably have been taken into ac₇₆count, are hot within the party's control and the risk was not assumed. Consequently, in the two illustrations just described

a prima facie claim of hardship is made out. Another illustration of hardship-in-fact is given in the Principles. A dealer in the former German

Democratic Republic contracts to buy electronic goods from a seller in another former communist country. Prior to delivery, the German Democratic Republic is unified with the Federal Republic of Germany. There is 110 market for the kinds of electronic goods produced by the seller. Unless other factors dictate a contrary conclusion, the buyer may invoke the doctrine of hardship.⁷⁸

It has been suggested that greater hardship would be needed to trigger the hardship provisions if the obligation is an obligation to achieve a specific result than where the obligation is to exercise best efforts.⁷⁹

The events could not reasonably have been taken into account b~ the disadvantaged party at the time of the conclusion of the contract....

As is the case with allegations of force majeure, foresecability is a central concern in hardship cases. The general notion is tl)at if an event is foreseeable, the parties should deal with it in the contract, otherwise, the part~' disadvantaged by the event should bear its burden. Yet, as

stated above, almost every~hing tl'iat ever happens is in some sense foreseeable. Again, the question is whether the eveut was so outside the

FORCE MAIE~JRE AND HARDs~AIP UNDER T1~E UNIDROIT

bounds of probability that reasonable parties would not provide for it. The Principles give two illustrations of the foreseeability issue. The first involves a contract for the purchase of crude oil at a fixed price for a five year term from country X, "notwithstanding the acute political tensions in the region". Two years later, war erupts in neigh boring countries, causing a world energy crisis and oil prices rise drastically. The seller cannot invoke the doctrine of hardship, because "a rise in the price of crude

oil was not unforeseeable' . The second illustration involves a contract for sale where the price is expressed in the currency of country X. This currency was depreciating slowly prior to contracting. One month later the currency depreciated by 80% in the aftermath of a political crisis. If other circumstances do not dictate a contrary result, this constitutes legally relevant Iiardship.⁸³

"The events are beyond the control of th~ disadvantaged party [..j

The Principles give no illustration of this subdivision. I will construct a hypothetical. A middleman contracts to deliver goods in the future that lie does not have and has no contract with a supplier for the acquisition of them. He could immediately contract for the goods from a manufacturer at a price that would make the resale profitable. Instead, speculating that the manufacturer will lower its price, the middleman takes 110 action to secure the goods. Because of changing market conditions, the manufacturer raise its prices dramatically. The middleman can only fulfill its contract at a considerable loss. Hardship cannot be invoked, because the reseller could have avoided the loss by promptly entering into a contract with the manufacturer. "The risk' of the events was not assuined by the disadvantaged party"⁸⁴

The contract may expressly allocate the risk of supervening hardship, in which case the contract itself supersedes the rules of hardship in the Principles. However, it is clear from the nature of the hardship doctrine, that, unlike American law,⁸⁵the mere fact that the contract contains a fixed price does not allocate that risk. The allocation must be express, or be inherent in the nature of the contract. Thus, if the contract is aleatory, such as an contract of insurance, the obligor cannot complain that

30 JOSEPH M. PERILLO

the risk has occurred, even though the occurrence far exceeded what had been foreseen. Thus, if an insurer writes a policy covering the risks of war and civil insurrection, it must honor the policy eveii if war and civil insurrection breaks out in three countries in the same region.⁸⁶

The Principles allow the parties broad autonomy to determine the terms of their relationship. The grounds for invoking hardship may be broadened or reined in by the terms of tile contract.⁸⁷Indeed, as the chairman of the working group that drafted the Principles has noted, parties are expected to specify in more detail [...] the contingencies which justify invoking hardship and force majeure, not the least because the consequences deriving from them are fundamentally differeut".⁸⁸

E. The Effects of Hardship

If performance has become excessively onerous, the party so burdened is entitled to request negotiations to adapt tile contract to the changed circumstances. The request should be made without "undue delay ~ but a delayed request is not automatically excluded.⁹⁰The Pnnciples stress communication. Therefore, it is important that the request state the grounds for the request, unless those grounds are obvious.⁹¹If the hardship claim is justified, the other party is obligated to Ilegotiate in good faith to adapt the contract to alleviate the burden. "[A) party who negotiates or breaks off negotiations in bad faith is liable for the losses

caused to the other party". In the event the parties do not reach agreement either party may apply to the court.⁹³

FORCE NIAJEURE AND 1IARDS1IIP UNDIR ri ii UNIDROIT 131

An iniportant question is whether tile party who claims llardsllip may suspend performance until the contract is modified by agreemeilt or by the court. The black letter text states that "[t]he request for reilegotiation does iiot in itself entitle the disadvantaged party to withhold performance' ~ The commelliary is consistent with the text iii statilig that suspension of perfonuance is permissible "ouly iii extraordinary circumstailces".⁹⁵However, the illustration coilsists of aii ordiiiary kiud of hardship in a constructioli case. New safety regulations require the iiistallation of additional equipment. The illustratioii indicates that the coil-tractor may "withhold the delivery of the additioiial apparatus, for so long as the corresponding price adaptatioll is hot agreed". Assuming, absent the hardship defense, the coiltractor was obligated to install the apparatus~ the circunistances do not seem very "extraordinary".

If the court finds that legally redressable hardship exists, it call terminate the contract, or revise it to restore the equilibrium of the contract.⁹⁶The commentary indicates tilat the court has great flexibility in its power to terminate or revise. The termination may be on such terms as the court deems just it should be Iloted that in many cases, tile rehauce uterest of the party not burdened by hardship ought to be redressed. Revision need not always be a price adjustmeiit. An illustratioii suggests that the place of delivery' could be changed.⁹⁷Of course, there is a strong possibility that a court will refuse to revise tile contract by a declaration that the contract be performed as originally agreed.

F. Common Law Comparisons

Compelled renegotiation and judicial reformation of the bargain are hot in the mainstream of tile Common Law.⁹⁸Oiie case of ref-

32 JO','1;P1~ M P1RILl~O

ormation⁹⁹and one case of compelled renegotiation'⁰⁰have been the

I0I

raw materials for serious scholarly urging of more of the same. In a well-argued article Professor Speidel has concluded that when a long-term supply contract is disrupted by changed conditions, "[a]t a minimum, the advantaged party should have a legal duty to negotiate in good faith. At a maximum, lie should have a legal duty to accept an 'equitable' adjustment proposed in good faith by the disadvantaged party".'⁰²Ilis conclusion approximates the law in countries such as Argentina,¹⁰³Germany and Italy,'⁰⁴and the provisions of the Principies. Professor Spiedel's solution does not receive a great deal of support from American case law or scholarly literature.'⁰⁵One reason

FORCE NIAJEURE AND 1b\RD~iJIP v'\"I)FR Till UNIDROIT 133

for the difference between the Common Law and the modem Civil Law approach is that the leading Common Law countries have not suffered from the unmanageable inflation that has ravaged much of the Civil Law ~~orld, but American law should realize that international trade is differeni from domestic trade and the modern Civil Law solution formulated in the Principles deserves respect. It should also be noted that there is ~ trend beyond the UNIDROIT Principles to the effect that excessive ₁&dship is a ground for relief. The Commission on European Contract Law has formulated a rule that is basically the same as UNIDROIT's.¹⁰⁶ In England, perhaps the staunchest bastion of pacta sunt servanda, the Law Commission's proposed "Contract Code"¹⁰⁷contains a comparable provision.¹⁰⁸Should we doubt that these documents show the direction of the law of the next century?