The hardship approach in the UNIDROIT Principles of International Commercial Contracts and its equivalent in German Law of Obligations - A comparison

Contents

Introduction

I. The UNIDROIT Principles
A. The Hardship Approach in the UNIDROIT Principles
B. Relevance and Acceptance of Hardship in International Commercial Law

II. The Concept of Hardship in German Law: Interference with the Foundation of the Contract - Störung der Geschäftsgrundlage
A. History and Development of the Hardship Doctrine in Germany
B. The Hardship Doctrine in present German Civil Law - the BGB after the Reformation of the Law of Obligations in 2002

III. Conclusion

Appendix - provision on hardship in the German Civil Code

Bibliography

Basedow, J., “Uniform Law Conventions and the UNIDROIT Principles of International Commercial Contracts” 1 Uniform Law Review (2000) 129.

Boele- Woelki, K., “ Principles and Private International Law - The UNIDROIT Principles Of International Commercial Contracts And The Principles Of European Contract Law: How To Apply Them To International Contracts” 4 Uniform Law Review (1996) 652.

Bortolotti, F., “The UNIDROIT Principles and the arbitral tribunals” 1 Uniform Law Review (2000) 141.

Brox, H. and Walker, W.D. Allgemeines Schuldrecht (28th ed. 2002, C.H. Beck).

Dawson, J.P., “Effects of Inflation on Private Contracts: Germany 1914- 1924” 33 Michigan Law Review (1934) 171.

Doudko, A.G., “Hardship in Contract: The UNIDROIT Principles Approach and Legal Developments in Russia” 3 Uniform Law Review (2000) 483.

Horn, N., “Changes in Circumstances and Revision of Contracts in some European Laws and in International Law” in Horn, N. (ed.) Adaptation and Renegotiation of Contracts in International Trade and Finance (1st ed. 1985, Kluwer Law International) 15.

Letterman, G.G. Unidroit’s Rule in Practice: Standard International Contracts and Applicable Rules (1st ed. 2001, Kluwer Law International).

Maskow, D., “Hardship and Force Majeure” 40 American Journal of Comparative Law (1992) 657.

Palandt, Kommentar zum Bürgerlichen Gesetzbuch (60th ed. 2001, C.H.Beck).

UNIDROIT International Institute for the Unification of Private Law, Principles of International Commercial Contracts, Rome, 1994.

Veytia, H., “The Requirement of Justice and Equity in Contracts” 69 Tulane Law Review (1994- 1995) 1191.

Zweigert, K. and Kötz, H. An Introduction to Comparative Law (3rd ed. 1998, Oxford University Press).

Statutes

Note: a collection of translations of German Acts and Statutes in English is available at the Website of the German Law Archive under >http://www.iuscomp.org/gla/index.html<.

Bürgerliches Gesetzbuch (BGB) - the German Civil Code as amended.

For the relevant provision on hardship in the German Civil Code see appendix.

Government Reports

Bundestags- Drucksache 14/6040 (publication of the Federal German Parliament in its 14th legislative period) >http://dip.bundestag.de/parfors/parfors.htm<.

Table of Cases

Decisions of the Reichsgericht RGZ 50, 257.

RGZ 103, 328.

Decisions of the Bundesgerichtshof BGHZ 25, 390.

BGHZ 89, 226.

Other

ICC Award No. 8873 of 1997, 4 Uniform Law Review (1999) 1010.

United States District Court, S.D. California, 7 December 1998, The Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v. Cubic Defence Systems Inc., 3 Uniform Law Review (1999) 799.

Introduction

The UNIDROIT Principles of International Commercial Contracts¹ have been published in May 1994 by the Rome- based International Institute for the Unification of Private Law (UNIDROIT), an intergovernmental organisation established in 1926. The Working Group on the UNIDROIT Principles was found in 1980 and consisted of independent legal scholars of all major legal sys- tems of the world. The UNIDROIT Principles are not binding law. Most legal writers agree that they can be characterised as a restatement of the law of international commercial contracts² and despite the controversial issue about the very existence, scope and content of a lex mercatoria - the possibility of applying supranational law to international legal relationships- most authors agree that it exists and that the UNIDROIT Principles are a significant part of it³.

The object of this paper is to examine the UNIDROIT Principles’ approach to hardship laid down in Chapter 6, Section 2 and to compare it with its equivalent provision in the German Civil Code ( Bürgerliches Gesetzbuch, hereinafter BGB), - 313⁴. For this purpose it is firstly necessary to define the term “hardship”. Thereafter I will consider the respective provisions in detail and highlight differences and similarities.

I. The UNIDROIT Principles

A. The Hardship Approach in the UNIDROIT Principles

The provisions on hardship in the UNIDROIT Principles can be found in Articles 6.2.1 to 6.2.3. From a systematic point of view the provisions about hardship are situated in Chapter 6 with the heading “Performance” which indicates that hardship is related to the fulfilment of the con- tract.⁵

The section of hardship starts with Article 6.2.1 stressing that a party for whom perform- ance becomes more onerous is nevertheless bound to perform his obligations. The binding char- acter of the contract as the general rule is similarly mentioned in Article 1.3 and shows that the UNIDROIT Principles adopted the juridical principle pacta sunt servanda as an indispensable basis of their concern⁶. But as comment No.2 of Article 6.2.1 states, the principle of sanctity of contract is not however considered to be an absolute one. It is accompanied by the counter- principle known as rebus sic santibus which comes into action when supervening circumstances create an exceptional situation so as to destroy the basic assumption which the parties had made when they entered into the contract, in other words when a “hardship” situation - as defined by Article 6.2.2- occurs.

The term “hardship” itself is defined in Article 6.2.2 of the UNIDROIT Principles basi- cally as a situation where the occurrence of events - as specified in lit. (a) to (d)- fundamentally alters the equilibrium of the contract, either because the cost of a party’s performance has sub- stantial increased or because the value of the performance a party receives has substantial di- minished.

The crucial point is clearly the definition of “fundamental” change which will strongly depend upon the circumstances of each individual case⁷. But the Principles give some guideline to fill the term “fundamental”: if the performance is measurable in monetary terms, a disruption of balance amounting to more than 50% of the cost or value of the performance may likely be regarded as a fundamental alteration.⁸ This means that the UNIDROIT Principles have taken an objective approach as a general rule and hardship exists if these objective criteria are met and it is not necessary that the parties themselves in a subjective manner have made the maintenance of certain conditions a basis of their relationship.

But according to Article 6.2.2 lit. (a) to (d), a hardship case can only occur, if four additional criteria are fulfilled: the respective events occurred or became known to the disadvantaged party after the conclusion of the contract; the events could not have been taken into account by that party at that time; the respective events were beyond the control of that party and lastly that the risk of the event was not assumed by the disadvantaged party.

From these preconditions, the foreseeability criteria of Article 6.2.2 lit. (b) is extremely difficult to determinate and contains therefore a certain amount of uncertainty. The foreseeability test puts very little light on the parties’ ability to control risks. In other words, all events are fore- seeable in one way or another, because business people nowadays usually have access to suffi- cient information to make reasonable predictions. But on the other hand, they are in no position to discern all circumstances that might eventually become relevant and measure their influence on the contractual relationship respectively. It is therefore suggested that the foreseeability test is confined to cases of negligence, where a party fails to exercise a reasonable degree of care and prudence where a change in circumstances is evident. This leads to the conclusion that attention should not be paid to the unclear foreseeability test but to more transparent criteria such as risk allocation.⁹

Compared to the foreseeability test, the provision on risk allocation in Article 6.2.2 lit. (d) is considered to contain a greater degree of precision to determinate the real, rather than purely hypothetical, intentions of the parties. It excludes cases in which the disadvantaged party has as- sumed the risk relating to those events which have caused the hardship situation. The risk need not have been taken over expressly but may also derive from the nature of the contract or be oth- erwise implied. If the parties have a certain adaptation clause, for example an indexation clause for the prices, it may be concluded that other price increases which are not covered by that clause must be borne by the disadvantaged party.¹⁰ In the case of speculative transactions, the Principles state that the parties are always deemed to have accepted a certain degree of risk even though they may not have been fully aware of that risk at the time they entered into the contract.¹¹

According to Article 6.2.3 (1), in the case of hardship the disadvantaged party is entitled to request renegotiations in order to adapt the terms of the contract to the new situation. The ex- istence of a hardship situation itself does not automatically lead to adaptation or termination of the contract; it merely gives one party the right to request renegotiations. These must be carried out in good faith and co- operation by either party according to Articles 1.7 and 5.3 UNIDROIT Principles. If the renegotiations are unsuccessful and no agreement is reached, Article 6.2.3 (3) authorises either party to resort to court. According to Article 6.2.3 (4), a court which finds that a hardship situation exists may either terminate the contact at a date and on terms to be fixed (lit.

a), or adapt the contract with a view to restoring its equilibrium (lit. b). The effects of hardship in the UNIDROIT Principles are therefore described as both procedural and substantive.¹² The pro- cedure starts with renegotiations and may lead to a court decision. The substantive effect is par- tially questioned since the power to terminate or adapt the contract given to the court includes to a certain degree the impositions of conditions on the parties.¹³ But the party autonomy is not derogated by giving the court this kind of power. Certain substantive rules such as Article 6.2.3 (4) and the respective comment No.7 secure this constructive legal decision- making which is also practised in some other cases where it is less obvious (Price determination, Article 5.7 (3), comment No.3). The contract may only be terminated if this is reasonable. Otherwise the court must adapt the contract whereby the adaptation is subject to three yardsticks: reasonableness, eq- uitable distribution of unexpected losses and maintenance of the contractual equilibrium.

B. Relevance and Acceptance of Hardship in International Commercial Law

One of the most controversial issues is whether the principle of hardship set out in the UNIDROIT Principles is recognised as a principle which governs international commercial contracts. Bortolotti¹⁴ criticised the Principles’ approach as too protective in favour of the weaker disadvantaged party. Their solution seems much wider than most existing domestic laws and the concern to protect the weaker party is not at all recognised in international trade.¹⁵ Fur- thermore, the concept of hardship is accepted only reluctantly by international arbitrators. In one ICC award the tribunal rejected the application of the doctrine of hardship, stating that these at present did not correspond to international trade practices.¹⁶ However this view does not seem to be justified any longer.

[...]

¹ UNIDROIT International Institute for the Unification of Private Law, Principles of International Commercial Contracts, Rome, 1994; hereinafter UNIDROIT Principles.

² cf. Bortolotti, F., “The UNIDROIT Principles and the arbitral tribunals” 1 Uniform Law Review (2000) 141 at p.142.

³ Boele- Woelki, K., “Principles and Private International Law - The UNIDROIT Principles Of International Com- mercial Contracts And The Principles Of European Contract Law: How To Apply Them To International Contracts”

4 Uniform Law Review (1996) 652 at p. 659; Letterman, G.G. Unidroit’s Rule in Practice: Standard International Contracts and Applicable Rules (1st ed. 2001, Kluwer Law International) at p. 68 et seq.

⁴ The scope of - 314 BGB (Termination, for good cause, of contracts for the performance of a recurring obligation) will remain out of consideration in this paper as well as special issues about hardship in long- term contracts.

⁵ Attention should be drawn to the proper differentiation of the principles of hardship and force majeure, the latter laid down in Article 7.1.7 of the UNIDROIT Principles. There are cases imaginable where both principles can coin- cide (cf. UNIDROIT Principles, Article 6.2.2, comment No.6.) and the requirements of both are similar. The tradi- tional approach to describe hardship is, that hardship occurs where the performance of the disadvantaged party has become much more burdensome but not impossible, while force majeure means that the performance of the party concerned has become impossible, at least temporarily, cf. Maskow, D., “Hardship and Force Majeure” 40 Ameri- can Journal of Comparative Law (1992) 657 at p.663. In this context hardship is more related to the fulfilment of the contract: the aim of the parties remains to implement the contract; and force majeure is linked rather to the question of responsibility. The UNIDROIT Principles are using the same approach to distinguish both concepts. This conclu- sion can already be drawn from the systematic alignment of the respective provisions on hardship and force majeure in the UNIDROIT Principles: the hardship provisions can be found in chapter 6 with the heading “performance” and the force majeure rule is aligned in chapter 7 under the title “non- performance”.

⁶ UNIDROIT Principles, Article 6.2.1, comment No.1; Doudko, A.G., “Hardship in Contract: The UNIDROIT Principles Approach and Legal Developments in Russia” 3 Uniform Law Review (2000) 483 at p. 494.

⁷ UNIDROIT Principles, Article 6.2.2, comment No.2.

⁸ UNIDROIT Principles supra note 5.

⁹ Doudko, A.G. supra note 4 at p. 498 et seq.

¹⁰ Maskow, D., “Hardship and Force Majeure” 40 American Journal of Comparative Law (1992) 657 at p. 663.

¹¹ UNIDROIT Principles, Article 6.2.2, comment No.3.lit.d.

¹² Veytia, H., “The Requirement of Justice and Equity in Contracts” 69 Tulane Law Review (1994- 1995) 1191 at p. 1205.

¹³ Veytia, H. supra note 12 at p.1206.

¹⁴ Bortolotti, F. supra note 2 at p. 144.

¹⁵ Bortolotti, F. supra note 2 at p. 150.

¹⁶ ICC Award No. 8873 of 1997, 4 Uniform Law Review (1999) 1010.