Best international practices – the ICC model contracts and changing circumstances

2 OPPOSITE CONTRACT LAW APPROACHES PACTA SUNT SERVANDA (“AGREEMENTS MUST BE KEPT” OR “CONTRACT TO BE OBSERVED”)   REBUS SIC STANTIBUS (“THINGS THUS STANDING” BUILDS ON THE IDEA OF CIRCUMSTANCES AT THE TIME OF CONTRACTING) CONTRACT LAW GENERALLY BUILDS ON PACTA SUNT SERVANDA BUT REBUS SIC STANTIBUS HAS GAINED GROUND IN EXCEPTIONALLY TURBULENT TIMES SUCH AS WARS

3 FORCE MAJEURE AND HARDSHIP SITUATIONS FORCE MAJEURE PERFORMANCE IMPOSSIBLE OR CLOSE TO IMPOSSIBLE BORDELINE CASE: ECONOMIC FORCE MAJEURE PERFORMANCE OF ANY CONTRACT MAY BE IMPEDED DUE TO CIRCUMSTANCES BEYOND CONTROL NOTICE, RELIEF FROM LIABILITY TERMINATION? HARDSHIP PERFORMANCE EXCESSIVELY ONEROUS LONG-TERM CONTRACTS ESPECIALLY VULNERABLE TO CHANGE OF CIRCUSTANCES NEGOTIATIONS TERMINATION? ADAPTATION OF TERMS BY COURT?

4 CHANGE OF CIRCUSTANCES IN LAW WHEREAS FORCE MAJEURE IS RECOGNIZED (ALBEIT DIFFERENTLY) IN MOST NATIONAL CONTRACT LAWS AS WELL AS IN THE CISG, FEW NATIONAL LAWS RECOGNIZE THE POSSIBILITY TO TAKE INTO ACCOUNT CHANGING CIRCUMSTANCES AFTER THE CONTRACT IS CONCLUDED AND THE CRITERIA AND THEIR IMPACT MAY VARY FROM COUNTRY TO COUNTRY  THE MATTER HAS TO BE REGULATED IN THE CONTRACT TO GAIN THE DESIRED EFFECTS

5 REGULATION OF HARDSHIP IN CONTRACTS INCORPORATE CONTRACT LAW PRINCIPLES SUCH AS THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS INTO THE CONTRACT AS THE RULES OF LAW TO BE APPLIED OR INCORPORATE THE ICC HARDSHIP CLAUSE AND/OR SPECIFIC CLAUSES SUCH AS A COST ESCALATION CLAUSE INTO THE CONTRACT

6 HARDSHIP AND CONTRACT LAW PRINCIPLES UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS (1994 AND 2004) PRINCIPLES OF EUROPEAN CONTRACT LAW (1995, 1999 AND 2003) EUROPEAN DRAFT COMMON FRAME OF REFERENCE (2008) REFERENCE TO THE CISG DOES NOT ENTAIL INCORPORATION OF HARDSHIP ALTHOUGH ECONOMIC FORCE MAJEURE COULD BE RECOGNIZED ACCORDING TO SOME COMMENTATORS UNDER ART 79; BUT WHERE THE CISG IS APPLIED WITH THE UNIDROIT PRINCIPLES, EXPRESSLY OR IMPLIEDLY, HARDSHIP COULD COME IN

7 ARTICLE UNIDROIT PRINCIPLES (Contract to be observed) Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.

8 ARTICLE UNIDROIT PRINCIPLES (Definition of hardship) 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 the events was not assumed by the disadvantaged party.

9 ARTICLE UNIDROIT PRINCIPLES (Effects of hardship) (1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based. (2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance. (3) Upon failure to reach agreement within a reasonable time either party may resort to the court. (4) If the court finds hardship it may, if reasonable, a) terminate the contract at a date and on terms to be fixed, or b) adapt the contract with a view to restoring its equilibrium.

10 ICC HARDSHIP CLAUSE 2003 ICC FORCE MAJEURE CLAUSE 2003 – ICC HARDSHIP CLAUSE 2003  ONE ICC PUBLICATION, TWO SEPARATE CLAUSES  INTEGRATE INDIVIDUALLY IN THE PREVIOUS PUBLICATION OF 1985, THERE WAS NO STANDARD HARDSHIP CLAUSE BUT FOUR DRAFTING OPTIONS INCLUDING A REFERENCE TO A CONTRACT COMMITTEE; THE CONCEPT ´HARDSHIP´ WAS RELATIVELY NEW IN 1985 BACKGROUND OF THE 2003 HARDSHIP CLAUSE: ARTICLE 1467 OF THE ITALIAN CIVIL CODE ARTICLE UNIDROIT PRINCIPLES

11 ICC HARDSHIP CLAUSE 2003 PARAGRAPH 1: CONTRACTUAL DUTIES MUST BE PERFORMED, EVEN IF MORE ONEROUS THAN ANTICIPATED AT THE TIME OF THE CONCLUSION OF THE CONTRACT PARAGRAPH 2 (a): RELIEF FROM PERFORMANCE IF PERFORMANCE EXCESSIVELY ONEROUS

12 ICC HARDSHIP CLAUSE 2003 DUTY TO NEGOTIATE PARAGRAPH 2: ”…the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms which reasonably allow for the consequences of the event.” PARAGRAPH 3: ”…where alternative contractual terms which reasonably allow for the consequences of the event are not agreed by the other party to the contract…, the party invoking this clause is entitled to termination of the contract.”

13 THE ICC HARDSHIP CLAUSE 2003 THE CLAUSE DOES NOT CONTAIN A SPECIAL REFERENCE TO COURT IN CASE THE ALTERNATIVE CONTRACTUAL TERMS ARE NOT AGREED UPON  THE PARTIES CAN USE THE GENERAL DISPUTE RESOLUTION MECHANISM APPLICABLE TO THE CONTRACT  FAILURE TO PROPOSE OR ACCEPT ALTERNATIVE CONTRACTUAL TERMS MAY AMOUNT TO BREACH OF CONTRACT (E.G. BREACH OF DUTY OF GOOD FAITH AND FAIR DEALING)  THE CLAUSE DOES NOT AS SUCH AUTHORISE THE RELEVANT COURT OR ARBITRAL TRIBUNAL TO ADAPT THE CONTRACT

14 THE ICC HARDSHIP CLAUSE 2003 THE WORDING IS MORE RESTRICTED THAN IN THE UNIDROIT PRINCIPLES: THE PHRASE “…BECAUSE THE VALUE OF THE PERFORMANCE A PARTY RECEIVES HAS DIMINISHED” IS MISSING  DOES THE CLAUSE PROVIDE RELIEF MAINLY FOR THE PARTY RESPONSIBLE FOR SPECIFIC PERFORMANCE?  IS THERE A NEED FOR SPECIAL CLAUSES (SUCH AS A CURRENCY CLAUSE) TO PROTECT THE PARTY OBTAINING PERFORMANCE SUCH AS THE BUYER?

15 HARDSHIP AND ICC MODEL CONTRACTS THE ICC MODEL FORCE MAJEURE CLAUSE 2003 AND FORCE MAJEURE CLAUSES IN INDIVIDUAL MODEL CONTRACTS, WHERE DIFFERENT, ARE NOT WRITTEN WITH ECONOMIC FORCE MAJEURE IN MIND AND FOCUS ON PHYSICAL IMPEDIMENTS  HARDSHIP RULES FOLLOW FROM EXPRESS INCORPORATION OF THE ICC MODEL HARDSHIP CLAUSE OR THROUGH SELECTION OF THE RULES OF LAW APPLICABLE  IN MANY CASES IT IS NECESSARY TO CONSIDER AN EXPRESS EXCLUSION OF HARDSHIP

16 HARDSHIP AND ICC MODEL CONTRACTS NO UNIFORM APPROACH IN ICC MODEL CONTRACTS AS TO 1) HARDSHIP 2) RULES OF LAW APPLICABLE  THE DIFFERENT APPROACHES ARE BASED ON THE DRAFTING HISTORY AND PRIORITIES OF DRAFTERS OF EACH MODEL  NO PARTICULAR ATTENTION IS NECESSARILY PAID TO THE ISSUE IN MODEL CONTRACTS USED FOR CONTRACTS OF LONGER DURATION OR MAJOR PROJECTS ESPECIALLY VULNERABLE

17 HARDSHIP AND ICC MODEL CONTRACTS THE ICC MODEL TECHNOLOGY TRANSFER CONTRACT INCORPORATES EXPRESSLY THE ICC HARDSHIP CLAUSE AND REFERS TO THE UNIDROIT PRINCIPLES  THE CLAUSE PREVAILS THE ICC MODEL INTERNATIONAL FRANCHISING CONTRACT REFERS TO “RULES AND PRINCIPLES GENERALLY RECOGNIZED IN INTERNATIONAL TRADE INCLUDING THE UNIDROIT PRINCIPLES” WITHOUT POINTING OUT HARDSHIP AS AN EXCLUSION THE ICC MODEL CONTRACT FOR THE TURNKEY SUPPLY OF AN INDUSTRIAL PLANT REFERS TO PRINCIPLES OF LAW GENERALLY RECOGNISED, THE CISG, USAGES AND THE UNIDROIT PRINCIPLES WITH THE EXCLUSION OF CLAUSES THE ICC MAJOR TURNKEY CONTRACT PRESUPPOSES SELECTION OF A NATIONAL LAW AND IS SILENT ON HARDSHIP

18 THANK YOU VERY MUCH! Lauri Railas, Attorney-at-Law, LL.D. Krogerus Attorneys Ltd. Jaakonkatu 3A, P.O.Box 533, FI Helsinki Tel +358 (0) Fax +358 (0)