International commercial contracts and the “hardship clause” during Coronavirus

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International commercial contracts and the “hardship clause” during Coronavirus

International commercial contracts and the “hardship clause” during Coronavirus

The Coronavirus pandemic has led to a considerable global commercial crisis, with the consequence that most of the international agreements concluded before the spread of the virus have not been respected by one or both parties, due to the occurrence of extraordinary elements (e.g.: the blocking of borders or the closure of activities imposed by government measures) which prevented the fulfillment of the contractual performance or made it too expensive (and therefore not convenient to fulfill), compared to the original agreement.

Many companies that have to face this situation, do not know how to “save” the original agreement and respect the promised performance – or obtain respect for the performance by the counterparty.

The risk for the company, in these cases, is to suffer economic damage both directly (from failure to comply with the agreement), and indirect (repercussions for the entire production or commercial activity).

Are there any solutions to remedy this extraordinary event?

Usually the parties, foreseeing the occurrence of future and uncertain circumstances that may affect the balance of contractual services, insert “hardship” clauses in the contract.

The main feature of these clauses is to express the willingness of the parties to assume the mutual obligation to renegotiate the original terms of the agreement, in the event that a significant change in the balance of the contract occurs.

What is the purpose of the hardship clauses?

By inserting this condition, the parties undertake to carry out a revision of the agreement – independently or by referring to the determination of a third party -, adapting the latter to the circumstances that have occurred, with the aim of rebalancing the original economic relationships and ensuring the continuation of the legal relationship.

The companies, in fact, avoid resorting to the remedy of the termination of the contract, as it is considered counterproductive from an economic-financial point of view.

In fact, they usually do not simply carry out a single sale of certain goods or services with each other, but increasingly aim to create a profitable and lasting business network.

Is there a standard type of hardship clause?

There is no standard type of hardship clause, as the wording differs significantly in each agreement, in order to better adapt to the needs of the individual business sectors.

However, the models most frequently used in practice are those provided for in the Unidroit Principles relating to international commercial contracts and that developed by the International Chamber of Commerce (ICC), the subject of a recent modification.

If the parties have not included a hardship clause in the contract, is it possible to save the commercial agreement?

If the parties have provided for other ways of continuing the relationship in the contract, this will continue on the basis of these provisions.

In the absence of these, reference should be made to the rules provided for by the law of the country chosen to regulate the terms of the agreement or to international agreements, when applicable.

If the contract is governed by Italian law, the excessive onerous burden of the performance for extraordinary and unforeseeable events can determine the termination of the contract.

IN SUMMARY

The Coronavirus pandemic led to a global commercial crisis, with the consequence that the occurrence of extraordinary elements (e.g. the blocking of borders or the closure of activities imposed by state measures) prevented or rendered the expected services too burdensome in international agreements concluded before the spread of the virus.

Usually the parties, in anticipation of the occurrence of future and uncertain circumstances that may affect the balance of the contractual services, insert “hardship” clauses into the contract, the main characteristic of which is to express the willingness of the parties to assume the obligation mutual to renegotiate the original terms of the agreement, adapting the latter to the circumstances that occurred, with the aim of rebalancing the original economic relationships and ensuring the continuation of the legal relationship.

If the parties have provided for other ways of continuing the relationship in the contract, this will continue on the basis of the contractual provisions. In the absence of these, reference should be made to the rules provided for by the law of the country chosen to regulate the terms of the agreement or to international agreements, when applicable.