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Important Principles in Contract Interpretation


A contract is the ultimate culmination of the consensus ad idem of the parties over a particular objective. However, contractual gaps[1] arise due to incorrect declaration of intention of the parties to the contract. In this regard, the common law provides a solution in the form of rectification of the contract, which however is a mere process of construction of the document.[2] The courts or arbitrators necessarily do not interfere with the pre-determined contractual obligations based on the principle of pact sunt servanda; but on the grounds of statutory0mandate to protect0the interest of the0weaker0parties[3], the former will interfere to rectify any contractual gaps. In doing so the court relies on the principle of good faith and the principle of contractual solidarity.[4]

One of the major problems faced by international trade is the unexpected changes in the circumstances in the performance of the contract.[5] The change in circumstances in contractual performance is dealt by two prominent common law doctrines – frustration of purpose or force majeure and commercial impracticability. The doctrines follow a concurrent principle of impossibilium nulla est obligation, which ultimately leads to termination of the contract – a consequence not desirable by the parties; especially in long-term contracts. Remedy in this regard would be adaptation or revision of the contract, possibly rebalancing the contract. This paper aims at addressing the arbitrator’s power to adapt the contract as against the principle of intangibility of contract that governs international contract law. The lack of uniformity in the legal provisions governing adaptation in international law and a need for reconsidering inclusion of provision for filling of gaps in contract will be answered in this paper.

A.   Principle of “Pacta Sunt Servanda”, Doctrine of Frustration and Hardship

The basic and universally accepted principle of contract law is the justification that the promises made by the parties are binding[6] and the philosophical and moral satisfaction[7] of the same is echoed in the principle pacta sunt servanda[8] or sanctity of contract. As early as 1919, the King’s Bench in the case of Balfour v. Balfour[9] observed that the agreements concluded between the parties will have the effect of force of law and the parties bound by the agreements are obligated to perform the agreed promise. The honouring of the principle pacta sunt servanda has obtained international recognition and it dictates the performance of the contractual obligations in the form of contract interpretation.[10] It empowers the courts or arbitrators to force performance of the contractual obligations. Hence, once the parties have entered into a contract by virtue of consensus ad idem the parties are bound to perform their obligation promised to be undertaken in the contract.

The susceptibility of the contract is based on ‘time’, which is influenced by factors not within the control of the parties to the contract.[11] Thus, unexpected circumstances in case of contract between international parties for international trade due to unforeseen events can lead to non-execution of the contract, in exceptional circumstances even terminate the contract, this is a burdensome issue especially in cases of long-term contract or contracts involving complex parties,[12] and the arbitrators as the adjudicators of the international trade disputes must handle them with preciseness.[13] The parties cannot take into account the unforeseen circumstances, which may arise due to various factors, such as, changes in policies of the Government, natural disasters, unrest due to socio political differences between various factions of the Government and so forth; while entering into the contract. For instance, the recent heightened escalation of tensions between United States and Iran has resulted in affecting numerous contracts entered between the commercial parties with respect to crude oil and other raw materials. In this regard, the predicted natural flow of goods as predetermined by the parties in the contract is disrupted by virtue of unforeseen circumstances, consequently, it imposes unwarranted burden, especially financial burden, on one of the parties to the contract in its performance.[14] Accordingly, any variation in the obligations undertaken by the parties under the contract can be performed via legal means which tantamount to respecting the principle pacta sunt servanda.[15]

On the contrary, the sacrosanct principle of pacta sunt servanda or the doctrine of absolute contracts[16], and its underlying obligation to perform the contract, is validly exempted under a classic Roman Law principle, the principle of impossibilium nulla est obligation[17]and the doctrine of rebus sic stantibus[18]. The principle of impossibilium nulla est obligation exempts the parties from performing things that are impossible to perform. In the modern context this doctrine is incorporated into the contract law under the head doctrine of frustration. According to the doctrine of frustration a party to the contract may be discharged from performance of its obligation under the contract if something occurs that renders the performance of the contract impossible commercially.[19]  This doctrine was recognised as early as in 1863 in the decision of the Court of Queen’s Bench in Taylor v. Caldwell[20]overruling the rule of “absolute contracts” laid down in Paradine v. Fane.[21] In this regard, numerous legal systems have adopted laws and thereby recognized impossibility as a ground for exemption of contractual performance, for instance, Art. 1256 Codice Civile of Italy, Art.1218 of Code Civil of France and § 275 of Bürgerliches Gesetzbuch of Germany.[22] On the other hand, the rule of rebus sic stantibus stipulates that if upon change of circumstances, which could not have been foreseen by the parties at the time of conclusion of the contract, renders the compliance (pacta sunt servanda) with the contract significantly burdensome[23] on the party, the performance can be exempted.[24]

Impossibility (force majeure) and hardship, the two most common grounds for exemption of performance of the contract[25] are significantly diverse. Situation of hardship arises when a simple change in economic conditions in the factors governing the contract causes loss of equilibrium amongst the parties to the contract. Force majeure, on the other hand, is a concept of civil law and is comparable, but not same as the common law doctrines of frustration of contract and impracticability.[26] While, under the civil law, in case of hardship, for instance as found in Art. 1195 of the French Civil Code, 2016, grants the parties a right to adapt the contract to the changed circumstances[27], English law rejects the idea of modification of the contract to the changed circumstances,[28] except in case of frustration of contract.[29]

In the context of international law with regards to change in circumstances leading to force majeure, the Unidroit Principles on International Commercial Contracts of 2016 in the chapter on Non-Performance deals with the ‘force majeure’,[30] consequence of which is non-performance.[31] On the other hand, chapter on Performance deals with the provisions on ‘hardship’,[32] which requires initiation of renegotiation by the parties and upon failure of such renegotiation, the courts or the (arbitral tribunal)[33] are allowed to adapt the contract. The Unidroit Principles provides a straitjacket common conceptual legal framework on issues over which the common and civil law have different outline.[34] According to Art. 6.2.2 of the Unidroit Principles, hardship is defined in the context of burden with other factors that make the burden legally relevant.[35] Hardship is defined as follows as per Art. 6.2.2 of Unidroit Principles:

“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.”[36] 

While Art. 79 of the United Nations Convention on Contracts for the International Sale of Goods is considered by few authors to include the situation of hardship, few other seminal scholars[37] fear the recognition of hardship within the scope of Art. 79.[38] In this regard, hardship considerations under Art. 79 of CISG will not be discussed in the following work of dissertation. On the other hand, the Principles of European Contract Law (hereinafter “PECL”) refers to the concept of changed circumstances under Art. 6:111. The PECL is an essential step in the conception of a European Civil Code as devised by the European Parliament[39] and it stipulates as under:

Article 6:111: Change of Circumstances

(1) A party is bound to fulfil its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished.

(2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or ending it, provided that:

(a) the change of circumstances occurred after the time of conclusion of the contract,

(b) the possibility of a change of circumstances was not one which could reasonably have been taken into account at the time of conclusion of the contract, and

(c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear.

(3) If the parties fail to reach agreement within a reasonable period, the court may:

(a) end the contract at a date and on terms to be determined by the court; or

(b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances.

In either case, the court may award damages for the loss suffered through a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing.”[40]

In this regard the international framework on contract law provides solution with regard to change in circumstances. The general rule in the context of international trade contracts governed by the Unidroit Principles or PECL in the event of changed circumstances is the adaptation of the contract.[41] In order for the arbitral tribunal to undo the imbalance in the equilibrium of the parties caused by change in circumstance unforeseen by the parties, it is contingent upon the principle of intangibility of contract.[42] According to which there must be a clause in the contract which grants the power to revise the contract. However, the contractual adaptation by the arbitrators is an exception to the general rule contained in the above-mentioned principle,[43] which brings the work of dissertation to the next important principle of party autonomy.



[1] George Verveniotis, Arbitrators and Contractual Gaps, Journal of Int’l Arb, 5 (1988).

[2] Holdings & Barnes plc v. Hill House Hammond [2001] E. W. C. A. Civ. 1334 at [47] (United Kingdom).

[3] Jeffrey Waincymer, Procedure and Evidence in International Arbitration 13.15 (2012).

[4] I. Gânfălean, I. N. Gheberta, A Brief Overview of the Effects of Contractual Imprevision, Int’l J. J. S. 63-70 (2014).

[5] Ingeborg Schwenzer & Edgardo Munoz, Duty to Renegotiate and Contract Adaptation in case of Hardship, Unif. L. Rev., 24 (2019).

[6] Dietrich Maskow, Hardship and Force Majeure, 40 Am. J. Comp. L. 657, 658 (1992).

[7] Rene David, Les contrats en droit anglais para. 101 (2nd Ed., 1985).

[8] This principle is echoed in multiple legal systems in the form of statutory necessity, Art. 1103 of the French Civil Code, 2016 (Legally formed contracts take the place of law for those who made them); and in the international context Art. 6.2.1 of the UNDORIT Principles of International Commercial Contracts, 2016 and Art. 6:111(1) of Principles of European Contract Law.

[9] Balfour v. Balfour, [1919] 2 K. B. 571 (United Kingdom).

[10] Charles T. Kotuby, Jr., Luke A. Sobota, General Principles of Law and International Due Process: Principles and Norms Applicable in Transnational Disputes 89 (2017).

[11] Klaus Peter Berger, Power of Arbitrators to Fill Gaps and Revise Contracts to Make Sense, 1 Arb. Int’l 17, 2 (2001).

[12] Ingeborg Schwenzer & Edgardo Munoz, Duty to Renegotiate and Contract Adaptation in case of Hardship, 24 Unif. L. Rev., 149-174, 149 (2019).

[13] Bernini, in New Trends in the Development of International Commercial Arbitration and the Rule of Arbitral and other Institutions (ed. Sander), (ICCA Congress ser. No. 1, 1983) at p. 193; and also see Berger, supra note 11, 2.

[14] Id.

[15] Norbert Horn, Adaptation and Modification of Contracts in View of a Change of Circumstances, 11 Tel Aviv U. Stud. L. 137, 150 (1992).

[16] Paradine v. Fane, (1647) Aleyn 26 (United Kingdom).

[17] James Gordley, Impossibility and Changed and Unforeseen Circumstances, The Am. J. of Com. L., 52/3 (2004), 513–30 at 514.

[18] Schwenzer, supra note 7, 150.

[19] Chitty on Contracts, General Principles, Vol. 1 1635 (H. G. Beale, 31st ed., 2012).

[20] Taylor v. Caldwell, (1863) 3 B. & S. 826 (United Kingdom).

[21] Paradine, supre note 11.

[22] Schwenzer, supra note 7, 150.

[23] Konrad Zweigert and Hein Ko¨tz, Introduction to Comparative Law (3rd ed., 1998).

[24] Id.

[25] Yohannes Hailu Tessema, Force Majeure and the Doctrine of Frustration under the UNIDOROIT Principle, CISG, PECL and the Ethiopian Law of Sales: Comparative Analysis, 58 J.L. Pol'y & Globalization 33 (2017).

[26] Id.

[27]François Chénedé, Le nouveau droit des obligations et des contrats : Consolidations, Innovations, Perspectives 142 ¶ 25.51 (2016); Alain Bénévent, Droit Des Obligations 253 ¶309 (16th ed., 2017).

[28] Chitty, supra note 14, 23-071; Ingeborg Schwenzer, Pascal Hachem and Christopher Kee, Global Sales and Contract Law, 652 ¶45.13 (1st ed., 2012).

[29] Christoph Brunner, Force Majeure and Hardship under General Contract Principles: Exemption for Non-Performance in International Arbitration, Int’l Arb. L. Lib., 18 410 (2008).

[30] Art. 7.1.7 Unidroit Principles 2010.

[31] Joseph M. Perillo, Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts, January 27, 2000, available at (Last visited on February 1, 2020).

[32] Arts. 6.2.1-6.2.3 Unidroit Principles 2010.

[33] Art. 1.10 Unidroit Principles 2010 states that “courts” include arbitral tribunal.

[34] Joseph M. Perillo, Unidroit Principles of International Commercial Contracts: The Black Letter Text and a Review, 63 Fordham L. Rev. 281, 284 (1994).

[35] Joseph supra note 26, 127.

[36] Art. 6.2.2 Unidroit Principles 2010.

[37] John Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (3rd ed., 1999) & Peter Schlechtriem, Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods (1986), available at (analysis of Article 79) (Schlechtriem, Uniform Sales Law).

[38] Larry A. DiMatteo, Contractual Excuse Under the CISG: Impediment, Hardship, and the Excuse Doctrines, 27 Pace Int'l L. Rev. 258, 280 (2015)

[39] The Commission on European Contract Law, Introduction to the Principles of European Contract Law, available at: (Last visited February 1, 2020).

[40] Art. 6:111 Principles of European Contract Law, 1998.

[41] Schwenzer, supra note 7, 166.

[42] Pascale Accaoui Lorfing, Adaptation of Contracts by Arbitrators in Hardship and Force Majeure in International Commercial Contracts: Dealing with Unforeseen Events in a Changing World Vol. 17 41 (Fabio Bortolotti and Dorothy Ufot, 2018).

[43] Id. p.42.

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