INTRODUCTION
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 https://www.cisg.law.pace.edu/cisg/biblio/perillo3.html#p1
(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 http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem-79.html
(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:
https://www.cisg.law.pace.edu/cisg/text/peclcomments.html (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.