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The Role Of Hardship Clauses In Controlling Liability By Contract

3482 words - 14 pages

The Role of Hardship Clauses in Controlling Liability by Contract

Introduction

The fundamental principle of the law of contract is that the parties
to a contract must carry out their contractual obligations. The
principle of hardship operates as a modification of the principle of
pacta sunt servanda; it gives relief to a party where performance of a
contractual obligation due to change of circumstances becomes
extremely onerous. This essay will discuss the role of hardship
clauses in controlling liability by contract. The first part briefly
states the key elements of hardship clauses. The second part considers
the role of hardship clauses in controlling liability from a
theoretical perspective whilst the third part undertakes an analysis
of the elements of hardship clauses with a view to finding out when
such clauses can be used to limit liability under a contract. The
fourth part discusses the obligation to renegotiate, and some
sanctions for failure to successfully renegotiate a solution in the
changed circumstances.

1. Contents of Hardship Clauses

Hardship clauses are usually incorporated in long-term construction
contracts, infrastructure projects, joint ventures, management and
marketing agreements and other contracts requiring regular performance
of services or delivery of goods from a particular source of supply.
Though the details of hardship clauses in each contracts vary, the
essential elements of any such clause is that the occurrence of
certain events has fundamentally altered the equilibrium of the
contract, and that the events are entirely uncontemplated and
unforeseeable, and are beyond the control of the disadvantaged party.[1]
If these elements are satisfied, the disadvantaged party may invoke
hardship clauses which usually provide for renegotiation of the terms
of the contract with the aim of adapting them in light of the changed
circumstances. If the parties are unable to renegotiate the terms of
the agreement, the clause may allow the parties to call for a third
party either to terminate the contract or to adapt the terms of the
contract with a view to restoring its equilibrium.[2]

It is noted that hardship clauses are different from force majeure
clauses in that the former requires performance of the contract to
become excessively onerous, not impossible. Besides, the contract is
not automatically ended upon occurrence of a hardship event; the
contract may be modified, and only if such modification is pointless,
it is to be ended. In other words, unlike force majeure clause, the
parties are not excused from performance of the contract.[3]

2. Role of Hardship Clauses in Controlling Liability: Theoretical
Perspective

Hardship clauses play an important function in controlling and
apportioning liabilities of parties to a contract where some
...

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