11 Hardship I Impracticability I Unconscionability I Unforeseeability Hardship Clauses Fluctuations in exchange rates can have disturbing and even cat­ astrophic effects on contracts, particularly if performance is necessary over a long period or at a time far ahead. As a consequence, what are known as hardship clauses have become common. 1 A hardship clause can be described as a term of a contract under which the con­ tract can be reviewed if a change in circumstances occurs that fun­ damentally modifies the initial balance between the obligations of the parties, so that performance, though not impossible, becomes un­ usually onerous for one party. The clause defines hardship for the purpose of the contract in which it appears and provides a procedure for adapting the contract if hard­ ship as defined occurs. Hardship clauses can be distinguished from doctrines familiar to the law that can be subsumed under the heading of imprevision or frustration. These doctrines apply to situations in which a fundamental disturbance occurs in the economic balance of a contract as the result of supervening events that were unforeseeable, 1 Bruno Oppetit, "L'adaptation des contrats internationaux aux changements de cir­ constances: Ia clause de 'Hardship'," Journal du Droit International (Paris), No. 1 (1974), pp. 794-814; "Contrats economiques internationaux: Les Hardship clauses," Droit et Pratique du Commerce International (Paris), Vol. 1, No. 3 (September 1975), pp. 512-17; "Hardship Clauses," Droit et Pratique du Commerce International (Paris), Vol. 2, No. 1 (March 1976), pp. 51-88; Harold Ullmann, "Droit et Pratique des Clauses de Hardship dans le Systeme Juridique Americain," Revue de Droit des Affaires Internationales, No. 7 (1988), pp. 889-904. 226 Hardship Clauses or that were not foreseen, when the contract was made. Hardship clauses, by contrast, can apply, if the parties wish, to supervening events that were foreseen as possible when the contract was made, but the term is applied also to clauses that deal with supervening events whether or not the parties thought the events might occur. Both hardship clauses and the doctrines to which the words imprev­ ision and frustration have been applied are inspired by the thought that the supervening events are beyond the control of the contracting parties. The contract is terminated if such a doctrine applies or if a force majeure term in the contract comes into operation. Hardship clauses, however, assume that the contract continues in force, but possibly with modified provisions. The International Chamber of Commerce (ICC) has issued a bro­ chure entitled Force Majeure and Hardship/ which casts some doubt on the scope of hardship clauses. The brochure states that the event giving rise to hardship must be one that was not contemplated when the parties made their contract, although the event need not be one that the parties could not have taken into account. The first part of this statement would cast doubt on the ability of a party to invoke a hardship clause as the result of a change in exchange rates, because in these days all parties must know that exchange rates are fluctuat­ ing. However, the brochure declares also that the parties may specify the contingencies entitling a party to invoke the clause in their con­ tract. 3 Although it would be unrealistic and highly inconvenient to provide that any change in exchange rates might be examined to see whether it had produced hardship, the same objection might not apply to a specified change of substantial amount that persists for a specified length of time or a similar change in average exchange rates over a defined period. Hardship clauses must be distinguished also from clauses that pro­ vide for the automatic modification of a specified term or terms of a contract in certain specified circumstances, such as changes in costs, prices, or exchange rates. Index or maintenance of value clauses fall into this category. They can apply whether or not the changes create what would be considered hardship. It may be necessary in determining the protection a contract affords to a party to distinguish not only between hardship clauses and clauses that provide for the adaptation of contractual terms if certain developments occur but also, in relation to the latter clauses, between 2 Paris, March 1985. 3 Ibid., p. 20. 227 HARDSHIP, IMPRACTICABILITY, UNCONSCIONABILITY, UNFORESEEABILITY higher operating costs and changes in exchange rates as the devel­ opment that increases contractual burdens. The necessity to make this latter distinction is illustrated by an English case4 in which the German owner of a vessel chartered it to an American corporation under a time charterparty entered into on January 9, 1969. The original period of three years for the charterparty was extended to five years. The charterer was to pay hire at the rate of 23.5 U.S. cents per bale cubic foot per 30 days. Payment was to be made in U.S. dollars in New York, monthly in advance. Clause 10, entitled Escalator Clause, provided that the original rate of hire was based on wages, including social insurances, and working conditions in force, at the time of delivery of the vessel, under an agreement between the German Shipowners' Association on one side and the Officers' and Crew's Unions on the other side in respect of the trade for which the vessel was chartered ("the crew agreement"). The rate of hire was to be increased or decreased if the wages pay­ able by the owner were raised or reduced under the crew agreement. The payments by the owner to the crew of the vessel were largely in deutsche mark. It was accepted by both parties to the action that to make the contract workable, the increase or decrease in the owner's wage bill had to be translated into U.S. dollars. All the changes in the crew agreement and in the wage bill involved in the action were made yearly and were increases. The issue in the case was the selection of the exchange rate at which deutsche mark had to be translated into dollars for the purpose of arriving at the monthly payment of hire. For a time there had been no problem because fluctuations in the exchange rate between the two currencies had been insignificant, but in 1971 the deutschemark began to appreciate against the dollar. Then, as one member of the English Court of Appeal said: Once again we are faced with having to consider the consequences of the present chronic instability of currencies in relation to a contract made some seven years ago in happier financial days, when the problems to which this case gives rise were not problems against which these parties thought it necessary expressly to guard them­ selves.5 The owner contended that the translation of deutsche mark into 4 W. Bruns & Company of Hamburg v. Standard Fruit and Steamship Company of New Orleans (The "Brunsrode") [1976)1 Lloyd's Rep. 501. 5 Ibid., p. 507. 228 Hardship Clauses U.S. dollars had to be made at the exchange rate prevailing when each monthly payment of hire was due. The charterer argued that the appropriate exchange rate was the one prevailing when agree­ ment was reached on revision of the crew agreement, and that this exchange rate continued to be applicable to subsequent monthly pay­ ments of hire until agreement was reached on the next revision of the crew agreement. The issue was one of construction of the char­ terparty, and of Clause 10 in particular. The court accepted the charterer's argument. Clause 10 was not intended to protect the owner against changes in the exchange rate as such. Some evidence of this interpretation was found in the fact that the rate of hire was fixed in U.S. dollars and did not vary with fluctuations in the exchange rate before the date of the first revision of the crew agreement. Clause 10 was intended to protect the owner solely against increases in the wages paid under the crew agreement. The dollar equivalent of such an increase had to be calculated on the basis of the exchange rate prevailing at the date of agreement on the increase and that dollar equivalent was added to the rate of hire until agreement was reached on the next revision of the crew agreement. Most often, cases deal with problems of the exchange rate between a foreign currency and the currency of the forum, as will be seen from later sections of this monograph. The case discussed above illustrates a problem of determining the appropriate exchange rate between two currencies when neither of them is the currency of the court. An advantage of hardship clauses is that they do not specify in the contract the adaptations that are to be made in contractual terms, and there is no need to attempt to define the adaptations. Agreement on adaptations is left to future review and negotiation. A hardship clause defines not the adaptations but the procedure to be followed if the clause is invoked. The procedure may be arbitration, the involvement of experts, negotiation between the parties themselves, or something else. A further advantage of hardship clauses is that they may be less likely than, say, index clauses to raise problems of validity under national law. However, there may be difficulties of interpreting a hardship clause to determine whether it applies to the events or the changes in circumstances that have occurred. Contracting parties are free to renegotiate their contract at any time after entering into it. An advantage of a hardship clause is that it compels the parties to consider the modification of their contract if the existence of hardship is not disputed.