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Renegotiating Long-Term Contracts Renegotiating Long-Term Contracts

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A jurisdictional guide Renegotiating long-term contracts Renegotiating long-term contracts Supply-chain strains are resulting in many companies being unable to fulfil their contractual obligations. Some businesses have been able to renegotiate contracts or reach agreement on deferring performance and/or payment. But others have been unable to resolve the situation, resulting in litigation or arbitration. If you are seeking (or your This guide aims to help you counterparty asks you) to renegotiate understand where your rights and a contract, you may be able to reach obligations lie should you be involved an agreement quickly and informally, in renegotiating a contract made for example following a short email under the laws of one of the following exchange or telephone call. nine key jurisdictions: China, England and Wales, France, Germany, Hong If this is not possible, you will have to Kong, Italy, Japan, Spain and the US. consider the contract-renegotiation law of the jurisdiction under which If you require any further information, the contract is written. For example, please don’t hesitate to get in touch some jurisdictions have laws that with a member of our team. oblige parties to enter formal renegotiation while others are silent on the issue, leaving it to the parties (and, if necessary, a court or arbitral tribunal) to look at the contract’s wording to resolve the issue. 2 Renegotiating long-term contracts Changing long-term contracts: from informal renegotiation to litigation 1 2 3 Informal renegotiation Escalation Litigation/arbitration More junior staff in, for More senior staff, for example A last resort for when example, the procurement, department managers and the negotiations fail or a party warehousing or shipping legal team, formally renegotiate refuses to renegotiate. department ‘informally’ with the counterparty. renegotiate supply schedules, Some courts/tribunals only look volumes, etc with their Requires full examination of at the words on the page; others counterparts. the contractual wording may try to uncover how/why the to determine who owes what contract was first agreed upon. The supply issues may be to whom. resolved amicably without the need for escalation. 3 Renegotiating long-term contracts Overview of contract-renegotiation law by jurisdiction Jurisdiction China England and Wales France Germany Hong Kong Italy Japan Spain US Is there a Yes – statutory No Yes – Article 1195 Yes – section 313, No No No No No statutory regime? concept of change of the French Civil para.1 of the German of circumstances and Code; only applies to Civil Code statutory concept of contracts entered into force majeure on or after 1 October 2016 Are there key legal No Yes – promissory No No Yes – doctrine Yes – pacta sunt Yes – doctrine of Yes – rebus sic Yes – adequate doctrines relevant estoppel; good faith; of frustration servanda changed circumstances, stantibus clause, assurance; for performance force majeure; material application has been implicit in Spanish- force majeure; under long-term adverse change; limited to a handful law contracts; force material breach contracts? frustration of cases; concept of majeure events the allocation of risks, doctrine has seldom been applied Is it possible to Yes Yes Yes Yes Yes Yes Yes Yes No – typically, US adjust a contract contracts do not using contractual contain provisions terms? that allow parties to renegotiate the terms post-signing What are the The contract should It depends on what Hardship clauses The requesting party Existing terms of Hardship clauses Negotiation clauses Contracts tend not to The contract will consequences of set out what the next the contract says tend to specify can gain the right to the contract will tend to specify do not govern govern what happens likely be silent on failed negotiations step is (eg the party If the contract is consequences of a adjust the contract on continue to apply consequences of a what happens if if negotiations fail this point (in the context of who requested the silent on the point, it failure to reach an its own terms Courts will not failure to reach an negotiations fail or or a party refuses contractual terms)? negotiations may be could be terminated agreement The requesting party intervene to rewrite agreement if a party simply to respond to a entitled to rely on unilaterally or may have the right to terms of a contract refuses to respond to renegotiation request force majeure) mutually but this ask courts to adjust if parties are unable a request Renegotiation clauses again depends on the the contract to agree on how the Under the good-faith cannot allow one contract’s wording A clause can give the terms should be obligation, each party of the parties to requesting party the altered must act so as not unilaterally modify right to immediately to betray the other the agreed terms claim under terms of party’s trust in the the amended contract circumstances 4 Contract-renegotiation law by jurisdiction China 1. General rules on renegotiating contracts 2.2 Negotiation/price-adjustment clauses be excused from performance of the contract or to Contracts can be modified or terminated if relevant While Chinese law does not generally require a terminate the contract, and any right under Chinese circumstances change significantly. However, party to attempt to renegotiate a contract before statute (see section 3) to seek the modification or whether or not a contract can be changed largely that party can invoke a force majeure clause, the termination of the contract from the Chinese courts depends on the individual case. contract itself may impose such a requirement. or in arbitration (see section 4). Whether there is an obligation to renegotiate and If a party seeks to renegotiate a contract due to whether that obligation has arisen will depend 3. Statutory provisions providing the a change in circumstances, and the other party on the specific terms of the relevant clause and possibility to adjust contracts refuses, the former party cannot rewrite the the facts. Chinese law allows parties to rely on changes contract unilaterally. However, that party may be of circumstances and force majeure to modify or entitled to apply to the Chinese courts to modify or It is not uncommon for contracts to provide that terminate a contract, even if the contract itself does terminate the contract on the basis of the change of certain terms (eg pricing or delivery time frames) not expressly provide for such a possibility. circumstances or to terminate the contract on the will be adjusted in accordance with a specific basis of force majeure (see section 3). Such entitlement formula if certain events occur, such as a change in 3.1 Change of circumstances the cost of the underlying raw materials (eg oil). can arise from the terms of the contract itself (see Under the statutory concept of ‘change of section 2) and/or statute (see section 3). 2.3 Consequences of failed negotiations circumstances’ (情势变更), a party that can show a change of circumstances may be entitled to If the contract imposes an obligation to negotiate 2. Contractual terms that can permit renegotiate its contract with its counterparties. in good faith, it is best practice for contracts to adjustment If the parties cannot agree on how the contract specifically set out: 2.1 Change of circumstances/force majeure should be revised, the affected party can seek the clauses • when the negotiations will be deemed to have modification or termination of the contract from the failed (eg upon the expiry of a certain length of Contracts may include change-of-circumstances and Chinese courts or via arbitration (as applicable). time); and force majeure provisions that mirror or broaden the The change of circumstances must: scope of the statutory counterparts of these concepts • what the next step is (eg the party who requested • be a significant change to the fundamental (see section 3), for example by providing that certain the negotiations may be entitled to rely on premise of the contract; events will constitute a change of circumstances or a the force majeure or material adverse change to force majeure event. terminate the contract, or the matter may be • have taken place after the contract was made and referred to expert determination, etc). been unforeseeable at the time of the contract; However, there are differing views on whether, • not constitute a commercial risk, ie a normal under Chinese law, parties can, by agreement, Generally speaking, if the parties cannot agree market risk that can be reasonably anticipated narrow or waive their right to invoke the on how their contract should be amended, the and assumed by the parties; and statutory concepts of change of circumstances existing terms of the contract will continue to apply, and force majeure. subject to any right under a force majeure clause to 5 Contract-renegotiation law by jurisdiction China (continued) • be obviously unfair to a party if the parties To rely on this concept, a party must notify the other 4. How to deal with a claim for adjustment continue to perform the contract. In other party in a timely manner, and provide evidence of in litigation or arbitration words, this concept applies even where continued the unforeseeable, unavoidable and insurmountable A party seeking to terminate or modify a contract performance of the contract is possible, but event within a reasonable time. Such evidence may on the basis of a change of circumstances can do so obviously unfair. For example, a party may take the form of ‘force majeure certificates’ issued by via litigation or arbitration (as set out in the terms of argue that its manufacturing costs have Chinese authorities such as the China Council for the contract). A party can find itself trying to either significantly increased as a result of shortages the Promotion of International Trade (CCPIT).
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