Some questions on the UNIDROIT Principles

Eugene T.

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Some questions on the UNIDROIT Principles

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UNIDROIT Principles, CISG

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Abstract

More specifically, though, the problem is about force majeure and hardship, as well as the relationship between the two concepts. The contention between the parties is essentially whether the provisions in the contract on force majeure cover the variation of price, and this may be broken down into two constituent questions: firstly, does force majeure cover hardship? Secondly, does the 70% rise in the price of the raw material constitute hardship? The combined response to these two questions will tell us not only whether a non-performance may be excused, but also how it may be excused—basically, whether X will be entitled to a renegotiation of the contract or not.

The two criteria of force majeure according to Article 7.1.7 of the UNIDROIT Principles are: 1) “the non-performance was due to an impediment beyond [the non-performing party's] control”; and 2) “that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences” (in other words, unforeseeability). On the other hand, hardship may be said to be a specific instance of force majeure where, in addition to the latter's two criteria, there must be an “occurrence of events [that] 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”.

Introduction
UNIDROIT Principles
Would the solutions be any different under the CISG - if the choice of law provision did not exclude the application of the CISG?
What would the solutions be according to the Principles in case a dispute arises and the claims are dealt with before the arbitral tribunal?
Conclusion

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[...] As established in the case Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd, clauses on liquidated damages will generally be upheld unless the sum is of an unconscionable amount. This is decided by comparing the sum agreed upon with the actual harm suffered, as well as by way of judicial discretion. Thus, whether the award would be substantially different under English law would depend largely on the adjudicator. But at the very least, there is no clearly articulated rule as to whether the liquidated damages clause constitutes a price floor or a price ceiling. [...]

[...] There is no substantial difference as to outcome between English law and the UNIDROIT Principles, as both essentially leave it to judicial discretion. The main difference is that the UNIDROIT Principles lay out rules for the procedure, in particular providing a somewhat greater protection to the debtor (i.e. non-performing party) should the actual harm suffered be higher (since specific sum may be reduced” but not increased under Article 7.4 .13). Ultimately, though, both are equally effective economically speaking since the results are similar. [...]

[...] There is, in addition, the possibility of falling back on national legislation, failing the CISG As in the first dispute, the CISG is not as articulate or specific as the UNIDROIT Principles when it comes to the question of standard forms. However, if we assume that the rules of contract formation as outlined in the CISG apply to standard forms as much as they do when the clauses are individually negotiated, we may refer to Article 19 of the CISG for some degree of guidance. [...]

[...] Now that we have established that an absence of a hardship clause does not preclude hardship from being invoked, there remains to be answered the question of whether the given circumstances constitute hardship. Normally, the equilibrium of the contract is said to be “fundamentally altered” when there is a 50% or more change in the cost, as was included in the earlier versions of the UNIDROIT Principles. Hence, this means that the 70% rise in raw material prices may be considered hardship. [...]

[...] There is no doctrine of hardship in English law. The closest concept is that of frustration of contract, as established in the landmark case Taylor v Caldwell, where contractual performance was literally impossible because an essential element of the contract was destroyed by a fire. However, frustration Eugene THONG is substantially different from hardship because it is not about a change in circumstances, even if this change is of a great degree. In fact, it has been ruled in the precedent case Davis Contractors v Fareham UDC that a price increase in labour and materials does not render a contract frustrated. [...]

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