Corporate / M&A

Romania: Hardship Clauses for Hard Times

In the context of the global economic crisis, contract law and contract drafting has increasingly considered unexpected events that dramatically change the landscape of a contract, rendering performance impossible or excessively onerous for the parties.

The new Romanian Civil Code has finally accepted the concept of hardship

The question of whether the parties should remain bound ad literam by their obligations irrespective of the evolution of the underlying economical circumstances has deep historical roots, and countries have taken different approaches to it.

Traditionally, the hardship clause has been accepted by national laws in the background of an economical or political crisis. In Europe, hardship started to be applied after the First World War. After the Second World War, many countries west of the Berlin Wall embraced the concept, while the East (predominantly socialist countries) resisted it.

For many years, Romania took the extreme approach of the French law, where no possibility to adapt or terminate a private law contract due to hardship was legally recognised, unless the parties had agreed so. Termination was possible only in cases of force majeure (acts of God) or fortuitous cases.

In isolated cases, Romanian courts have recognised the application of hardship, which led to debates on how hardship tied in with our absolute legal principle that contracts are mandatory for the signing parties (pacta sunt servanda).

Promoted in the midst of the global crisis, the New Civil Code, inspired by the Canadian Civil Code of Quebec, has adapted itself to the complex economic circumstances in which contracts are now signed. It has thus finally accepted and regulated the effects of unpredictable changes and hardship.

As a result of these regulations, even without a hardship clause in the contracts, a party affected by new external circumstances that severely affect the initial contractual balance between the parties may request that the court take appropriate measures to reinstate such balance.

Circumstances in which hardship may apply

Hardship is conditional upon the fulfillment of the following conditions:

  • a change in the contractual circumstances underlying the execution of the contract occurred after signing;
  • the change of the contractual circumstances were not, and could not have been, easily foreseen at signing;
  • the party claiming hardship has not assumed the risk of a change of the circumstances underlying the contract, nor can it be reasonably considered to have accepted this risk; and
  • the party claiming hardship reasonably and in good faith attempted a fair and reasonable revision of the contract.

Effects of hardship

The introduction of hardship in the New Civil Code has increased the vigilance in contract drafting since, depending on one’s contractual position, the contract would remain silent on the hardship or expressly carve out a hardship from the parties’ benefits, or clearly define the circumstances entitling one party to claim hardship and the benefits arising therefrom.

Due to the limited developments in jurisprudence on the topic of hardship, pressure still exists for the parties to fill in the gaps in hardship regulations by contractual clauses. A contractual approach remains the suggested way of dealing with hardship and offers more possibilities to foresee potential problems.

The New Civil Code provides that, if hardship occurs and the circumstances allowing one party to claim hardship are observed, the court may decide (i) to adapt the contract with the aim of reasonably and fairly allocating between the parties the losses and benefits arising out of the new circumstances or (ii) to terminate the contract.

Clearly, the contractual clauses should not just reiterate the provisions of the New Civil Code (which would be redundant) but should contain clear provisions on the remedies applicable should hardship occur.

Choosing a set of remedies instead of termination (or instead of having the court decide on remedies) offers more contractual stability. The remedies for hardship may range between financial adjustment of an agreement with clearly defined terms on the amount and role of a third party in this process, or the parties’ duty to renegotiate the contract on defined terms respecting the process of renegotiation or involving third parties.

Conclusion

By codifying hardship, the New Civil Code has recognised the value of the previous jurisprudence and allowed Romanian law contracts to align themselves to the constantly changing circumstances surrounding the execution of contracts.

A fair contractual protection in case of hardship should include a further enrichment of the legal principles introduced by the hardship concept with the requirment to renegotiate the contract before applying for court adaptation.

With the introduction of the hardship principle in the New Civil Code and the pressure of keeping long-term contracts adapted to economical fluctuations, contract drafting is witnessing an increasing need to define the terms of possible contract adaptations.