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.