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Discuss the role of hardship clauses in controlling liability by contract.

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Introduction

TOPIC: DISCUSS THE ROLE OF HARDSHIP CLAUSES IN CONTROLLING LIABILITY BY CONTRACT. Introduction The fundamental principle of the law of contract is that the parties to a contract must carry out their contractual obligations. The principle of hardship operates as a modification of the principle of pacta sunt servanda; it gives relief to a party where performance of a contractual obligation due to change of circumstances becomes extremely onerous. This essay will discuss the role of hardship clauses in controlling liability by contract. The first part briefly states the key elements of hardship clauses. The second part considers the role of hardship clauses in controlling liability from a theoretical perspective whilst the third part undertakes an analysis of the elements of hardship clauses with a view to finding out when such clauses can be used to limit liability under a contract. The fourth part discusses the obligation to renegotiate, and some sanctions for failure to successfully renegotiate a solution in the changed circumstances. 1. Contents of Hardship Clauses Hardship clauses are usually incorporated in long-term construction contracts, infrastructure projects, joint ventures, management and marketing agreements and other contracts requiring regular performance of services or delivery of goods from a particular source of supply. Though the details of hardship clauses in each contracts vary, the essential elements of any such clause is that the occurrence of certain events has fundamentally altered the equilibrium of the contract, ...read more.

Middle

The second step is whether the event is beyond the control of the party invoking the hardship clause. The third step involves the effect of the event on the performance of the contractual obligation. Step 1: Is there an event of hardship? The hardship clause should set out the circumstances in which the clause is applicable. It is possible to provide, as with force majeure, a catalogue of circumstances which constitute hardship but in such case it will be necessary to have a concluding general clause because it is the characteristic of hardship that not all its contingencies are foreseeable. Some examples are significant rise in raw materials or sharp devaluation of currency making the initial contractual arrangement "financially disastrous" to a contractual party. In addition to setting out the circumstances, one has to ask if the hardship event was reasonably foreseeable by the parties to the contract, and if yes, there is no excuse for invoking hardship clause. The rationale behind the test is that the failure of a party to contractually insulate itself from the occurrence of a foreseeable contingency is ipso facto an assumption of that risk.11 In answering the issue of foreseeability, the arbitrator should neither refer to an excessively concerned "pessimist who foresees all sorts of disasters" nor to a "resolute optimist who never anticipates the least misfortune."12 The issue rather is whether any of the parties ought to have reasonably foreseen a realistic possibility that an impediment to performance would occur. ...read more.

Conclusion

Apart from arbitration, the parties may also provide that, if the renegotiation results in failure, the contract shall be suspended or terminated or that either party may claim suspension or termination.23 They may also provide for third party intervention or for recourse to the courts, a clause which would seem to be superfluous unless combined with prorogatio fori, because otherwise it is self-evident that recourse to the courts is open to the party who feels aggrieved. Conclusion: The absolute application of the pacta sunt servanda rule in long-term contracts may be quite harsh since during the existence of the contractual relationship unpredictable and unavoidable factors could render the performance of the contractual obligations excessively onerous or unfair. The purpose of hardship clauses is to ensure that the parties renegotiate the terms of the agreement in such changed circumstances so as to adjust their contractual obligations in a mutually acceptable manner. Care should be taken in drafting such clauses so that no party can take unfair advantage of such clauses; only fundamental change in circumstances beyond the control of the parties should allow reliance on hardship clause. Further, to maximise the effectiveness of hardship clauses, it is suggested that an arbitrator or a third party intervenor should be appointed under the clause to adapt the terms of the contract should the parties fail to come to a mutually acceptable solution. ...read more.

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