Limiting the Risk of Disputes Arising Out of International Agreements in Force Majeure and Hardship Situations: A Guidance Note - Introductory chapter - Force Majeure and Hardship in the Asia Pacific Region

Pacta sunt servanda – Latin for “agreements must be kept” – is arguably one of the most fundamental legal maxims. If contracts could be breached without any consequences, there would be chaos. Commercial and other transactions would cease, except for those where there is an immediate exchange of goods or services, for no one could rely upon the promise of the other. Importantly, pacta sunt servanda and its fundamental relevance applies both in private transactions and in public international law.

Yet, despite being a principle of such fundamental importance, pacta sunt servanda does not apply at all times. When exceptional circumstances occur, rendering a party’s performance impossible,this non-performance may be excused. This is commonly referred to as force majeure.

Similarly, there may be the occurrence of – again, exceptional – events, because of which the equilibrium of the contract is fundamentally altered. In other words, performance of the contractual obligations is still possible, yet only on terms which would so greatly disadvantage one party that there is a fundamental shift in performance and consideration. Since performance is still possible, in situations like this, renegotiation of the contractual terms becomes an option. The underlying Latin principle here is (clausula) rebus sic stantibus. In today’s world, it is commonly referred to as hardship.

Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and 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 an ideal world, the abovementioned principles would apply at all times and all legal consequences of excused non-performance and fundamental changes in the equilibrium of the contract would be clear to commercial parties. Unfortunately, this is only theory, not reality: the above definitions are taken from the Principles of International Commercial Contracts 2016 (the “UNIDROIT Principles”). Drawn up in 1984 and ratified, their main purpose is to help harmonize international commercial contract law.

Of course, parties to a contract could choose for the UNIDROIT Principles to govern their contract. UNIDROIT even provides various different model clauses to that end. In practice, neither author has yet come across a contract that contained such agreement except for a few reported cases.

Commercial parties thus usually rely on national law. The law may be harmonized in accordance with the UNIDROIT Principles – or not. When it is not, the above legal concepts will be different or may not even exist altogether. And this is very often where problems emerge.