Hardship as one of the main principles of European contract law : proposing a just regulation of hardship in the Common European Sales Law

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Hardship as one of the main principles of

European contract law

Proposing a just regulation of hardship in the Common European Sales Law

Kalina Varbanova

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Hardship as one of the main principles of

European contract law

Proposing a just regulation of hardship in the Common European Sales Law

Kalina Varbanova

student number: 10622985

email: kalina.varbanova@gmail.com

Assistant Professor Jaap Baaij

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The aim of my thesis is to propose a just regulation for the institute of hardship in the Common European Sales Law (CESL). The European legislator evaluates the need of this institute and includes it in most of the European instruments concerning contract law. In CESL, there is an explicit hardship provision in article 89, called “change of circumstances”. The overarching goal of my thesis is to propose amendments in this provision in order to provide a more detailed and mandatory rule that would bring back justice after a change of circumstances. Throughout my thesis, I argue for a broader and more correct application of the institute of hardship on both national and European levels.

It is important to recognize the institute of hardship, because an event, such as a financial crisis, can destroy the equilibrium in contractual relationships and results in an unreasonably-burdensome and unfair situation for one of the parties. It is contrary to good faith to keep the contract in force for the disadvantageous party.1 The equilibrium between rights and obligations is lost and it is up to the law to restore balance and justice. Hardship is a precise instrument that protects the disadvantageous party after the change of circumstances. The continuation of a contract, which is unreasonably burdensome for one of the parties, is contradictory not only to justice, but also to the common intention of the parties. The institute of hardship, in this line of thought, ensures protection to the contractual parties from a future unforeseeable event. Ex post the adjustment of a contract is only beneficial to the disadvantageous party, as the creditor experiences a positive economic effect. Due to the unforeseeable nature of the event, however, when concluding a contract, it is unpredictable who is going to be prejudiced by the supervening event. In this sense, the institute of hardship should be considered as beneficial for both counterparties.

The main problem in front of the creation of a unified set of rules on European level is that most of the member-state legal systems do not recognize hardship as one of the principles of contract law. The reasoning behind the non-recognition of hardship is that it is considered

to oppose the main principle of contract law – the binding force of contract.2 Thus, in some

legal systems – such as the one in France - hardship does not exist at all, while other systems, like the Bulgarian one, have a hardship provision, which, however, is hardly applied. If there is no hardship provision or hardship is not applied by the parties and courts, however, injustice and unfairness will likely overtake contractual relationships in the event of a change

1_{Simeon Angelov, “Business frustration of execution”, Commercial law, N 5, 2002, p. 600}

2_{Mustapha Mekki, Hardship and modification (or “revision”) of the contract, 2010, available at} SSRN: http://ssrn.com/abstract=1542511; Ivan Apostolov, Law of obligations, part 1 General studies of obligations, 1990, p. 242

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of circumstances. Another problem that arises from the application of hardship is the impossibility to find a just criterion for assessing the changed circumstances. Hardship should be seen as part of the principle of justice, because its primary goal is to restore justice in contractual relations after a change of circumstances, and its applicability should be extended to all situations resulting in injustice for one of the contracting parties. A mandatory hardship provision should therefore be created in all national legal systems in order to ensure justice in sufficient way.

In view to persuade the reader, I also prove that hardship should be considered as conforming – and not opposing – to the principle of the binding force of contracts. Theoretical knowledge about the institute of hardship is needed to understand the idea behind it, as well as to outline the demand for its application in case of change of circumstances. I explain the institute of hardship by the egalitarian theory of justice delineated by John Rawls, the utilitarian concepts of justice presented by Jeremy Bentham, and Ernest Weinrib’s theory of corrective justice. Drawing on this theoretical foundation, I outline a new criterion which can help legally establish whether there is hardship in a particular case. This criterion reflects the need for restoring the fairness and justice in misbalanced contractual relationships due to change of circumstances.

The theoretical review also permits the later analysis of national laws in order to prove that CESL should regulate hardship as one of the main principles of European contract law. In particular, a comparative analysis between the French and Bulgarian legal system is used to achieve this goal. The topic of my thesis limits the choice of legal systems to those of European Member States. Having into consideration the length limitations of my thesis, and in order to engage in a more detailed analysis, I chose to compare only two legal systems that are part of the civil law legal family. As noted above, the French legal system does not regulate the institute of hardship; however, in case law, the adjustment of contracts because of changed circumstances is sometimes allowed. The Bulgarian legal system, on the other hand, regulates explicitly the change of circumstances, but does not apply the institute correctly and consistently. The analysis of the French legal system points to the necessity of explicit hardship provision which would protect the principle of justice in contractual relationships. The examination of Bulgarian hardship provision reveals that it requires improvement in order to limit contradictory judicial interpretations and broaden the application of the institute. I apply a functional method of comparison in pursuance of discovering which legal institutes in both national laws are equivalent in their function to adjust the contract in case of change of circumstances. The comparison shows that both legal systems do not maintain the

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principle of justice in a sufficient way after the occurrence of an unforeseeable event. Throughout the analysis, I also apply my criterion for assessing hardship to some court’s decisions, challenging the arguments used to decline the application of hardship. The comparative insights are used to prove that to achieve justice, it is important not only to implement a hardship provision, but also to ensure that the provision is interpreted correctly and is indeed applied towards the misbalanced contracts.

Findings from the comparison are helpful for a creation of a just hardship provision in CESL that overpasses the difficulties and weaknesses of the institute in these two legal systems. As most of the comparative studies, my aim is to suggest reforms in domestic law in order to implement a hardship rule that brings back justice in contractual relationships. Attention is also paid to the need for improved application and interpretation of the provision in CESL.

The institute of hardship should be interpreted uniformly throughout Member States in order to ensure legal certainty in international contractual relationships. That is why the decision of the European legislator to include an explicit hardship provision is commendable. The last chapter of the thesis presents an in-depth analysis of the hardship provision in CESL which aims to reveal its weak points. I propose amendments to some of the requirements and effects of the institute based on insights gained throughout the first two chapters. Through the discussion of the institute of hardship, I aim to make a contribution to the improvement of CESL and establishment of detailed and efficient hardship provision.

1. Justice as the main principle in case of change of circumstances

This chapter provides useful theoretical knowledge about the basis of the institute of hardship. Theoretical insights are needed in order to create a just legal provision that takes into account the main idea behind the institute of hardship. In order to propose amendments to the existing legal regulation and to argue for the extended application of hardship - not only on a national but also on the European level - it is necessary to understand the basis of the particular institute. The main goal of the adjustment of a contract in the case of change of circumstances is to bring back the balance in contractual relationships turned “excessively onerous” for one of the parties.3 Thus, a starting point in the application of the hardship provision is the

3

Hugues Bouthinon-Dumas, “Les contrats relationnels et la theorie de l`imprevision”, Revue internationale de droit économique, 2001/3, p.5

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existence of a misbalanced contract that results in injustice towards one of the parties. That is why in order to understand correctly the institute of hardship it is necessary to first seek where the line between just and unjust lies, and how the unjust is assessed. It is therefore imperative to first understand the principle of justice.

1.1. The notion of justice. Hardship as part of the principle of justice

There is no common meaning of the principle of justice in general law, and numerous positive and normative theories interpret this notion. Some authors consider the principle of justice in private relationships as the balance between the protection of legal rights and the interests of individuals.4 Others see justice as a concrete rule, created by the court, based on its interpretation of legislation, its sense of what is just, as well as the facts of a concrete case.5 Injustice is a starting point in the institute of hardship, because a change of circumstances destroys the initial balance in contractual relationships and makes them unjust and burdensome for one of the parties. In order to adjust a contract, one should prove that there is injustice in contractual relationships. Therefore, the theories of justice - both egalitarian and utilitarian - give necessary insights of what is just and how to assess injustice, which is the first step in the process of legally establishing whether there is hardship in a particular case. The theories are complimentary to each other and provide a holistic understanding of what

constitutes a just and correctly formulated hardship provision.More precisely, the egalitarian

theory pinpoints the presence of injustice in contractual relationship which necessitates the application of hardship clause, while the utilitarian concepts give guidance as to how to assess the utility of the contract before and after the change in circumstances.

1.1.1 Equality as one of the concept of justice applicable in case of change of circumstances

The oldest concept of justice refers to equality.6 This is the doctrine of egalitarianism, which proposes that the starting point of assessing injustice is equality. This theory of justice can teach how to assess injustice after a change of circumstances, using the concept of equality. Hence, in order to understand the institute of hardship and its objective, one should first gain knowledge of the concept of justice based on equality.

4_{Maria Pavlova “Civil law”-common part, 1995, p. 43}

5_{Ivan Apostolov, Law of obligations, part 1 General studies of obligations, 1990, p. 33} 6

Jamed Konow, “Which Is the Fairest One of All?A Positive Analysis of Justice Theories, Journal of Economic Literature, Vol. XLI (December 2003) pp. 1188–1239

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Equality is a foundation of the concept of justice of one of the leading figure in that field - John Rawls, who sees justice as fairness.7 Rawls takes as an initial point an original position of equality in which each party looks after their interests. No one is keen to sacrifice their own profit for the “greater net balance of satisfaction”8 of the other. Rawls considers that inequalities should be compensated by unequal distribution of rights and duties. The author

also argues for helping “the needy”9. These ideas can be used as a mechanism for assessing

how a change of circumstances alters contractual relationships. In case of change in circumstances, the equality between parties is destroyed and one of the parties is in a worse position than expected when concluding the contract. If the new situation can be characterized as inequality, Rawls’s view on unequal distribution of right and duties should be applied in favor of justice. The main idea behind the adjustment of contract in case of change of circumstances is to divide between the contractual parties the increased costs caused by the unforeseeable event.10 In this vein, the hardship provision could be interpreted through Rawls’s concept of unequal distribution in order to restore justice and equilibrium in contractual relationships. From this point of view, hardship should be considered as a mechanism for achieving justice in case of change of circumstances.

1.1.2. How utilitarian concepts of justice are applicable in case of change of circumstances

The theory of utilitarianism creates the theoretical basis of ethics and welfare economics.11 One of the prominent authors from this school of thought is Jeremy Bentham. He uses the principle of utility to measure every action and to assess whether it augments or diminishes the happiness of the party whose interest is in question.12 The utility of an act in regard to an individual is measured in terms of whether this act adds something to the sum total of their pleasures, or diminishes the sum total of their pains.13 This aspect of the principle of utility can provide guidance for assessing the utility of a contract before and after a change in circumstances. Thus, Bentham’s concept of utility is helpful for creating a just mechanism for evaluating whether the contract is “excessively onerous” for one of the parties. Therefore, the

7_{John Rawls “A Theory of justice ”Harvard University Press, 1971, p. 12} 8_{John Rawls “A Theory of justice ”Harvard University Press, 1971, p. 14}

9_{Jamed Konow, “Which Is the Fairest One of All?A Positive Analysis of Justice Theories, Journal of Economic} Literature, Vol. XLI (December 2003) pp. 1188–1239

10

Rodrigo Momberg, Change of circumstances under the Common European Sales Law, p. 7

11_{Jamed Konow, “Which Is the Fairest One of All?A Positive Analysis of Justice Theories, Journal of Economic} Literature, Vol. XLI (December 2003) pp. 1188–1239 p.13

12

Jeremy Bentham, An Introduction to the Principles of Morals and Legislation, 1789, London: Payne.

13_{Jeremy Bentham, An Introduction to the Principles of Morals and Legislation, 1789, London: Payne, chapter} I.6

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utility of the contract both before and after the change in circumstances should be taken into account in order to discover how the extraordinary event alters the contractual relationship and balance.

The second aspect of the utilitarian theory applicable in case of change of circumstances is the idea that an act should be judged according to its consequences.14 Therefore, when assessing the nature and the impact of the act, its consequences should be seen as one with the act itself.15 If applied to cases of change of circumstances, this concept focuses not on the nature of the exceptional event, but on the effects and the intensity the change of circumstance has on contractual relationships.

The next aspect of utilitarian concept which I will use in building my criterion for assessing injustice is the notion that welfare should not necessarily be evaluated only objectively. On the contrary, the evaluation of justice should be based on subjective elements as well. Contractual parties are free to determine the substance of the contract according to their subjectivity.16 They judge the equivalence of the contractual considerations by taking into account their particular needs. The concept of subjective value of consideration is contrary to the concept of value represented by Weinrib in his book Corrective justice.17 Weinrib argues that equivalence in exchange should be assessed objectively, not in respect to the parties’ subjectivity. Instead of seen as necessarily conflicting, however, these two views should both find place in the process of assessing whether there is hardship in a particular contractual situation. Although objective criterion is preferred for legal certainty, individual circumstances,18 such as the financial situation of the parties, their needs and the utility of the contract for them, should also be considered in order to evaluate the specific situation of each party. Moreover, a subjective element that is used by the court in assessing hardship is the common will of the parties. The court will try to discover “what the parties would reasonably have agreed at the time of contracting if they had taken the change of circumstances into

14_{Jamed Konow, “Which Is the Fairest One of All?A Positive Analysis of Justice Theories, Journal of Economic} Literature, Vol. XLI (December 2003) pp. 1188–1239 p.13

15

Jeremy Bentham, An Introduction to the Principles of Morals and Legislation, 1789, London: Payne, chapter XII.2

16_{Charles Blackorby, Walter Bossert and David Donaldson, Utilitarianism and the Theory of Justice, August} 1999, Prepared as Chapter 20 of the Handbook of Social Choice and Welfare, p. 4

17_{Ernest J. Weinrib “Corrective justice”, Oxford legal philosophy, chapter Unjust Enrichment} 18

Hannes Rösler, Hardship in German Codified Private Law – in comparative perspective to English, French and international contract law, European Review of Private Law 3-2007, 483-513, p. 10

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account.”19 Thus, the judge should consider the elements from internal, as well as from the external perspective of the relationship.20

The utilitarian concept of justice provides insights into how injustice should be assessed. Complimentary to each other, the concept of utility, the theory of consequentialism and the concept of subjective evaluation of welfare are useful for the application of hardship provision.

1.1.3. Theory of local justice as one of the arguments in favor of a detailed European regulation of the institute of hardship

The next concept useful for my research is the theory of local justice,21 which indicates the necessity of a uniform and detailed rule on a European level which does not give a broad discretion for interpretation to national courts. Authors who support this concept decline the existence of the general theory of justice.22 In their opinion, the concept of justice “differs according to the set of persons, good, institution, culture, country, region, historical context and precedents.”23 The decline of the general concept of justice defines the need to evaluate separately each case and to take into account all facts and the specific characteristics of the contract.

1.2. Principle of justice as a subsidiary source of law

The principle of justice is the basis of some legal institutes such as culpa in contrahendo, hardship, and unjust enrichment. Because of misbalanced contractual relations or an unjust situation not related to a contract, the principle of justice is applicable throughout these instruments. The first subsection shows when misbalanced contractual relations should trigger the application of the principle of justice, while in the next one, the concept of corrective justice and its application towards unjust enrichment is examined. The second subsection also provides insights into the theory of corrective justice, whose objectives and mechanisms are applicable to cases of change in circumstances even in the absence of wrongdoing.

19_{Article 89 (2) (b) of CESL} 20

Rodrigo Momberg, Change of circumstances under the Common European Sales Law, p.8 21

Jamed Konow, “Which Is the Fairest One of All?A Positive Analysis of Justice Theories, Journal of Economic Literature, Vol. XLI (December 2003) pp. 1188–1239 p. 35

22

Jon Elster, Local Justice, December 1993, p. 4 23

Jamed Konow, “Which Is the Fairest One of All?A Positive Analysis of Justice Theories, Journal of Economic Literature, Vol. XLI (December 2003) pp. 1188–1239 p. 35

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1.2.1. Justice in contractual relationships

Justice in bilateral contractual relationships can be analyzed from two aspects.24 From one point of view, the contract is just when both parties are acting consciously and independently from each other or from a third person, while concluding the contract. When a contract for consideration is concerned, the principle of justice is mainly seen as the equivalence of rights and obligations of both parties. This precludes the possibility for one of the parties to be unjustly enriched at the expense of the other one. When a contract is concluded fairly, the considerations are equivalent according to the parties’ subjectivity. The opposite aspect can be also true: when the considerations are equivalent, the contract is concluded without undue influence by one of the parties. It is possible that these two aspects do not dovetail. The contract can be negotiated and concluded independently, but the contractual rights and obligations can be unequal. In this situation, the principle of justice should be applied as a subsidiary source of law. Special legal institutes, such as culpa in contrahendo, vices of the will and others should be applied in order to protect the balance between the parties. The same is true about hardship. In pursuance of bringing back justice in misbalanced contractual relationships, the hardship provision should be applied. Hence, the adjustment of contract should be seen as an instrument which is able to provide justice after a change of circumstances.

1.2.2. Corrective justice theory and its application to hardship cases

Reviewing the theory of corrective justice should be considered as the next step in understanding the idea behind the institute of hardship. While in the first section different theories of justice were examined in order to understand different aspects of the application of the hardship provision, the theory of corrective justice represents a whole mechanism for restoring the balance in private relationships, applicable to some extent in cases of change of circumstances. From the perspective of corrective justice, the principle of justice is also a subsidiary source of law. The corrective justice theory subordinates private relationships and the freedom of contract to the unwritten norm of fairness25. Private law relationships are a subject to legal institutes that protect fairness and justice. The main aim of the theory, in this sense, is to eliminate injustice in private relationships in which one party obtains more than it should have in connection to its counterparty.

24_{Van Mehren,International Encyclopedia of comparative law, volume VII, Contracts in General, p. 64-68} (1980)

25

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The theory of corrective justice is applicable to cases of hardship, although it mainly concerns tort law and unjust enrichment. The three fundamental notions on which corrective justice is based are the correlation between parties, the connection between right and obligation, and the equality between contractual parties.26 If the contractual relationship is analyzed after a change of circumstances, injustice would be concluded, because one of the parties is in a worse position than it should be. Therefore, the outcome is the same as in the event of unjust enrichment. The theory of corrective justice can be considered as appropriate to reestablish the contractual equilibrium after the change of circumstances. The main problem in the applicability of corrective justice to hardship cases, nevertheless, is that the theory is based on wrongdoing by one of the parties which results in harm for the other one. This wrongdoing does not take part in the institute of hardship; it is merely an extraordinary event beyond the parties’ control that creates the injustice. Although there is no wrongdoing, however, the main objective of corrective justice - to restore the equality in misbalanced private situations - should also be applicable towards misbalanced contracts due to hardship. Thus, the theory of corrective justice with its methods and objectives appears useful for the application of the hardship provision and the adjustment of the contract to the new circumstances.

1.3. Hardship as one of the main principles of contract law

In order to establish hardship as one of the main principles of contract law, the concept should be examined not only in connection with the principle of justice, but also in respect to the principle of the binding force of the contract. The explanation of a correlation between these two institutes is needed for placing the hardship in the same rank of importance as principle

pacta sunt servanda even though it has a narrower scope of application.

The modification of contract in case of change of circumstances is primarily seen as an exception from the fundamental principle of the binding force of contracts.27 Contract is considered immutable, unless the parties explicitly express common will to change it. Therefore, an obligatory adjustment of contract without a mutual agreement between counterparties is unacceptable according to the principle pacta sunt servanda. Another argument for the fact that hardship is considered as an exception is its place in some European instruments, such as the Unidroit principles, DCFR, and the Principles of European contract law, just after the rule on binding force of the contracts. These arguments show that hardship

26

Ernest J. Weinrib “Corrective justice”, Oxford legal philosophy, chapter Unjust Enrichment, p. 227 27_{Mustapha Mekki, “ Hardship and modification (or “revision”) of the contract”, p.6-7}

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should be applied only in exceptional cases in order to mitigate the binding force of the contract.28

In order to assess whether hardship is a part of the principle of binding force of contract or opposes it, one should take into account the common intention of the parties. When concluding a contract, parties should have an equal bargaining power. The contract itself is the result of a common agreement which is beneficial for both parties. No one would agree independently upon contractual relationship which is harmful for them. If there is a valid and fair contract, none of the counterparties is prejudiced. The question that should be answered is whether the common intention of the parties has been changed in case of hardship. The balance reached by the parties during the contractual negotiations will not change after the event. Even if the new situation is desired by one of the parties, as the change of circumstances is beneficial for them, this situation was not the party’s intention while concluding the contract. The other party will be disadvantaged, which also diverges from the goal of the initial contract. The application of the hardship provision is a legal device which restores the initial balance aimed by the parties29, and which ensures that the initial will of the counterparties is protected by the adjustment of the contract to the new circumstances. Thus, the modification of the contract is not opposite to the principle of the binding force of the contracts. Rather, it should be considered as a means by which the binding force of the contract is restored in case of change of circumstances.

In conclusion, the application of the hardship provision should not only be seen as part of the principle of justice, as I argue in section 1.1 of my research, but also as necessary for the protection of the binding force of the contract in case of change of circumstances. In this sense, even if hardship is not applicable to all situations and contracts, as it is the case with the principle of justice and the principle of binding force of the contracts, it deserves to

be putamong the main principles of contract law.

1.4. A new criterion for legally establishing whether there is hardship

My aim is not to create my own concept of justice. Many authors have already elaborated on this topic and it is therefore unlikely to further this concept, especially given the limitations of the current research. Rather, I use the existing theories of justice discussed above in order to understand and highlight the importance of the hardship provision, seen as a mechanism for restoring justice in case of change in circumstances.

28

Mustapha Mekki, “ Hardship and modification (or “revision”) of the contract”, p. 7 29_{Mustapha Mekki, “ Hardship and modification (or “revision”) of the contract”, p.7}

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The principle of justice can be taken as fundament of the institute of hardship. The egalitarian concept of equality appears to be a proper test for assessing whether the extraordinary event influenced the contractual relations and caused inequality. Justice - understood as equality - can be taken as a starting point while evaluating the changed circumstances. I agree with Rawls’s mechanism for compensating inequality by unequal distribution of rights and duties. This concept is a main idea behind the institute of hardship. The distribution of costs created by the extraordinary event between parties is the main objective of the hardship provision.30 This idea is further elaborated by the theory of corrective justice. That is why the insights gained by this theory are helpful for understanding the institute of hardship. The corrective justice theory is an argument for the modification of a contract in case of change in circumstances, because a misbalanced situation is contrary to fairness and justice. In this situation the principle of justice as a subsidiary source of law should be applied. In case of change in circumstances, the principle of justice finds its way throughout the institute of hardship with the same objective - to bring back justice and fairness.

The first step in the application of the hardship provision should be to check the characteristic of the event. This is a factual test, which does not depend on the theories

discussed above. There are mandatory requirements31 for the event stipulated in the positive

law and if they are not met, the institute of hardship cannot be applied. Thus, the evaluation of the characteristic of the event is absolutely necessary and should be the first one in assessing whether there is a hardship in particular case. Following the postulates of positive law, on both national and European levels, the court should check whether the event is of extraordinary nature, or whether the change in circumstances is exceptional.32 The event should occur after the conclusion of the contract33 and it should not have been foreseeable at that moment.34 Moreover, the risk should not be assumed by the disadvantageous party.35 I adhere to Bentham’s supposition that it is important to focus on the consequences of the event, and not only on its nature. This idea is stipulated by CESL in article 89 (3) (b) by using the word “scale” of the change of circumstances. The main yardstick is the intensity of the consequences and how they change the balance in private relationships.

30

Rodrigo Momberg, Change of circumstances under the Common European Sales Law, p. 7 31_{See art. 89(3) of CESL,}

32

See art. 89 (1) par 2 of CESL 33

See art. 89 (3)(a) of CESL

34_{See art. 89 (3) (b) of CESL, art. 307 Bulgarian Commercial code} 35

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The next step in my criterion is the creation of a hypothetical contract - one which the counterparties would have concluded if they could foresee the occurrence of the extraordinary event. When adapting a contract, a court should consider “what the parties would reasonably have agreed at the time of contracting, if they had taken the change of circumstances into account.”36 The parties’ common will is needed because of the principle of the freedom of contract. The court does not have competence to decide by itself the content of the hypothetical contract. It has to try to discover what would be the parties ‘common will if they were in the position to negotiate equally. This hypothetical contract is needed for the application of hardship because it provides a benchmark on the basis of which one should assess whether the contract after the change is more burdensome for one of the parties than it was supposed to be. Without this step, the court does not have a reliable mechanism to prove that the changed circumstances are “excessively onerous.” The judge firstly needs to know what fair performance and “more onerous” performance are in order to conclude that the performance has become “excessively onerous” due to the change on circumstances.

Trying to find the common will of the parties brings a subjective element in assessing whether there is hardship in a specific case. Subjectivity is needed in order to understand the goals and expectation of the parties37, and is helpful for establishing the terms of the hypothetical contract. Rawls’s presumption that no one would agree to conclude a contract which would be harmful for them after the change of circumstances, if the change is foreseeable, is applicable towards hardship cases. At least no one would agree to a contract under the same terms. This is a strong argument for adapting the contract after the occurrence of the event. Moreover, the will of each of the parties, acting in good faith, is not to prejudice the other party, but to conclude a mutually-beneficial contract. So if the parties could foresee the extraordinary event, they would not enter into the same contractual relationships. That is why the application of hardship provision will bring the contract closer to common will of the parties- initial common intention.

In addition to subjective elements, objective criteria are needed with a view to discover the reasonable terms of this hypothetical contract. Market values after the change of circumstances and the comparison with other similar contracts concluded after the unforeseen event takes place are two objective elements which can help the court create a reasonable contract in accordance to the new circumstances. In addition, if the parties concluded a long term contract with fixed prices, the risk of inflation is allocated toward only one of them.

36_{Article 89 (2)(a) of CESL}

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Thus, the hypothetical contract will not be completely equal to a contract concluded after the change of circumstances.

As the first step of my criterion assures that the event meets the prerequisites for the application of hardship provision, and the second one creates a hypothetical contract by taking both subjective and objective elements into account, the third step logically compares the outcome of the hypothetical contract with the real one concluded by the parties without considering the occurrence of the event. This last stage is needed to prove that the new situation is unjust and unfair, and that the preservation of the initial contract is unreasonably burdensome for one of the parties. The gravity of the differences is a fundament argument for the application of a hardship provision. In order to see how the extraordinary event influences the contractual relationships, I will use the utilitarian concept of utility of the contract. The utility of the contract should be assessed for both parties and not only for the prejudiced one. A comparison between both counter-performances is needed in order to determine whether there is an economic disequilibrium in contractual relationships. A proportionality test comparing the debtor’s efforts to overcome the increase in the cost of performance and the creditor’s interest in receiving the performance is required with a view to prove that there is contractual inequality.38The balance will not be altered if both the performance of the disadvantageous party is excessively onerous and its counter-performance became more

burdensome due to the change of circumstances.39 If the differences between real obligations

and hypothetical ones are big enough, and the performance of the contract is proven to be excessively onerous and unjust, one should apply the hardship provision in order to protect justice and bring back the balance in contractual relationships.

In the construction of this new criterion I do not deny the necessity of objective evaluation, proposed by Weinrib, but consider it as insufficient to invoke the application of the hardship provision. Thus the new situation should be judged from both subjective and objective point of view. Moreover, based on the insights of the theory of local justice, each case should be assessed separately in order to take into account all of its important characteristics and to restore justice towards the specific contractual relationships.

38_{Christoph Brunner, Force majeure and hardship under general contract principles: Exemption of} non-performance in International Arbitration, Kluwer Law International, The Hague, 2009

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2. A comparative analysis between the French and Bulgarian legal systems outlines the necessity of a detailed and mandatory hardship provision.

The first chapter proves the need for hardship provision in order to achieve justice in changed circumstances. Based on egalitarian and utilitarian concept of justice, as well as on theory of corrective justice, I created a criterion for legally assessing whether there is hardship in particular case. In line with the above-discussed theories, it represents a more holistic view of what is just and fair in case of change of circumstances. However, in order to test whether the criterion is a useful and working mechanism for restoring justice, I will apply it to real cases from the French and Bulgarian legal systems. In favor of a more in-depth understanding of the institute of hardship in these two legal systems, an analysis of their current legislation and legal tradition is required. A comparative legal research between French and Bulgarian law proves that a detailed and mandatory provision is indeed needed in order to assure the application of the principle of justice.

The research of French law, in particular, shows that there is injustice in private relations in case of change of circumstances because of the lack of a hardship provision. The analysis of Bulgarian legal system, on the other hand, proves the need for a detailed provision that does not give courts a too broad discretion to interpret the institute in order to prevent non-application or too broad application of hardship. The comparative research argues for the creation of a mandatory hardship provision in civil laws in Member States that assures justice in contractual relationships influenced by change of circumstances. Moreover, this chapter gives useful insights about how the institute of hardship is regulated in positive law of two of the Member States and what kind of problems arise from unjust and incomplete regulation. In addition, the comparative analysis represents how the institute is applied by the courts and whether the justice is achieved in a sufficient way. The results of this research aid the creation of just regulation of the institute of hardship on European level, which avoids gaps and mistakes made by the positive laws of these two legal systems. The critical analysis of court decisions, made by applying my criterion, can provide further guidance to judges who apply hardship provision. In facts, the current jurisprudence in the two legal systems, devoid of a clear criterion on the application of hardship, results in legal uncertainty and injustice in contractual relationships.

In this chapter, I focus on two main characteristic of each legal system: the current legislation and case law. These are two complementary parts that form the whole institute. In some legal systems, the institute is explicitly regulated but not correctly applied by the courts, as it is in Bulgarian law. In the others, as in French legal system, the regulation is missing but

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the institute is sometimes applied by the courts. In both cases, an amendment of current situation is needed to avoid uncertainty and controversial case law. In order to make a proposal for the best solution in regard to a hardship provision is CESL, I will discuss the main problems that can arise in the application of the hardship provision in the French and Bulgarian legal systems. The explanation of the problems is therefore helpful for the creation of a just regulation of the institute of hardship that overpasses the difficulties met in these Member States. In this sense, from one point of view, this comparative analysis aims at proposing amendments in the national laws of France and Bulgaria in regard to hardship provision, which concludes my comparative research. On the other hand, the ultimate objective of my comparative chapter is to give insights for the improvement of hardship provision in CESL.

2.1. The French legal system

2.1.1. Current legislation and the applicability of the institute of hardship

Firstly, it is necessary to present the current state of legislation on hardship in order to understand whether and in what situations the court is empowered to adjust the contract. In the French legal system, there is no general hardship provision either in civil or in commercial law. The French institute of imprevision40 is only applicable in the realm of administrative

law41. The French civil and commercial laws, on the other hand, consider the principle of the

binding force of the contract, stipulated in article 1134 (1) Code civil42 as applicable with precedence over the principle of good faith and equitable contractual considerations. Although the present legislation does not permit courts to adjust or terminate the contract in regard to change of circumstances, however, the institute of hardship is not completely unknown in French civil law. There were some provisions in temporal legislation after the

World War I and World War II that can be considered as particular cases of hardship,43 such

as the case in Cass civ. 6 June 1921. The Court of Appeal stipulated that the parties could have foreseen the normal rise in animal prices, but not the extraordinary increase due to the World War I. These provisions empowered the judge to adjust or terminate the contract in

40_{V.A. De Laubadère, F. Moderne and P. Devolé “Traite des contrats administratifs” p.560; Definition of}

imprevision (my translation: circumstances beyond the control of counterparties and non-foreseeable … that

upsetting the economy and prejudice one of the parties,…the disadvantageous party has a right to ask for help administrative authority in order to overpass these difficultie..)?

41

Hugh Beale, Benedicte Fauvarque-Cosson, Jacobien Rutgers, Denis Tallon and Stefan Vogenauer “Cases, Materials and text on Contract law, Ius commune casebooks for the common law of Europe, Hart publishing, 2d edition, p. 1130

42

Article 1134 (1) Agreements lawfully entered into take the place of the law for those who have made them. 43_{La loi Faillot, 21 January 1918; La loi N49-547, 22 April 1949}

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order to restore the balance in contractual relationships, but only in particular cases or for particular period of time.

In the French legal doctrine, it is accepted that the institute of hardship can be applied on the base of article 1134 (3) that presents the principle of good faith and solidarity in contractual performance.44 According to this provision, the parties are obligated to execute their duties “de bonne foi”. 45 Because of the concept of solidarity, the parties could be seen as bound to renegotiate the contract in case of change of circumstances without the court’s intervention.

2.1.2. Case law and court arguments. Are these arguments fair and just if the steps of my criterion are applied?

The next step in order to acquire a deeper understanding of the institute of hardship is to examine the case law concerning it. Inasmuch as the hardship is not recognized by the French jurisprudence, I present arguments used by the court to decline hardship, and evaluate whether these arguments are fair and just. The assessment of arguments is based on my criterion for legally establishing whether there is hardship in each specific case. I apply the steps proposed in the previous chapter in order to conclude what should be examined by the court to prove that application of hardship is needed to restore balance and justice.

In the area of civil and commercial contracts, there is one landmark judgment that represents the immutability of the principle of binding force of the contract in the French law. This is The Canal de Craponne judgment of 6 May 1876.46 The dispute concerned a long-term contract for water supply and the maintenance of a canal. In order to evaluate the court’s criteria in assessing hardship, it is necessary to analyze the decision of the Court of Appeal of Aix, which confirms the adjustment of the contract, and the judgment of the Court of Cassation, which quashed the lower court’s decision. It was ruled that the charge per unit of water is no longer sufficient, because the costs of maintaining the canal had increased significantly due to the currency depreciation. The court stipulated that the balance between the counterparts is destroyed and it is for the court to re-establish the initial equality between parties. In the court’s arguments, one can find Rawls’ concept of justice as fairness. The court used an objective criterion to evaluate the balance between contractual obligations. It compared the proportion between the costs of both obligations in order to conclude that there

44_{Ruth-Sefton-Green “Cultural diversity and the Idea of European Civil Code”, p. 81} 45

Art. 1134 Agreements lawfully entered into take the place of the law for those who have made them. They may be revoked only by mutual consent, or for causes authorized by law. They must be performed in good faith.

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is a misbalance between the parties. If I apply the new criterion to this case, I would use similar objective criteria and reach the same conclusion as the Court of Appeal of Aix. In order to prove that the contract is unreasonably burdensome to one of the parties, it is useful firstly to create a hypothetical contract which would be concluded by the parties if they could foresee the event. After that, according to the criterion, the court should compare the market values of considerations of this hypothetical contract with the costs of the contractual performances of the real agreement. During this last step of assessing how seriously the contractual relationships are influenced by the change of circumstances, the court is advised to use the concept of utility. The utility of the contract for both parties should be considered in order to prove that one of the parties is enriched at the expense of the other, even if there is no wrongdoing.

The Court of Cassation rejected the decision of the Court of Appeal and refused to adjust the contract. It based its decision on article 1134 Code civil47 which regulates the principle of the binding force of the contract. According to the decision, the principles of equality, change of circumstances, and fairness are not as important as the principle pacta

sunt servanda. Fairness should be seen as a more important principle than the biding force of

the contract, because the principle of fairness is common for the whole legal system, while the binding force of the contract is applicable only to contractual relationships. Principles of one area of law should not be contrary to the principles of law. Therefore, the principle pacta sunt

servanda should not undermine the principle of fairness and justice.48 According to the Court of Cassation, in order to adjust the contract in the French legal system, a specific contractual clause should exist, or parties should give their mutual consent. I agree with this argument of the Court of Cassation, because the court cannot change the contract without having an explicit competence. As one of the public institutions, the court cannot do more than it is explicitly allowed to do by law.49 Thus, in order to apply hardship, the court should be empowered by a legal provision. Although I agree that it is impossible to modify a contract without a specific provision, I cannot accept other arguments of the Court of Cassation. It categorically denied the possibility for the judge to consider the time and circumstances of the contract in order to adjust its terms. These, however, are the main criteria which are taken into account when one has to prove that the balance of the contract is significantly changed.

47_{Article 1135 Code civile Agreements are binding not only as to what is therein expressed, but also as to all the} consequences which equity,usage or statute give to the obligation according to its nature

48_{Algel Kalaidziev, Law of obligations: general part, edition IV, Sibi, 2007 p.66} 49

Doncho Hrusanov, Dimityr Kostov, Ivan dermendziev, Administrative law of Republic Bulgaria-general part, Sibi, 2012, p. 106

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There is, therefore, a paradox, because the circumstances and the timing of the contract are considered as irrelevant in civil and commercial matters, but taken into consideration in regard to administrative contracts. In order to assess whether the justifications used in administrative matters are not applicable towards civil contracts, it is necessary to analyze one of the landmark cases in this field. In its decision of 30 March 1916,

Gaz de Bordeaux, Consei d`Etat (Supreme Administrative Court) allowed adjustment of the

contract because of exceptional circumstances. The court used two main arguments. Firstly, the revision of the contract was needed because of the continuity of the public service. The second argument was that the person contracting with public institution should expect a fair and just contractual relationship. The party is considered to have the right to financial equilibrium.50 The public interest in the continuity of the contract is not enough to prove the necessity for the application of hardship. This second argument is completely relevant to civil and commercial matters as well. Each contractual party should rely on a fair and just relationship based on contract, not only those who have a public authority as counterparty. The division of civil and administrative law in regard to the hardship provision is unreasonable and not well justified, because the equilibrium and fairness are main principles of civil law. That is why hardship should be applicable towards purely private situations in which public interest is not touched.

There are some judgments51 in the realm of civil and commercial law that admit the obligation to renegotiate in case the contract has become misbalanced on the basis of the principle of good faith. One can consider them as a tendency towards mitigation of the principle of the binding force of the contract and admission of hardship in the French case law. But from a general point of view, they are just isolated cases.52 In Con. 3 Nov. 1992, BP

c/ Huard the Court of Appeal held that one of the parties failed to execute their obligation to

renegotiate the contract in good faith because of the change of economic circumstances. This decision can be considered as implying a duty to cooperate, but only towards the petrol distribution agreement. In this way, the French jurisprudence accepted the application of hardship, but only in specific fields.

50_{Cases, Materials and text on Contract law, p. 1130}

51_{Com. 3 novembre 1992, Huard, JCP G 1993, II, 22164, obs. G. Viramassy ; RTD Civ 1993, p. 124 s., obs. J.} Mestre ; Defrénois 1993, p. 1377, obs. JL Aubert ; Com. 24 novembre 1998, D. 1999, IR p. 9 ; Contrats, conc., consomm. 1999 1999, Comm. n°56, obs. M.Malaurie-Vignal ; Defrénois, 1999, p. 371, obs. D. Mazeaud ; JCP 1999, I, 143, obs. Ch. Jamin ; RTD civ. 1999, p. 98, obs. J. Mestre et 646, obs. P.Y. Gautier ; Civ 1re, 16 mars 2004, D. 2004, jurisprudence p. 1754

52

Claire Debourg ,Fiche de niveau 3. Droit des contrats / Responsabilité contractuelle / 26 novembre 2007 and Ruth-Sefton-Green “Cultural diversity and the Idea of European Civil Code”, p. 80

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Although there are a few exceptions, the French case law does not accept the concept of adjustment of contract in case of unexpected change of circumstances. The fact that most of the European legislations have a hardship provision or case law on adjustment of contract in the case of change of circumstances makes the position of French law an extreme one.53

2.1.3. Problems with the application of hardship

In order to argue for the creation of hardship provision on national level first, it is useful to rebut the main arguments in the French legal doctrine against this institute. The basic arguments against the hardship provision are the precedence of the principles of the binding force of the contract and legal certainty. If the contract is susceptible to changes, it will lose its objectivity and will result in legal uncertainty in private relationships.54 In the first chapter, it was proven that the institute of hardship is not opposite to the principle of pacta sunt

srvanda and that a hardship provision should be considered as means by which the binding

force of the contract is restored in case of change of circumstances. Another argument against hardship is that the court is not in a good position to adjust the contract. If parties do not arrange what is going to happen with their relationship in case of change of circumstances, it will not be for the court to decide. Parties should renegotiate freely, without the court’s intervention. Although the freedom of contract is a main principle of civil law, the principle of fairness should be taken into account as well. If private relationships are unjust and the parties themselves cannot solve the problem, the court is the only institution that can prevent unfairness and bring back justice.55

The application of a hardship provision by the courts will be difficult because the French legal system does not allow judges to intervene into contractual relationship. The French doctrine considers an adjustment of contract by courts as a violation of the principle of free will of the contracting parties.56 Judges are unwilling to adjust contracts because of their prejudices and their deep-rooted understanding that the principle of the binding force of the contract is immutable. This excessive opposition to the institute of hardship can hinder the

implementation of hardship in the French civil law.57 Thus, a mandatory provision is needed

that does not give to courts the opportunity to decline the application of hardship because of their prejudices.

53

Ingeborg Schwenzer “Force Majeure and hardship in international sales contracts” L. Rev. 709 2008-2009 54

Mauricio Prado “ Le hardship dans le droit du commerce international”, 2003

55

Anthony Chamboredon – Unexpected circumstances -28/08/14, 56

Harold Ullman „Enforcement of hardship clauses in the French and American legal systems”, p. 21 57_{Franc¸ois Ost, Le temps du droit, Paris, Editions Odile Jacob, 1999, p. 35}

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2.1.4. What should be done in order to achieve justice in changed contractual relations?

The abovementioned examples straighten the need for the French legislator to create a mandatory hardship provision in the Civil Code. The French judge is not unfamiliar with the application of principle of fairness and justice towards misbalanced contractual relationships, because of the institute of imprévision in the realm of administrative law. The transposition of imprévision to the private law is an advisory means by which the French legislator can respond to the need of hardship provision applicable to civil law. The understanding and applicability of the rule will be less troublesome than creating a new rule or transplanting one

from foreign law or European harmonizing instruments.58

2.2. The Bulgarian legal system

2.2.1. Current legislation and the applicability of the institute of hardship

De lege lata the institute of change of circumstances is regulated in Bulgarian Commercial

Code in article 30759 by the amendment publicized in State’s official journal № 86 from 1996.

This provision is situated in chapter IV Non-Performance and it includes a legal definition of hardship. The notion of hardship is generally formulated and gives almost unlimited freedom to judges to evaluate whether the contract is unfair and contrary to good faith. Irrespectively of the fact that this institute is placed in the Commercial Code, most of the authors60 claim that it is applicable to civil relationship as well. The principles of fairness and good faith are common principles in the Bulgarian civil law, based on articles 12 and 63(1)61 of Act of Obligations and Contracts. The hardship provision is considered to be an exception form the principle pacta sunt servanda, stipulated in article 20(a) of the Act of Obligations and Contracts.62 It is right that the Civil Act in article 81(2) stipulates that when the debtors lack

58

Velimir Živković, Hardship in French, English and German Law, October 1, 2012, p. 15

59_{Business Frustration (Article 307): A court may, upon request by one of the parties, modify or terminate the} contract entirely or in part, in the event of the occurrence of such circumstances which the parties could not and were not obliged to foresee, and should the preservation of the contract be contrary to fairness and good faith. 60

Algel Kalaidziev, Law of obligations: general part, edition III, p. 316; I. Staykov, Institute of clausula rebus

sic stantibus in the present Bulgarian commercial law, journal Legal thought, 1,1998, p. 81; Al. Kojuharov, Law

of obligations, Sofia, 2000, p. 80

61_{Article 12 The parties shall act in good faith in conducting negotiations and concluding contracts. Otherwise} they shall owe damages.

Article 63 (1) (Amended, SG No. 12/1993). Each of the parties to the contract must fulfill its obligations arising from it accurately and in good faith, in accordance with the provisions of the law, and must not obstruct the other party from fulfilling its obligations in the same manner.

62

Article 20. (New article, SG No. 12/1993) Contracts shall have the force of a law for the parties which have concluded them.

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cash they are not free from liability.63 This provision introduces the general principle for monetary obligations; exceptions from this principle are hardship and force majeure. The hardship provision concerns professional merchants, who can more easily foresee the extraordinary event. This institute should be applicable with greater reason towards civil relationships, because non-merchants do not have enough experience to foresee the event and its consequences.64 Another argument for the applicability of the institute in civil relationships is the fact that in the civil act there are particular rules in which the main objective is bringing back the balance in misbalanced contractual relationships.65 Such a provision is article 266(2)

of the Act of Obligations and Contracts,66 which concerns contracts of manufacture. It can be

considered as a particular form of application of the hardship provision for this type of contracts.67

2.2.2. Case law and courts’ arguments. Are these arguments fair and just if the steps of the new criterion are applied?

In order to discover whether the hardship provision is correctly interpreted and applied, a detailed analysis of the Bulgarian case law and arguments used by the court is needed. The evaluation whether the court uses fair and sensible arguments will be made in respect to my criterion for assessing change in circumstances and the previously-proposed steps to achieve justice after a supervening event.

In Bulgarian case law, there are only a few cases that consider the applicability of hardship and its consequences on contractual relationships. A lot of legal disputes were terminated because the extraordinary event was deemed foreseeable by the court. Such was the case of a farmer who had to be able, according to the court, to predict the unfavorable change in climate.68 In this decision, there are several arguments against the application of hardship. I will focus on the one I consider unreasonable. The court stipulated that the claimant, a professional farmer, could have foreseen the extraordinary event - drought - and that it has been his obligation to insure his harvest from it. To link the applicability of the

63_{Article 81 A debtor shall not be liable if the impossibility to perform an obligation is due to a reason for which} he cannot be found to be at fault.

The circumstance that the debtor lacks cash for performance of the obligation shall not exempt him from liability.

64_{Iasen Nikolov, Hardship, journal of Commercial and conmetitive law, 2011/9, p. 6} 65

Algel Kalaidziev, Law of obligations: general part, edition III, p. 316

66_{266. The person ordering the work shall pay compensation for the accepted work. If the compensation is} agreed upon on a unit price basis, its amount shall be determined upon acceptance of the work.

If in the course of the performance of the contract the duly determined prices of materials or labour change, the compensation shall be adjusted accordingly, even where it was agreed upon as a total sum

67_{Solomon Rozanis, Commercial contracts: general part, 1998, p. 79}

68

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hardship provision with another contractual obligation or with the possibility to insure the harvest, however, is not a correct argument. The opportunity to ask the court to terminate or adjust the contract is a statutory right for each of the counterparties, irrespectively formulated by the legislator from their contractual obligations and other rights. Moreover, in this case the utilitarian concept about consequences is applicable. According to it, the court should take into account not only the foreseeability of the event, but also the intensity of its consequences. In general, anything is foreseeable to some extent. For example, normal inflation is predictable. But hyperinflation is one of the common examples of change of financial circumstances that triggers the application of the hardship provision. Thus, not the event by itself should be predictable, but its consequences on private relationships.

There is only one decision of the Bulgarian Supreme Court which recognizes and

allows the adjustment or termination of a contract because of a change of circumstances.69 In

order to evaluate the court’s arguments, I represent both judgments - first the decision of the

Appeal Court in Varna,70 which denied the applicability of hardship, and then the decision of

the Supreme Court, which withdrew the lower-court decision and terminated the contract based on the hardship provision. The dispute at issue concerned a lease contract for mall premises, concluded for a period of ten years. Until September 2008, the rented shop achieved good financial returns. However, the world economic crisis plummeted the lease prices of the mall premises. The court admitted that the crisis was an unforeseeable and extraordinary event. Nevertheless, the Supreme Court and the Appeal Court in Varna used different criteria for establishing whether there was hardship in this particular case.

The Appeal Court used only objective criteria. It compared the rent in the contract with the market rent for identical mall premises after the occurrence of the event. The court denied the existence of hardship because it was not proven that the rent for identical properties differed significantly. This argument coincides with the objective elements that should be considered in creating the hypothetical contract according to my criterion. The market rent for identical premises is needed to presuppose what the contract concluded between the parties would be if they could foresee the event. But this criterion is not sufficient to reveal the misbalance in contractual relationships. Even if the court admitted that there was a sharp fall of the lease prices of mall premises, this alone would not warrant the application of the hardship provision. If my method of assessing the change of circumstances is applied, however, the court should also take into account the utility of the contract for both parties. It

69

Supreme court, Decision №.240, Sofia,12.09.2013 70_{Appeal court in Varna, decission № 192 от 18.11.2010}

Hardship as one of the main principles of European contract law : proposing a just regulation of hardship in the Common European Sales Law

Hardship as one of the main principles of

European contract law

Proposing a just regulation of hardship in the Common European Sales Law

Hardship as one of the main principles of

European contract law

Proposing a just regulation of hardship in the Common European Sales Law

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